Say understood human
nature and the fact that people tend to be rational but are
not omniscient. It follows that overproduction of particular
commodities, by individuals firms and producers, is possible
when mistakes have been made. The glut of a specific
commodity can arise from its production in excessive
abundance outrunning the total demand for it or from the
shortfall in the production of other commodities. A glut
can only take place temporarily when too many means of
production are applied to one type of product and not enough
to others. This type of disequilibrium is normally quickly
remedied in a free market economy as market incentives and
rational self-interest lead to adjustments in production,
prices, marketing strategies, and so on. People have a
rational self-interest in correcting their errors.
What about savings?
People do not spend all of the wealth that their production
created. The demand for current goods and services fails to
match the value of what has been produced as people choose
to hold some of it in monetary form. According to Say,
savings is beneficial and better than consumption because it
is used in the production of capital goods or in additional
production. Contrariwise, consumption does not provide a
stimulus to wealth. When production exceeds consumption, the
difference is savings which goes toward the production of
investment goods and investment is the basis for future
growth. Such a reinvestment process is fueled by
entrepreneurs. If money is stored in the form of
bank-created money such as checking accounts, the held-back
consumption power will be transferred to borrowers from the
bank that created it. In other words, the power to consume
is shifted to the borrower. There will be no deficiency in
aggregate demand as long as the banking system is free to
carry out the process of transforming depositors' savings
into borrowers' spending. As long as savings are reinvested
in productive uses in the aggregate there need be no
decreases in income, production, or consumption. Say argued
that savings searching for profits goes quickly into
investments for production.
Higher rates of savings
bring about higher rates of subsequent growth in aggregate
output. This takes place because someone else borrows the
money that will produce an even greater number of goods. It
follows that people need incentives for working, saving,
investing, and risk-taking. Say's insight was that incomes
are always totally spent on commodities satisfying current
wants (i.e., consumption) or on commodities satisfying
future wants (i.e., savings accumulation) and that savings
are essential if the economy is to grow. Demand thus comes
from supply whenever you demand it. People save in order to
expand their production or to live on their savings when and
as they need them. Savings buy time for people to do more
than just work. It could be said that consumption is the
final cause of production and that saving is the efficient
cause of production.
Say taught that income not devoted to
consumption will be spent on investment and that the market
would automatically and fairly rapidly return toward
equilibrium. Say contended that money is a neutral mechanism
through which aggregate supply is transformed into aggregate
demand. He viewed money as an intermediate good or conduit
that enables people to buy. Like Menger, Say described the
spontaneous evolution of a commodity to become money. He
favored commodity money and free banking. In Say's system,
money serves chiefly as a medium of exchange and was not
explicitly identified as a store of wealth. Say denounces
state manipulation of money through debasement of the value
of currency. He observes that such manipulation of monetary
values confuses the pricing system. He viewed inflation as a
monetary phenomenon rather than the result of excessive
employment and economic growth.
Say viewed interest rates
as the price of credit. He understood that market-determined
interest rates perform the function of a market clearing
price for money. However, he did not explicitly recognize or
discuss the relationship between interest rates and time
preferences as did the later Austrian thinkers.
Say on Government Interference |
According to Say, the cause of, or reason for, an excess
supply of goods is an excess demand for money of which there
is shortage. In turn, an excess demand for, or general
shortage of goods can only come about if there is an excess
supply of the commodity that goods trade against, which is
money. It follows that both a deficiency and an
overabundance of money undermine the process of converting
the savings of depositors into the spending of borrowers. If
a general glut of products were to exist it would not be the
cause of recession but rather the effect of a recession
caused by conditions (e.g., the actions of central bankers)
which have brought about gross misallocations of productive
resources, unemployment, and the accumulation of inventory.
Consumers would thus have less purchasing power due to the
reduced demand for those goods until inventories are used up
and misallocated resources become redirected.
Say is highly critical of
taxation and loans to the government because they reduce the
wealth to be exchanged in the private sector. He says that
taxation injures production because it thwarts the
accumulation of productive capital and that loans to the
government remove productive capital from society only to be
carelessly spent by government. The reduced capital
available means that fewer goods will be exchanged and there
will be a subsequent decline in wealth. Say thus viewed taxation
as slavery and condemned government spending. He also noted
that as the size of government increases, the range of
efforts to redistribute wealth expands.
Seeing taxation as
confiscatory and involuntary, Say understood the coercive
nature of taxation and that taxation is the enemy of
economic affluence. Taxation decreases the capital available
in an economy by redirecting private investment to
expenditures by the state. He saw that taxation not only
destroys capital, it also inhibits the functioning of a free
market and lowers citizens' standards of living. Noting that
taxation and its related expenditures do more harm than
good, Say states that the proper tax is the lowest possible
tax.
According to Say, the
goal of good government is to stimulate production while the
goal of bad government is to foster consumption. He observes
that an economy that stresses demand over supply is on the
road to relative decline and stagnation. He also maintains
that if business cycles occur then they are due to
government intervention that impedes market forces and
market clearing. Production and freedom are the concerns of
good government. Say's discourse on government intervention
provides a clear demonstration of the ineffectiveness of
fiscal policy as a wealth creator.
Keynes Denies But Does Not Refute
Say's Law |
John Maynard Keynes (1883-1946) thought that Say and the
other classical economists were saying that market economies
will never create general gluts or shortages and that every
increase in production constitutes its own demand. According
to the classicals, this would be true only if goods and
services are assigned without misallocation among all types
of produce in the proportion which private interests
dictate. In that situation only, the income generated by
sales would be sufficient to purchase the quantity of goods
available to be bought. Keynes mischaracterized Say's Law of
Markets as "supply creates its own demand" and said that the
law states that there is no obstacle to full employment and
that full employment is the rule. Observing that full
employment does not exist, Keynes concluded that Say's Law
does not hold. Keynes misunderstood and/or misrepresented
Say's views by claiming that they denied the possibility of
depressions and unemployment. Keynes had singled out Say
making him the antithetical background for his own views on
how markets behave and the role that the government should
play in the economy.
Keynes, the
underconsumptionist, unlike Say, thought that production and
consumption are disconnected activities. In addition, in the
Keynesian system, saving and investment are not two
perspectives of the same phenomenon. Instead, he saw them as
two separate, unequal, and often discoordinated activities.
For Keynes, the decision to save is not automatically
coordinated with the amount of investment needed and desired
by businessmen. He says that whether or not entrepreneurs
and businessmen invest depends upon a number of subjective
and irrational psychological factors instead of simply
depending on the availability of savings at a low interest
rate. According to Keynes, too much savings in the economy
is the cause of the unemployment of resources. He contended
that the Saysian system was only true in the special case of
when savings equals investment. He says that, because this
is rarely the case, economists need a general theory to
explain unemployment. Keynes believed that the breakdown of
Say's Law came about because of a lack of aggregate demand
which results from the disequilibrium of planned savings and
planned investment. For Keynes, savings can be too high or
too low. Either way, he considers savings to be dangerous,
self-defeating, and the source of the problem. According to
Keynes, savings is a destructive "leakage" from the economy.
In the end, after a series of convoluted discourses, Keynes
concludes that (1) when savings are less than investment,
government action is necessary to stimulate investment and
(2) when savings are greater than investment, government
action is needed to encourage consumption expenditures. In
both cases, it is up to the government to step in.
Keynes' solution to
unemployment is an increase in government spending. His
theory thus shifts from the classical economists' concern
with production to a concern with consumption. He said that
when supply outstrips demand some goods will not be sold
and, as a result, production and employment will be cut
back. His proposed solution is to increase consumption
through government spending. Keynes says that general
overproduction is the problem and the men are unemployed
because they have produced too much. His proposed solution
is to stimulate consumption and beat down production. He
says that "aggregate demand" can be too low relative to
"aggregate supply" and that government spending is needed to
fill the gap left by private-sector demand to ensure full
employment. For Keynes, spendthrifts, rather than savers,
are virtuous. He holds that both consumer spending and
government spending are the means to economic growth. His
spending theory has enjoyed great popularity with statists
who equate government spending with economic stimulus.
Keynes' solution for
stimulating the economy is to have the government spend
money thus bridging the gap between savings and investment.
He advocates government schemes to pump up consumption such
as printing and spending new money (which debases the
currency and results in inflation), deficit spending, public
works projects, higher taxes on producers, and the punitive
graduated income tax which puts more money in the hands of
the poor who are said to spend a greater portion of their
income.
Keynes maintains that
sometimes people want to hoard money instead of saving it.
When this money is withheld from investment the result is
unemployment which, in turn, causes overproduction.
Unemployed people are not able to buy the previous output of
products and depression results. According to Keynes, there
will be an absence of savings during a depression as people
withdraw money to survive. He goes on to say that (1)
without savings there will be no investment; (2) without
investment there will be no employment; (3) without
employment there will be no spending; and (4) without
spending there will be unsold goods.
Keynes explains that
savings can overshoot the demand for investment in capital
equipment resulting in excess savings and the withdrawal of
funds from circulation and from the necessary sufficient
demand for goods. Drawing money away from the purchase of
finished commodities makes them less profitable at the very
same time that firms are seeking to set up additional
capital resources to produce finished commodities. Keynes
maintains that a deficiency of purchasing power is
inevitable resulting in an increased supply of, and a
diminished demand for, products. As a result, profitable
production cannot be continued and crises and depression
begin. Keynes' solution for preventing or alleviating
depressions is to either reduce the amount of savings or to
stimulate consumption through government spending and/or the
issuance of new money.
Keynes says that in a
free market interest rates fail to perform the function of a
market clearing price and that wage rates do not adjust. The
result is underconsumption and unemployment in an
unregulated economy. As a cure to bolster consumption, he
proposed state management of the money market to supplement
fiscal policies with respect to taxation and government
spending.
Although Keynes was the
most significant and substantial critic of Say's Law he
never really does refute it. Reality cannot be denied. Of
course, Keynes' belief that he had invalidated Say's Law
remains his most enduring legacy – a legacy that has
crippled economic theory to this day. Contrary to Keynes,
overproduction is not the problem. Rather, the problem is
government intervention that penalizes production causing
both capital and producers to go on "strike." For example,
the Great Depression was due to government policies
including high income taxes, quotas and tariffs, abandonment
of the gold standard (i.e., objective money), and various
and numerous regulations and controls.
Government efforts to
stimulate the economy via direct spending and efforts to
stimulate consumer spending are counterproductive. When the
government spends an investment it must expropriate money
from businesses to do so thus ensuring a misallocation of
resources. Government should get out of the way by reducing
taxation, spending, regulations, and government control of
money and the interest rate.
Say's Law: A Powerful Economic
Truth |
Say's Law, a landmark achievement of integration in economic
science, is an essential foundation for a reality-based
macroeconomic theory. It reflects the interconnectedness,
reality, and harmony of human economic behavior in a free
market economy. To produce requires rationality and
self-interest. It is irrational and contrary to man's nature
not to produce or to produce less than one needs to produce.
Production is both necessary and primary for man's
existence. Say thus recognized the fact that it is
production that opens the demand for products. He saw that
money is not the cause of prosperity but rather is its
effect. This fact is eloquently stated in Ayn Rand's novel
Atlas Shrugged (1957, 387) through her character
Francisco d'Anconia who said: "Money is made possible only
by the men who produce … When you accept money in payment
for your effort, you do so only on the conviction that you
will exchange it for the product of the effort of others."
Say's Law is implicit throughout all of Francisco's "money
speech."
The full explanatory
power of Say's Law of Markets is that, because of the
integration of all individual markets into one functioning
system, it has to be the reality that government does not
have to be concerned with artificially stimulating demand.
There is one harmonious self-correcting system. Markets
clear if not interfered with. Such a system leads to
stability, justice, peace, and prosperity. It is no wonder
that many consider Say's Law to be the broadest, most
powerful, and most fundamental conceptual integration in the
discipline of economics.
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