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.

Tuesday, November 5, 2019

Say’s Law of Markets

As we saw in the previous posting on this subject, under the Currency Principle “consumption” is divided into direct consumption by people, and indirect consumption to create capital instruments.  Under the Banking Principle, of course, consumption is consumption, it does not matter whether it is direct or indirect.

Adam Smith
This is consistent with Adam Smith’s first law or principle of economics.  That is, as he expressed it in The Wealth of Nations, “Consumption is the sole end and purpose of all production.”  Why, after all, produce something that is not intended for consumption?  The idea that you must produce goods that are not intended for consumption is a Keynesian fallacy, based on the disproved belief that the only way to be able to consume is to have a job that pays a wage.
Because technology can outproduce human labor, far more is produced by people working with machines than can ever be consumed.  At the same time, the Keynesian belief that new capital can only be financed out of past savings means that more must be produced than can be consumed.
These two Keynesian fallacies reinforce each other, each one making the other seem valid, when all they really are is two circular arguments that take their conclusions as the starting premise!  Thus, in Keynesian economics, everybody needs a job because jobs are the only way people can consume.  At the same time, because machinery is producing more goods than human labor, it is clear that human labor is not as important to production as capital.  You don’t need human labor to produce.
John Maynard Keynes
Instead of drawing the obvious conclusion that consumption and production have been separated because the people who consume do not produce all they consume, and the people who produce (by owning capital) do not consume all they produce, the experts just say to increase demand by manipulating the currency and the money supply.  This actually makes the problem worse.  It does not occur to the experts that  it would solve everything to make all consumers producers by owning capital, thereby giving more people the power to consume by producing.
That is what is at the heart of Say’s Law of Markets that Keynes and Karl Marx rejected.  By claiming that only labor is productive, Keynes and Marx missed the whole point of Say’s Law, which assumes as a given that people produce with both labor and capital, not labor alone.
Jean-Baptiste Say made one mistake, however.  He assumed that if people were not sufficiently productive with labor all they had to do was obtain capital.  He did not take into consideration the fact that the reason so many people did not own capital was because they were not able to use credit the way the rich did to buy capital that pays for itself out of its own future earnings, then pays income to the owner of the capital once the original acquisition cost is repaid.
Karl Marx
This is odd, because Jean-Baptiste Say was one of the leading members of what became known as the Banking School.  He knew that you don’t need existing savings to purchase capital that pays for itself out of its own future earnings.  He just assumed — incorrectly — that if you want capital, then go and buy capital.
This made sense from his line of reasoning, because Say understood money and banking.  Starting with Adam Smith’s first principle of economics, that the sole end and purpose of all production is consumption, Say noted that, ignoring charity, theft, or some other form of redistribution, there is only one way to be able to consume: you must produce something.
Either you must produce what you want to consume, or you must produce something to trade for what you want to consume.  “Money” is, ultimately, just the way I exchange what I produce for what you produce.  As Say explained in a letter he wrote to the Reverend Thomas Malthus,
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.
Jean-Baptiste Say
From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — 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.
I know that this proposition has a paradoxical complexion, which creates a prejudice against it. I know that one has much greater reason to expect to be supported by vulgar prejudices, when one asserts that the cause of too much produce is because all the world is employed in raising it. — That instead of continually producing, one ought to multiply barren consumptions, and expend the old capital instead of accumulating new. This doctrine has, indeed, probability on its side; it can be supported by arguments, facts may be interpreted in its favor. But, Sir, when Copernicus and Galileo taught, for the first time, that the sun, although we see it rise every morning in the east, magnificently pass over our heads at noon, and precipitate itself towards the west in the evening, still does not move from its place, they had also universal prejudice against them, the opinions of the Ancients, and the evidence of the senses. Ought they on that account to relinquish those demonstrations which were produced by a sound judgment? I should do you an injustice to doubt your answer.
Besides, when I assert that produce opens a vent for produce; that the means of industry, whatever they may be, left to themselves, always incline themselves to those articles which are the most necessary to nations, and that these necessary articles create at the same time fresh populations, and fresh enjoyments for those populations, all probability is not against me.
No wonder Keynes rejected Say’s Law!  It cuts the ground out from under the most fundamental assumptions of Keynesian economics: the necessity of past savings and of human labor to be productive!  According to Say, you don’t stimulate demand by inflating the currency or redistribution, but by making people who are not productive, productive!  There is no need for the government to manipulate the currency and cheat people out of their savings by transferring value from the poor to the rich via rises in the price level.  No wonder the politicians didn’t listen to Say when Keynes was telling them it’s alright to steal. . . .