THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Thursday, February 3, 2011

The Problem with Money, Part IV: Say's Law of Markets

In his book, Aristotle for Everybody (available through the Just Third Way "Bookstore" over there to your right), Mortimer Adler inserted a section on "Man the Doer." Boiling it down 'way too much (you really should read it for yourself . . . after you've read How to Read a Book a couple of times, of course), we find that the reason for engaging in economic activity (political economy) is not merely to live, but to live well, that is, to pursue the "good life" by acquiring and developing virtue.

It necessarily follows that, in order to acquire and develop virtue, we need "leisure." Leisure is time spent on the "work of civilization," that is, either working on our own virtue or (as a preliminary step) organizing with others to restructure our institutions so that we can get to work on our own virtue. Since "man is by nature a political animal," if our institutions are flawed, they may inhibit or prevent us from acquiring and developing virtue. This is because, paradoxically, as political animals we normally realize our fullest possible development as individual human beings within a social context — "politics."

Given this understanding of "Man the Doer," it is clear that we must reject the idea of people as mere consumers, contributing nothing and simply indulging insatiable appetites. The idea of "Man the Bottomless Pit" not only contradicts basic economic assumptions such as the theory of marginal utility (as we saw in yesterday's posting), it directly contradicts human nature itself. Of course, if you are one of those natural law fanatics, you've already accepted the fact that economics, a social science, is necessarily rooted in human nature, a reflection of God's Nature, and cannot contradict its own foundation. Thus, common sense as well as objective analysis tells us that people cannot be mere consumers. They must also (as, not coincidentally, Mortimer Adler observed in Aristotle for Everybody) be producers; man is a maker as well as a doer.

The question then becomes how people are to make, that is, produce.

If we listen to the lords of conventional economics (especially Lord Keynes), there is only one way that the great mass of people should or can produce: through the sale of their labor to owners of capital. That is, to produce marketable goods and services and thereby gain a living income, most people must be restricted to the use of labor alone.

Keynes and others have come up with all kinds of rationalizations to justify this rather bizarre (from the point of natural law) assertion, but it always boils down to one thing: the slavery of past savings. That is, the main reason for keeping virtually the whole of the world's population in the condition of dependency that can accurately be described as "wage slavery" is the fixed belief that the only way to finance new capital formation is out of existing accumulations of money savings.

How's that?

Simple. In order to accumulate sufficient money savings to finance the increasingly advanced capital instruments of the modern age you need people whose income from capital is so immense that they can't possibly consume it all and must reinvest it in additional new capital. In fact, according to Keynes, people who actually consume income from capital instead of reinvesting it to finance yet more capital are a drag on the economy. Contradicting Adam Smith, as far as Keynes and his followers are concerned, the purpose of production is not consumption, but the generation of savings by cutting consumption to reinvest in yet more production; the purpose of production is production!

At least, according to Lord Keynes. (And people keep wondering why the Keynesian economy doesn't seem to work no matter how it is "fine tuned.") This explains why Keynes and others reject "Say's Law of Markets," sometimes in terms more than a little tinged with hysteria, when they cannot even state Say's Law with any degree of accuracy, and never manage to connect Say's Law with its chief application in the real bills doctrine.

Oversimplified, Say's Law is that supply generates its own demand, and demand, its own supply. Elaborated a little, as Say explained to Malthus, if supply (production of marketable goods and services) remains unsold, it is because potential purchasers are not themselves producing other marketable goods and services to trade for the unsold productions:

As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce. (Jean-Baptiste Say, "Letter 1," Letters to Mr. Malthus on Several Subjects of Political Economy, 1821)

"Wait!" shrieks the Keynesian economist, as well as adherents of any other school of economics based on the British Currency School of finance — and yes, Keynesian economics is, despite the pronouncements of a number of authorities who really should know better, Currency School. "You don't purchase the produce of another with your own produce! You purchase it with money — 'money' being coin and banknotes, sometimes demand deposits that the State creates as a general claim on the wealth of the economy!" In other words, Say's Law is invalid because its critics use a different definition of money than that used by Say.

That's not exactly playing fair. As G. K. Chesterton noted, "It is no good to tell an atheist that he is an atheist; or to charge a denier of immortality with the infamy of denying it; or to imagine that one can force an opponent to admit he is wrong, by proving that he is wrong on somebody else's principles, but not on his own. After the great example of St. Thomas, the principle stands, or ought always to have stood established; that we must either not argue with a man at all, or we must argue on his grounds and not ours." (The Dumb Ox, p. 95.)

How did Say define money?

All those who, since Adam Smith, have turned their attention to Political Economy, agree that in 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.

To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. 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. (Letters to Malthus, op. cit.)
In other words, money is anything that can be used in settlement of a debt. A particular piece of money, whatever form it takes, is simply the symbol of the present value of marketable goods and services with which the promise conveyed by the "money" is ultimately redeemed.

Consistent with Say's Law, then, people are not only consumers, they are necessarily producers. As far as Say was concerned, no one can consume unless he first produces something. Nor is people's productive potential limited exclusively to labor, but (as Say noted) to capital and land as well. The question becomes how ordinary people without existing accumulations of savings are supposed to acquire (legitimate) ownership of capital and land: that which binary economics groups together as "capital," the non-human factor of production.