Yesterday we looked at how, under Say’s Law of Markets — everything else being equal — every producer is a consumer, and every consumer is a producer. Thus, as Say’s Law is often (if somewhat inaccurately) summarized, “supply (production) generates its own demand (consumption), and demand its own supply.”
As Jean-Baptiste Say explained in his Letters to Mister Malthus on Several Subjects of Political Economy and on the Cause of the Stagnation of Commerce (1821) — noting, of course, that is the date of the translated English version, not the original French . . . and we didn’t include the rest of the title, which is “To Which Is Added A Catechism of Political Economy, Or, Familiar Conversations on the Manner in Which Wealth is Produced, Distributed, and Consumed in Society” . . . .
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.
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.
|Rev. Thomas Malthus|
Thus, any rational person necessarily draws the conclusion that, if we want supply to equal demand (and demand to equal supply), and therefore production to equal income . . . and income to be sufficient to purchase all production, every producer must consume, and every consumer must produce.
There is one problem, though. To Say, Smith, and other classical economists of what became known as the Banking School, labor, land, and capital (technology) are all productive. To Keynes, Marx, and others of the “Ricardian” school of classical economics, only human labor is productive. (If you want to see something very nearly incoherent, see how the Ricardians explain how land both is and is not productive, and how it is both a cost free factor of production, and not a factor at all.)
What’s wrong with that? If there is production taking place that can’t be accounted for by labor, and if you’re convinced that labor is the only thing that is productive, you’re going to come to some very bad conclusions, and even worse decisions. And the problem will get worse the more capital productiveness outstrips that of labor.
For example, if labor is responsible for all production, and capital instruments are accumulated or “congealed” labor, then all the owner of capital is due is the cost of capital, nothing else. Labor is due everything above the cost of capital.
|Marx: "Didn't recognize me, did you?"|
But, obviously, owners of capital are making enormous profits. Where are those profits coming from? Why, it’s surplus or extra value stolen from either consumers who paid more than the cost of labor and materials that went into it, or from the workers who were deprived of production that belongs to them.
Thus, all owners of capital are thieves if they take anything more than depreciation, or recover the cost of their own labor that they put into the capital they purchased.
That kind of thinking is bad enough. It’s when consumers can’t produce enough with their labor to exchange for what the machines produce that the real trouble starts. Even if you admit that capital is productive, this gets you into trouble, because then all profits attributable to capital go to the owners of capital, not to the owners of labor.
This means that producers pile up goods that cannot be sold because consumers don’t have the income — they’re not producing, therefore they can’t consume. Capital is producing, so that the owners of capital have far more income (“demand”) than they can spend, and owners of labor don’t have enough. In aggregate, of course, there is theoretically exactly enough production for consumption, and vice versa . . . but the production is in the hands of people who can’t consume it all, meaning, yes, it’s all there, but it’s in the wrong place.
|Keynes: "Trust me. I know what I'm doing."|
So, what do governments do? They listen to Keynes, that’s what, and start “creating” demand by issuing debt to back new money that can be spread out and used to clear unsold goods.
But the demand already exists! Doesn’t that cause a problem?
It sure does. Because government can never catch up by creating demand that does not represent production, it has to keep going into debt deeper and deeper. The money loses value as more money chases the supply of goods, making it necessary to issue more debt because prices went up. In extreme cases, the money can lose all value. In the meantime, of course, government debt is a way of taxing people without really telling them what’s going on.
And what’s going on? By issuing debt to back new money, governments make it possible to consume without producing. That can’t go on indefinitely, though, but while it does, there is no reason for people to be productive, because what they produce gets siphoned off through inflation to make it possible for the unproductive to consume. As Say put it, the government “multiplies barren consumptions,” that is, it allows consumption without production. As he explained,
|"Hi. I'm Copernicus. What's your sign?"|
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.
So, is there a solution to the lunacy of government creating demand that already exists to stimulate growth that would take place naturally if government didn’t discourage it by removing the incentive to become productive? Yes — and that will be our New Year’s gift to you.