 |
|
Say's Law in Context
Posted on: March 1, 2021 at 13:49:33 CT
pickle MU
Posts:
265879
Member For:
25.81 yrs
Level:
User
M.O.B. Votes:
0
https://mises.org/library/says-law-context
A broader understanding of "Say's Law" would assist those who continued to be puzzled by macroeconomic questions, but even better would be to understand the context in which this Law was formulated. Say not only built a case for the essential stability of a free market (in contrast to the instability of the present mixed economy) but also made the case for the free society against every alternative.
It is an unfortunate facet of the history of economic thought that Jean Baptiste Say (1767-1832) has been largely discussed only for his law of markets or Say's Law. The marginalization of Say's work as a whole is due largely to the poor definition of his law of markets – supply creates its own demand – which comprises chapter XV in Book I of A Treatise on Political Economy [Treatise].
English Classical Economists James Mill and David Ricardo who integrated the catchphrase "supply creates its own demand" into classical theory contributed to the neglect of J.B. Say's work as a whole.1 However, the worst treatment of Say was by John Maynard Keynes in The General Theory. Keynes's attempted refutation of Say's Law relied upon formulations of the law by J.S. Mill and Alfred Marshall.2 Even authors generally sympathetic to Say's writings have neglected to integrate his law of markets into the whole of his Treatise.
For example, Joseph Schumpeter attributes the Keynesian attack on Say's law of markets as the reason for giving the law more significance than it deserves.3 Even Murray Rothbard – who considers Say as a proto-Austrian – states that Say's law of markets is a "relatively minor facet of his thought."4
The misunderstanding of the importance of Say's Law is due to looking only at chapter XV of Book I without observing how it fits into the complete Treatise. Say's Law is like a pane in a stained glass window. When one removes the pane it loses its significance; only when the pane is placed in the window as a whole can we accurately view the beauty of the edifice. Such is Say's Law.
Jean Baptiste Say grasped the fundamental problem of economics, in that we live in a world of scarce means, but have unlimited desire or demands. Only such things as sunlight, air, or water are freely afforded to man. Thus man uses nature to transform goods that give utility to others.5 In conjunction, Say recognized that all men were both producers and consumers.6
From these two basic truisms arises Say's Law. If individuals wish to procure a good they must give something in return that is also desirable to individuals. Therefore in order for one to be a consumer one must first be a producer of a good in which others find utility. Thus individuals desire the commodity of money not as an end in itself,7 but rather as a means to procure more desirable goods. However, in order to acquire money one must first produce a good that will exchange for money.8
The most important point in Say's formulation is that the individual must produce something that is desirable to others. It is from the erroneous statement "supply creates its own demand" where the notion comes that as long as something is produced it will readily find a market. This idea conjures connotations of Ricardo's labor theory of value in which a product is endowed with value due to the exertion of labor in its production.
However, Say explicitly refutes Ricardo's labor theory of value and aptly states that it is consumer demand that induces a producer to undergo the costs of production.9 J.B. Say consequently uses his law of markets and apt understanding of utility to demonstrate why gluts of commodities will not be a long run phenomenon.
Say admits that there can be short-term gluts of a commodity. However, this can only happen if supply has outstripped demand or others do not have goods to exchange in return. Say very precisely deals with the first point by showing that the profit and loss mechanism in production will drive producers away from unprofitable production to areas that promise a greater return. The only thing preventing such a beneficial change in production would be the interference of the government or a natural disaster.
As to the second point Say uses the example of a European backwater such as Poland. He says that it would not be advantageous for a producer to take his goods to a poor country like Poland because they are lacking in goods to exchange. Thus there would be no glut in a poor market such as Poland, merely the inability to exchange goods. Also this would not produce a long-term glut because the producer could take his goods to a wealthier country such as England and quickly find a market – the idea of the adventurer.10
We have now seen in essence what has become known as Say's Law. However, this law of markets does not have much importance if it is excluded from the rest of the Treatise. For example, Say devotes the last chapter of Book II to analyze the effects of political economy on population.
J.B. Say comes to a Malthusian understanding that population is limited by means of subsistence. However, Say realizes this does not have to perpetually continue. Greater production and cheaper goods allow for population growth and whatever may inhibit production in turn decreases population.11 12 This acknowledgement combined with the most basic premise of his law – that one good must be exchanged for another good – lead Say to rail against those policies that would reduce the amount of goods exchanged and subsequently diminish national wealth. Thus the crux of Say's advocacy for a laissez-faire society is revealed.
J.B. Say did not advocate private property out of some desire to protect the bourgeoisie. Instead Say advocates private property because he views it as the greatest encouragement to increase national wealth. Only when one can enjoy the fruits of their labor will they be inclined to produce for others.13
Say rails against taxation as well as government debts because they too reduce the amount of wealth to be exchanged in society. Say writes that taxes reduce the consumption of a good and consequently make production of the good less profitable. This has the twofold effect of hurting both the consumer and producer – especially those with specific capital in the taxed area – as well as creating market distortions because some areas of production will now be less profitable. Consequently individuals will move to formerly less profitable areas of production.14
In the case of government debts they also have a negative effect on exchange and wealth. Say rightly states that loans to the government withdraw productive capital from society only to be wasted by the government. The reduced capital available will mean a reduced quantity of goods to be exchanged and a subsequent diminution of societal wealth.15
J.B. Say also uses his law of markets to advocate the free exchange of foreign goods. It is unfortunate that Say views exchange in terms of equal values. However, his argument for free trade does not live and die on this point. Instead it should be realized that Say is refuting the mercantilist notion that at least one party must lose from foreign trade. Say uses his law of markets to state that in the case of foreign exchange one needs to give up a good to gain a desired good. Whether the cargo imported is specie or other goods is irrelevant. Goods that have the highest rate of profitable return will be imported. Thus in global exchange goods will flow from where they are less desired to locations in which they are more desired.16
Finally in regards to money, Say has been accused of missing the point that money is dynamic.17 However, this is not the case. Say is a strong advocate of a hard currency and decries the state's manipulation – usually through debasement – of the value of the currency. Quite astutely Say writes that the manipulation of the monetary value confuses the pricing system thus making the adventurer/entrepreneur hesitant to further invest in capital and production. In addition, grievous price controls and taxation usually follow such debasement, which together all greatly limit production and exchange.18
As stated earlier Say's Law cannot be accurately understood in and of itself. Say's law of markets incorporates catallactics, the impetus for production and the adventurer, subjective value, and a framework for the refutation of violent government intervention that decreases production and exchange. Thus Say's Law cannot be separated from the Treatise as a whole and still be accurately understood.
————
1. See J.R. McCulloch’s The Literature of Political Economy [originally published 1845]. McCulloch writes that Say’s treaty is remarkable only for its law of markets and its popularization of Adam Smith’s work – to which Say purportedly added nothing – on the continent.
2. John Maynard Keynes, The General Theory of Employment Interest and Money (New York: Harcourt, Brace & World, INC., 1962), 18-21.
3. Joseph Schumpeter, History of Economic Analysis (New York: Oxford University Press, INC., 1954), 615. Schumpeter does understand that Say’s law is vital to his arguments against the violent hampering of internal and external trade.
4. Murray N. Rothbard, Classical Economics (Edward Elgar Publishing Limited, 1996), 27.
5. Jean Baptiste Say, A Treatise on Political Economy (New York: Sentry Press, 1964), 285-286.
6. Ibid., 471.
7. Here Say misses out on the desire of individuals to hold money for various personal utilities and regards money only as a medium of exchange.
8. Ibid., 133.
9. Ibid., 225.
10. Ibid., 135-137.
11. Say, 374.
12. For a similar conclusion see Human Action for Mises’ discussion of the Industrial Revolution.
13. Ibid., 127-132.
14. Ibid., 465-467.
15. Ibid., 479.
16. Ibid., 148-175.
17. Larry J. Sechrest, 15 Great Austrian Economists (Auburn: Ludwig von Mises Institute, 1999), 52.
18. Say, 234-240.
A broader understanding of "Say's Law" would assist those who continued to be puzzled by macroeconomic questions, but even better would be to understand the context in which this Law was formulated. Say not only built a case for the essential stability of a free market (in contrast to the instability of the present mixed economy) but also made the case for the free society against every alternative.
It is an unfortunate facet of the history of economic thought that Jean Baptiste Say (1767-1832) has been largely discussed only for his law of markets or Say's Law. The marginalization of Say's work as a whole is due largely to the poor definition of his law of markets – supply creates its own demand – which comprises chapter XV in Book I of A Treatise on Political Economy [Treatise].
English Classical Economists James Mill and David Ricardo who integrated the catchphrase "supply creates its own demand" into classical theory contributed to the neglect of J.B. Say's work as a whole.1 However, the worst treatment of Say was by John Maynard Keynes in The General Theory. Keynes's attempted refutation of Say's Law relied upon formulations of the law by J.S. Mill and Alfred Marshall.2 Even authors generally sympathetic to Say's writings have neglected to integrate his law of markets into the whole of his Treatise.
For example, Joseph Schumpeter attributes the Keynesian attack on Say's law of markets as the reason for giving the law more significance than it deserves.3 Even Murray Rothbard – who considers Say as a proto-Austrian – states that Say's law of markets is a "relatively minor facet of his thought."4
The misunderstanding of the importance of Say's Law is due to looking only at chapter XV of Book I without observing how it fits into the complete Treatise. Say's Law is like a pane in a stained glass window. When one removes the pane it loses its significance; only when the pane is placed in the window as a whole can we accurately view the beauty of the edifice. Such is Say's Law.
Jean Baptiste Say grasped the fundamental problem of economics, in that we live in a world of scarce means, but have unlimited desire or demands. Only such things as sunlight, air, or water are freely afforded to man. Thus man uses nature to transform goods that give utility to others.5 In conjunction, Say recognized that all men were both producers and consumers.6
From these two basic truisms arises Say's Law. If individuals wish to procure a good they must give something in return that is also desirable to individuals. Therefore in order for one to be a consumer one must first be a producer of a good in which others find utility. Thus individuals desire the commodity of money not as an end in itself,7 but rather as a means to procure more desirable goods. However, in order to acquire money one must first produce a good that will exchange for money.8
The most important point in Say's formulation is that the individual must produce something that is desirable to others. It is from the erroneous statement "supply creates its own demand" where the notion comes that as long as something is produced it will readily find a market. This idea conjures connotations of Ricardo's labor theory of value in which a product is endowed with value due to the exertion of labor in its production.
However, Say explicitly refutes Ricardo's labor theory of value and aptly states that it is consumer demand that induces a producer to undergo the costs of production.9 J.B. Say consequently uses his law of markets and apt understanding of utility to demonstrate why gluts of commodities will not be a long run phenomenon.
Say admits that there can be short-term gluts of a commodity. However, this can only happen if supply has outstripped demand or others do not have goods to exchange in return. Say very precisely deals with the first point by showing that the profit and loss mechanism in production will drive producers away from unprofitable production to areas that promise a greater return. The only thing preventing such a beneficial change in production would be the interference of the government or a natural disaster.
As to the second point Say uses the example of a European backwater such as Poland. He says that it would not be advantageous for a producer to take his goods to a poor country like Poland because they are lacking in goods to exchange. Thus there would be no glut in a poor market such as Poland, merely the inability to exchange goods. Also this would not produce a long-term glut because the producer could take his goods to a wealthier country such as England and quickly find a market – the idea of the adventurer.10
We have now seen in essence what has become known as Say's Law. However, this law of markets does not have much importance if it is excluded from the rest of the Treatise. For example, Say devotes the last chapter of Book II to analyze the effects of political economy on population.
J.B. Say comes to a Malthusian understanding that population is limited by means of subsistence. However, Say realizes this does not have to perpetually continue. Greater production and cheaper goods allow for population growth and whatever may inhibit production in turn decreases population.11 12 This acknowledgement combined with the most basic premise of his law – that one good must be exchanged for another good – lead Say to rail against those policies that would reduce the amount of goods exchanged and subsequently diminish national wealth. Thus the crux of Say's advocacy for a laissez-faire society is revealed.
J.B. Say did not advocate private property out of some desire to protect the bourgeoisie. Instead Say advocates private property because he views it as the greatest encouragement to increase national wealth. Only when one can enjoy the fruits of their labor will they be inclined to produce for others.13
Say rails against taxation as well as government debts because they too reduce the amount of wealth to be exchanged in society. Say writes that taxes reduce the consumption of a good and consequently make production of the good less profitable. This has the twofold effect of hurting both the consumer and producer – especially those with specific capital in the taxed area – as well as creating market distortions because some areas of production will now be less profitable. Consequently individuals will move to formerly less profitable areas of production.14
In the case of government debts they also have a negative effect on exchange and wealth. Say rightly states that loans to the government withdraw productive capital from society only to be wasted by the government. The reduced capital available will mean a reduced quantity of goods to be exchanged and a subsequent diminution of societal wealth.15
J.B. Say also uses his law of markets to advocate the free exchange of foreign goods. It is unfortunate that Say views exchange in terms of equal values. However, his argument for free trade does not live and die on this point. Instead it should be realized that Say is refuting the mercantilist notion that at least one party must lose from foreign trade. Say uses his law of markets to state that in the case of foreign exchange one needs to give up a good to gain a desired good. Whether the cargo imported is specie or other goods is irrelevant. Goods that have the highest rate of profitable return will be imported. Thus in global exchange goods will flow from where they are less desired to locations in which they are more desired.16
Finally in regards to money, Say has been accused of missing the point that money is dynamic.17 However, this is not the case. Say is a strong advocate of a hard currency and decries the state's manipulation – usually through debasement – of the value of the currency. Quite astutely Say writes that the manipulation of the monetary value confuses the pricing system thus making the adventurer/entrepreneur hesitant to further invest in capital and production. In addition, grievous price controls and taxation usually follow such debasement, which together all greatly limit production and exchange.18
As stated earlier Say's Law cannot be accurately understood in and of itself. Say's law of markets incorporates catallactics, the impetus for production and the adventurer, subjective value, and a framework for the refutation of violent government intervention that decreases production and exchange. Thus Say's Law cannot be separated from the Treatise as a whole and still be accurately understood.
————
1. See J.R. McCulloch’s The Literature of Political Economy [originally published 1845]. McCulloch writes that Say’s treaty is remarkable only for its law of markets and its popularization of Adam Smith’s work – to which Say purportedly added nothing – on the continent.
2. John Maynard Keynes, The General Theory of Employment Interest and Money (New York: Harcourt, Brace & World, INC., 1962), 18-21.
3. Joseph Schumpeter, History of Economic Analysis (New York: Oxford University Press, INC., 1954), 615. Schumpeter does understand that Say’s law is vital to his arguments against the violent hampering of internal and external trade.
4. Murray N. Rothbard, Classical Economics (Edward Elgar Publishing Limited, 1996), 27.
5. Jean Baptiste Say, A Treatise on Political Economy (New York: Sentry Press, 1964), 285-286.
6. Ibid., 471.
7. Here Say misses out on the desire of individuals to hold money for various personal utilities and regards money only as a medium of exchange.
8. Ibid., 133.
9. Ibid., 225.
10. Ibid., 135-137.
11. Say, 374.
12. For a similar conclusion see Human Action for Mises’ discussion of the Industrial Revolution.
13. Ibid., 127-132.
14. Ibid., 465-467.
15. Ibid., 479.
16. Ibid., 148-175.
17. Larry J. Sechrest, 15 Great Austrian Economists (Auburn: Ludwig von Mises Institute, 1999), 52.
18. Say, 234-240.
Please explain why this message is being reported.
MESSAGE THREAD
Say's Law in Context - pickle MU - 3/1 13:49:33