THE TRUE COST OF ABANDONING SAY´S LAW / MACLEOD FINANCE

The true cost of abandoning Say’s Law

Keynes trashed Say’s Law to invent macroeconomics — a non-science full of errors, anti-market, and pro-government interfering. It has led to today’s increasingly visible crisis.

ALASDAIR MACLEOD

The magnitude of the error cannot be emphasised enough. 

Imagine employing an electrician ignorant of Ohm’s Law: sooner or later he will blow up your wiring and probably himself and your house as well. 

Similarly, the consequences of ignoring the truth in French economist Jean-Baptiste Say’s writings, collectively summarised as Say’s Law, blows up entire economies. 

As Ohm’s Law is the basis of everything electrical and electronic, Say’s description of how the division of labour and specialisation of skills works was and is still the basis of all economic activity.

Ignoring what Say wrote over two centuries ago is leading to our economic destruction, and that destruction is laid at Keynes’s door.

Denying this fundamental truth is what Keynes did with his General Theory, of Employment, Interest and Money published in 1936. 

It provided the foundation for today’s macroeconomics. 

The root of Keynes’s misconception was his desire to justify state intervention in the economy. 

In order to do so he had to dismiss free market capitalism, and with it the central tenet of classical economics — Say’s Law. 

This problem clearly occupied his mind in the 1930s, and he could not dismiss it. 

But he had to for his General Theory to make apparent sense.

In that seminal work, his references to Say’s Law were only two in number, both of them early on in the General Theory so that he could develop his thesis in the rest of the book. 

When deceiving a reader, do it early in obfuscatory language and then move on.

Keynes’s was the most credible example of other endeavours by his contemporaries to escape the strictures of Say’s Law in an attempt to progress economics beyond its classical origins. 

He takes to task the theory that he describes as “Say’s Law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output” by misconstruing the concept — that is the deceit. 

Note that the central elements of the division of labour, which is what Say was all about, is missing from Keynes’s offhand dismissal.

From the division of labour, which is an uncontroversial fact, we get to explain the functions of money, credit, and prices in an economy. 

Dismiss it, and you will be like the hapless ignorant electrician who is a danger to himself, you, and your property.

Jean-Baptiste Say never condensed what was subsequently ascribed to his name into a short aphorism. 

Instead, he wrote a book, Traité d'Économie Politique, first published in 1803, which by its sixth edition had almost doubled in length. 

Say’s skill was to describe in terms accessible to the reading public the principles of free markets and sound money, and why they delivered economic progress. 

He explained it in the context of individuals and their interaction, despising the manipulation of people for social engineering. 

Like the Austrian School that later emerged following Carl Menger from the 1870s onwards, he convincingly demolished the cost theory of labour and mathematical economics. 

Murray Rothbard put it this way:

In a surprising and perceptive prefigurement of modern controversies, Say goes on to explain why the logical deductions of economic theory should be verbal rather than mathematical. 

The intangible values of individuals, with which political economy is concerned, are subject to continuing and unpredictable change: “subject to the influence of the faculties, the wants and the desires of mankind, they are not susceptible of any rigorous appreciation, and cannot, therefore, furnish any data for absolute calculations”. 

The phenomena of the moral world, noted Say, are not subject to strict arithmetical computation.

Another important element ignored by Keynes was time. 

A business has to make payments ahead of its sales. 

It has to buy materials and assemble the other factors of production. 

It has to pay suppliers, including the acquisition of higher levels of production; all this in advance of selling a single unit of production. 

To equate, as Keynes appeared to do, today’s sales with today’s consumption is wrong, because a business has to pay its employees ahead of their production being realised, for which it requires monetary capital.

Clearly, Say’s observations were chalk to Keynes’s cheese, disproving everything that followed on from his denial of what had become a cornerstone of free market economics.

The concept of the division of labour was only part of Say’s Traité. 

Behind Say’s Law, there is a truism, that over the longer term there must be a balance between what is produced and what is consumed. 

We work with our specialised skills to maximise our output so that we can acquire those goods and services that we need and desire. 

To allege, as Keynes did, that this is the same as “that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output” arrives at the wrong conclusion by skating over the relevant factors.

Central to Say’s actual argument was that changes in demand would lead to surpluses of some commodities and shortages of others, which would, left to markets correct themselves through the price mechanism — that’s why it is nonsense to ignore the role of money and prices. 

A fall in some commodity and goods prices would create unemployment — that much is obvious. 

But left to themselves in free markets, unemployment and the opportunities created elsewhere would always correct this situation over time. 

It is central to how free markets continually evolve to meet the needs and wants of consumers.

Government intervention is therefore undesirable and unnecessary and can only hamper the market’s natural tendency to adjust to an ever-changing situation, which is the condition necessary for economic progress. 

By denying Say’s Law, Keynes was misleading us by claiming a short-term adjustment problem was the same as an absolute one.

Furthermore, the division of labour requires capital resources backed by savings, without which it cannot deliver its potential. 

Another example of Keynes’s wilful deception was his paradox of savings argument to boost immediate consumption.

As a mathematician Keynes had little or no understanding of deductive aprioristic theory. 

He demonstrated a bias against the “unearned” income of the idle rich living off the interest on their capital. 

But the role of savings was fully addressed by Say. 

He explained why capital as a fund of savings naturally earns interest. 

Capital is a tool of business and of calculation, and money is the only form of capital whose cost is so denominated. 

Just as commodities have a price, and labour its wages, the time-use of capital comes with a cost. 

And that cost, its freely set interest rate is an integral part of functioning markets.

Savings as a source of capital are needed by entrepreneurs, who are prepared to bid up for them having estimated an interest rate in their business calculations and knowing what rate of interest is affordable to a project.

This is not the usurious assumption that Keynes appear to have assumed; that greedy work-shy capitalists withhold their spending, thereby restricting output potential. 

Furthermore, Keynes’s mathematical macroeconomics has driven us down a blind alley whose endpoint is now reached. 

His paradox of thrift is such a case: it damages current consumption by saving. 

Therefore, do away with savings to enhance consumer demand.

Simply put that was the level of his thinking. 

It was the same with interest rates. 

But the manipulated trend towards zero, and even negative interest rates in some places in recent years has depleted savings as a source of finance. 

The belief that lowering interest rates stimulates production and consumption has been found wanting.

Instead, we have unlimited quantities of fiat currency, which over time have eroded everyone’s purchasing power. 

So why, are we not seeing Keynes’s vision being realised?

The answer lies in those few paragraphs which Keynes used to deceive in his General Theory by denying the validity of Say’s Law. 

There is no role for governments to intervene in an economy other than a destructive one. 

The true cost of increasing economic intervention is measured in the declining purchasing power of every governments’ currencies, which are being debauched at an accelerating rate relative to real money in common law, which is gold.

For some time, it has become an unstoppable process, logically ending in the existential global monetary crisis we can now envisage.