In the previous posting in this series we saw that Say's Law does not function in a modern industrial economy. Keynes claimed that this is because there are obstacles to full employment of labor that only the State can remedy by manipulating the money supply. Keynes's analysis of Say's Law, however, assumed as a given that labor alone is responsible for all production.
Say, however, specifically stated that production is the result of employing both labor and capital. His "law" assumed as a given that there were no obstacles to full employment of either labor or capital.
The remedy for the failure of Say's Law to function is thus not to try and reach the ephemeral goal of full employment of labor in an economy in which capital is taking over the burden of production of labor. That is impossible in any event. The remedy to the non-functioning of Say's Law is to remove obstacles to full ownership of capital, especially for people whose labor is falling in value relative to the capital that is displacing them. As Pope Leo XIII pointed out,
"We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (Rerum Novarum, § 46.)
It is easy to understand why Say's Law does not function when capital ownership is concentrated. Capital does not consume in the same sense as human beings do. Owners of capital consume, of course, but they are constrained by physical reality as to how much they can consume. Wealth piles up for those who own capital, at the same time that people who do not own capital are in want. The problem is how to turn non-owners of capital into owners of capital without violating the rights of existing owners by redistributing their capital or its fruits, or by consuming the financial capital — savings — believed to be essential to invest in new capital.
This is a form of what Harold Moulton called the "economic dilemma." As Moulton described the "Catch-22" into which most modern schools of economics have trapped themselves, "The dilemma may be summarily stated as follows: In order to accumulate money savings, we must decrease our expenditures for consumption; but in order to expand capital goods profitably, we must increase our expenditures for consumption." (The Formation of Capital, 28.)
Moulton demonstrated the falsity of this "dilemma" by pointing out that rapid economic growth and capital expansion had taken place in the past (notably in the United States from 1865 to 1893) at a time when the currency was being deflated, savings depleted, and prices were falling — a combination of circumstances that, according to Keynesian analysis, is impossible.
It is not impossible, and what was really happening shows how capital ownership can be financed for propertyless workers without redistributing existing savings through either taxation or inflation.