Production is the key to a sound economy, but consumption is the lock. And, as should be obvious, neither the lock nor the key does very well without the other, and in fact neither one will function at all without the other. As Adam Smith noted in The Wealth of Nations as the first principle of economics, and that Jean-Baptiste Say applied in “his” Law of Markets, “Consumption is the sole end and purpose of all production.” Production not intended for consumption is therefore waste, while the need for consumption without production is want.
Of course, Smith’s principle cuts both ways. If consumption is the sole end and purpose of all production, it necessarily follows that production for which there exists no demand is useless and the sign of a sick system, and needs that cannot be met is the sign of a failed system. When you have needs that cannot be met at the same time that you have production for which there is no market, you have all the evidence you need of a system so sick it’s on its deathbed.
As we saw in the previous posting on this subject, however, that was not the problem France faced following the Franco-Prussian War. Demand certainly existed in the form of the Prussian indemnity. With the discoveries of Louis Pasteur the capacity to produce was no longer in question. All that was needed was a way to make as many French citizens as possible productive and a way to turn the production into cash to pay the indemnity.
Thus, the upshot of Pasteur’s discoveries was that France was able to produce the vast quantities of goods and services needed in order to generate the cash required to meet the indemnity payments. This was a graphic demonstration of Say’s Law of Markets. Say’s Law is a common sense observation that production equals income. Consequently, demand generates its own supply, and supply its own demand. As Jean-Baptiste Say explained the matter to the Reverend Thomas Malthus,
Since the time of Adam Smith, political economists have agreed that we do not in reality buy the objects we consume, with the money or circulating coin which we pay for them. We must in the first place have bought this money itself by the sale of productions of our own. To the proprietor of the mines whence this money is obtained, it is a production with which he purchases such commodities as he may have occasion for: to all those into whose hands this money afterwards passes, it is only the price of the productions which they have themselves created by means of their lands, capital, or industry. In selling these, they exchange first their productions for money; and they afterwards exchange this money for objects of consumption. It is then in strict reality with their productions that they make their purchases; it is impossible for them to buy any articles whatever to a greater amount than that which they have produced either by themselves, or by means of their capitals and lands. (Jean-Baptiste Say, Letters to Mr. Malthus on Several Subjects of Political Economy and on the Cause of the Stagnation of Commerce. London: Sherwood, Neely & Jones, 1821, 2.)
|Coin used to pay much of the indemnity|
Not only was the indemnity, obviously intended to cripple France forever, paid in full, it was paid off ahead of schedule. Bismarck was evidently unaware that as long as a country can produce marketable goods and services, there is no need to use existing accumulations of savings for anything except consumption. A financial and economic reactionary (and a political progressive only when it suited him), Bismarck evidently looked only at France’s existing accumulations of savings, not at French productive capacity in setting the amount of the indemnity. This appears to be the same mistake made by world leaders today, and their incomprehensible reliance on Keynesian deficit spending to bring about what only increased production can accomplish.
In this, the German Chancellor outsmarted himself, something that many of today’s politicians and policymakers have acquired the habit of doing. Bismarck succeeded in laying the foundation of long-term enmity between France and Germany, as well as giving cause for lasting resentment for the 5 billion Francs shipped to Berlin, mostly in silver, which (as far as Bismarck was concerned) was “real” money.
. . . and therein lies a tale, which we will relate in the next posting on this subject.