As we discovered in the previous posting in this series, Say's Law of Markets obviates the Keynesian dogma that effective demand needs to be artificially stimulated in order to keep the economy in a state approaching equilibrium. Far from maintaining the economy in anything approaching a steady state, in fact, artificial stimulation of effective demand (whether by taxing and redistributing wealth that the rich presumably need to finance the formation of new capital, or through the "hidden tax" of inflation), the Keynesian program lays the groundwork for the ultimate bankruptcy of any economy that employs the measures as anything other than an emergency — and necessarily temporary — stopgap.
There is, however, a serious problem with Say's Law. Say's Law — virtually the whole of classical economics, in fact — assumes that the means to produce a marketable good or service is available to anyone who wishes to be productively employed. We know that is not the case, for there are and have almost always been people ready, willing, and able to work, yet unable to find gainful employment.
Further, the working assumption of most economic theories is that the means to acquire and possess the means of production — capital credit — is available only to those who have already accumulated sufficient savings to invest, or who can persuade those who have saved to lend them the money. This, the basic assumption of Keynesian economics, seems to invalidate Say's Law. How can people purchase "capital and land" when they lack the means to do so, and jobs do not exist that enable them to sell their labor? Worse, what if the available jobs pay below the amount necessary either for the worker and his or her dependents to live in a manner befitting the demands of human dignity, or fail to clear all the goods and services that have been produced at market prices?
The answer lies in a deeper knowledge of the science of finance. Keynes believed as an absolute (and unproved) dogma that the financing of new capital formation could only come out of the accumulations of the wealthy — people whose income was so great that they could not possibly consume all their income, and were "forced" to invest the excess in new capital. Dr. Harold G. Moulton, then president of the Brookings Institution, proved the falsity of this assumption in his 1935 monograph, The Formation of Capital.
Searching for the principles that would bring about a sound recovery from the Great Depression in opposition to Keynes' artificial stimulation of effective demand, Moulton examined the cycles of consumption and investment from 1830 to 1930. If Keynes was right, then periods of intense capital formation would necessarily be preceded in each and every case by counterbalancing decreases in consumption to generate the savings Keynes deemed absolutely necessary to finance capital formation.
What Moulton found, however, was that, in each and every case, periods of intense capital formation were preceded not by counterbalancing decreases in consumption, but by increases in consumption! Savings were not being accumulated, but depleted! Where, then, did the money come from to finance all the new capital formation during a century that saw periods of the greatest industrial, commercial, and agricultural expansion in human history? It is possible (though not proved) that the amount of capital in real terms that existed at the end of the 19th century, December 31, 1900, was several thousand percent greater than the amount of capital in real terms than existed at the start of the 19th century, January 1, 1801. Where did the money come from?
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