Money and Say’s Law of Markets

In the previous posting on this subject, we looked at Adam Smith’s “invisible hand” and how it fits into Smith’s first principle of economics, that “Consumption is the sole end and purpose of all production.”  We concluded (tentatively) that production for a purpose other than consumption is a serious mistake.

Waste is built into the Keynesian framework.

Yet production for non-consumption is a fundamental principle of Keynesian economics, one that is used to justify money creation backed only by government debt, not private sector debt representing the value of actual assets.  Backing a currency with government debt and valuing the currency only in terms of how the market views a particular government’s creditworthiness has more than a few drawbacks.

For one thing, backing a currency with government debt means that the value of the currency is completely in the power of the government to maintain or manipulate.  The government decides whether the dollar, peso, or pound that a worker was paid will have the same value when he goes to spend it as when he earned it.

To explain, if the government wants “more demand” infused into the economy, it prints more money, which shifts purchasing power from those who have managed to save money into the hands of those who receive payments from the government.  If a government wants less demand in the economy, it retires debt, driving up the value of the currency, and making it harder for debtors to pay their debts.

No one really knows from one day to the next whether his money will be worth less, more, or nothing.  Thus, governments act unjustly when they manipulate the currency, even for the best of reasons, because simple justice demands that a currency have a stable and uniform value so that what someone produces is the same value that he consumes.

Jean-Baptiste Say

For another thing, since the purpose of production is consumption, it follows logically that in order to consume, you must produce.  That brings us to “Say’s Law of Markets.”  Jean-Baptiste Say did not develop the law that bears his name, but he did explain it better than anyone else.

Say began with Smith’s first principle of economics, as he noted in his responses to Thomas Malthus.  As Say argued, absent charity, theft, or some other form of redistribution, there is only one way to consume, and that is to produce.

You must either produce for your own consumption, or to have something to trade to others for what they produce that you want to consume.  When governments issue money backed with their own debt, they are consuming without producing, which violates private property.  Thus, as Say concluded,

[I]n reality we do not buy articles of consumption with money, the circulating medium with which we pay for them.  We must in the first instance have bought this money itself by the sale of our produce. . . . It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land. (Jean-Baptiste Say, Letters to Malthus.  London: Sherwood, Neely, and Jones, 1821, 2.)

The best, indeed, the only legitimate way to create money, then, is to convert “produce” into money.  And that creates a problem.

Say's Law (Ultrasimplified)

Smith, and to a lesser degree Say, simply assumed as a given that the rich would never be able to satisfy their wants without employing the poor.  They failed to take into account the effect of advancing technology, which is to displace human labor from the production process, and which enabled the rich to satisfy their wants and needs without employing the poor.  No one, after all, will freely undertake to purchase a machine unless it can do something better or cheaper than a human being.  (Say did note the labor-displacing effects of advancing technology but for some reason failed to see what this could mean for the productive capacity of human labor relative to that of technology.)

In addition, consistent with the natural right of private property, the owner of capital owns what his capital produces in the same way as the owner of labor owns what his labor produces.  At the same time, the power to produce is, per Say’s Law of Markets, also the power to consume.  “Production equals income,” as Say’s Law is often summarized, “and therefore supply generates its own demand, and demand, its own supply.”

As the productive capacity of capital began greatly surpassing that of labor, owners of capital generated consumption power far in excess of their capacity to consume.  Capital owners necessarily reinvested their excess consumption power in additional new capital.

Marx: Capital is like a vampire (blah, blah!)

Reinvestment of consumption income accelerated the generation of additional excess consumption power that was also reinvested; as Marx put it, “Capital is dead labour, that vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.” (Karl Marx, Capital.  New York: The Modern Library (ND), 257.) As a result, the disparity in both production and consumption power between the rich and the poor expanded geometrically, with the results that can be seen today.

At the same time, owners of labor were increasingly hard put to sell their labor for enough to provide even minimal subsistence for themselves and their dependents.  As technology advanced and ownership of productive capital became ever more concentrated, private charities, especially the churches, became overwhelmed by the growing number of the poor and the degree of distress.  Consistent with New Christian principles that substitute the collective for God, and the State for organized religion, governments began redistributing wealth, first through taxation, then through inflation.

The real solution to poverty, however, is not to “increase unproductive consumption,” (Jean-Baptiste Say, Letters to Mr. Malthus.  London: Sherwood, Neely, and Jones, 1821, 3) whereby people are empowered to consume without producing.  Rather, as Leo XIII pointed out in § 46 of Rerum Novarum, the only way to solve “the Labor Question” consistent with principles of natural law is to turn every producer into a consumer, and every consumer into a producer.

The question, of course, is how that can be done — but to understand how it can be done, we need to look more closely at the role of money in Say’s Law, which we will do in the next posting on this subject.

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