While J.B. Say has been almost totally ignored by
mainstream economists and historians of economic thought, this is not true for
one relatively minor facet of his thought that became known as "Say's law
of markets." The one point of his doctrine that the active and aggressive
British Ricardians got out of Say was this law. James Mill, the
"Lenin" of the Ricardian movement (see below), appropriated the law
in his Commerce Defended (1808), and Ricardo adopted it
from his discoverer and mentor.[1]
Say's law is simple and almost truistic and self-evident, and it is hard to escape the conviction that it has stirred up a series of storms only because of its obvious political implications and consequences. Essentially Say's law is a stern and proper response to the various economic ignoramuses as well as self-seekers who, in every economic recession or crisis, begin to complain loudly about the terrible problem of general "overproduction" or, in the common language of Say's day, a "general glut" of goods on the market. "Overproduction" means production in excess of consumption: that is, production is too great in general compared to consumption, and hence products cannot be sold in the market.
If production is too large in relation to consumption, then obviously this is a problem of what is now called "market failure," a failure which must be compensated by the intervention of government. Intervention would have to take one or both of the following forms: reduce production, or artificially stimulate consumption. The American New Deal in the 1930s did both, with no success in relieving the alleged problem. Production can be reduced, as in the case of the New Deal, by the government's organizing compulsory cartels of business to force a cut in their output.
Stimulating consumer demand has long been the
particularly favored program of interventionists. Generally, this is done by
the government and its central bank inflating the money supply and/or by the
government incurring heavy deficits, its spending passing for a surrogate
consumption. Indeed, government deficits would seem to be ideal for the
overproduction/underconsumptionists. For if the problem is too much production
and/or too little consumer spending, then the solution is to stimulate a lot of
unproductive consumption, and who is better at that than government, which by
its very nature is unproductive and even counterproductive?
Say understandably reacted in horror to this analysis
and to the prescription.[2] In the
first place, he pointed out, the wants of man are unlimited, and will continue
to be until we achieve genuine general superabundance — a world marked by the
prices of all goods and services falling to zero. But at that point there would
be no problem of finding consumer demand, or, indeed, any economic problem at
all. There would be no need to produce, to work, or to worry about accumulating
capital, and we would all be in the Garden of Eden.
Thus Say postulates a situation where all costs of
production are at last reduced to zero: "in which case, it is evident
there can no longer be rent for land, interest upon capital, or wages on
labour, and consequently, no longer any revenue to the productive
classes." What will happen then?
What then, I say, these classes would no longer exist.
Every object of human want would stand in the same predicament as the air or the
water, which are consumed without the necessity of being either produced or
purchased. In like manner as every one is rich enough to provide himself with
air, so would he be to provide himself with every other imaginable product.
This would be the very acme of wealth. Political economy would no longer be a
science; we should have no occasion to learn the mode of acquiring wealth; for
we should find it ready made to our hands.
Since, apart from the Garden of Eden, production
always falls short of man's wants, this means that there is no need to worry
about any lack of consumption. The problem that limits wealth and living
standards is a deficiency of production. On the market, Say points out,
producers exchange their products for money and they use the money to buy the
products of others. That is the essence of the exchange, or market, economy.
Therefore the supply of one good constitutes, at bottom, the demand for other
goods. Consumption demand is simply the embodiment of the supply of other
products, whose owners are seeking to purchase the products in question. Far
better to have demand emerging from the supply of other products, as on the
free market, than for the government to stimulate consumer demand without any
corresponding production.
For the government to stimulate consumption by itself
"is no benefit to commerce; for the difficulty lies in supplying the
means, not in stimulating the desire for consumption; and we have seen that
production alone, furnishes the means." Since genuine demand only comes
from the supply of products, and since the government is not productive, it
follows that government spending cannot truly increase demand:
a value once created is not augmented … by being
seized and expended by the government, instead of by an individual. The man,
that lives upon the productions of other people, originates no demand for those
productions; he merely puts himself in the place of the producer, to the great
injury of production …
But if there can be no general overproduction short of
the Garden of Eden, then why do businessmen and observers so often complain
about a general glut? In one sense, a surplus of one or more commodities simply
means that too little has been produced
of other commodities for which they might exchange.
Looked at in another way, since we know that an increased supply of any product
lowers its price, then if any unsold surplus of one or more goods exists, this
price should fall, thereby stimulating demand so that the full amount will be
purchased. There can never be any problem of "overproduction" or
"underconsumption" on the free market because prices can always fall
until the markets are cleared. While Say did not always put the matter in these
precise terms, he saw it clearly enough, particularly in his Letters to Malthus, in his controversy with the
Rev. Thomas Robert Malthus over Say's law. Those who complain about
overproduction or underconsumption rarely talk in terms of price, yet these
concepts are virtually meaningless if the price system is not always held in
mind. The question should always be: production or sales at what price! Demand or consumption at what price! There is never any genuine unsold
surplus, or "glut," whether specific or general over the whole
economy, if prices are free to fall to clear the market and eliminate the
surplus.
Moreover, Say wrote in his Letters to Malthus, "if the quantity sent in
the slightest degree exceeds the want, it is sufficient to alter the price
considerably." It is this notion of what we would now call
"elasticity," and resulting sharp changes in price, that for Say
leads many people to mistake a "slight excess" of supply "for an
excessive abundance."
The policy implications of attending to the price
system are crucial. It means that to cure a glut, whether specific or pervasive,
the remedy is not for the government to spend or create money; it is to allow
prices to fall so that the market will be cleared.
In his Letters to Malthus, Say
offers the following example. One hundred sacks of wheat are produced and
exchanged for 100 pieces of cloth (or rather, each is exchanged for money and
then for the other commodity). Suppose that productivity and output of each is
doubled, and now 200 sacks of wheat are exchanged for 200 pieces of cloth. How
is superabundance or overproduction going to affect either or both commodities?
And if by producing 100 units of each product, the producer made 30 francs'
profit, why couldn't the resulting increase of production and fall in the price
of each product still reap 30 francs' profit
for each seller? And how can general glut arise? Yet Malthus would have to
maintain that part of the new production of cloth would find no buyers.
Say then notes that Malthus in a sense conceded the
point about prices falling due to increased production, and then fell back on a
second line of defense: that "productions will fall to too low a price to
pay for the labour necessary to their production." Here we come to the nub
of the overproductionist/underconsumptionist complaints — if we can get past
their foggy aggregative concepts and their real or seeming neglect of the fact
that a lower price of any product can always clear the market.
In reply, Say noted that Malthus, having unfortunately
adopted the labor theory of value, neglected to add the productive services of
land and capital to labor in the costs of production. So that the assertion is
that selling prices will fall below the costs of production.
But where do "costs" come from? And why are
they somehow fixed, exogenous to the market system itself? How are they determined?
Although Ricardo joined with Say on the question of overproduction, it was easy
for a British follower of Smith and Ricardo (such as Malthus) on cost theories
of value to fall into this trap and to assume that costs are somehow fixed and
invariant. Say, believing as we have seen that costs are determined by selling
price rather than the other way round, was impelled to a far clearer and more
correct picture of the entire matter. Returning to his example, Say points out
that if the wheat and cloth producers double the quantity produced with the
same productive services, this means not only that the prices of wheat and
cloth will fall, but also that factor productivity has risen in both
industries. A rise of factor productivity means a lowering of cost. But this
means that an increase in output will not only lower selling price; it willalso lower costs, so there is no reason to assume
grievous losses or even a lessening of profit if prices fall.
Apparently, Say continued, Malthus is worried about
the prices of productive services remaining high and therefore keeping costs
too high as production increases. But here Say brings in a brilliantly
perceptive point: prices of productive factors must be high for a reason; they are not preordained to be high.
But this high wage or rent in itself precisely "denotes that what we seek
for exists, that is to say, that there is a mode of employing them so as to
make the produce sufficient to repay what they cost." In short, factor
prices being high means that they have been bid up to that height by
alternative uses for them. If the costs of these factors seriously impinge upon
or erase the profits of a firm or industry, this is because these factors are
more productive elsewhere and have been bid up to reflect that vital fact.
Say's reasoning is strikingly similar to the modern free trade reply to the
"cheap labor" argument for protective tariffs. The reason why labor
is more expensive, say, in the United States or other
industrialized country, is that other American industries
have bid up these labor costs. These industries are therefore more efficient
than the industry suffering from competition, and hence the latter should cut
back or shut down and allow resources to shift to more efficient and productive
fields.
In more peripheral but still relevant areas, J.B. Say
engaged in some lovely and powerful examples of reductio
ad absurdum argument. Thus, on the importance of demand vis-à-vis supply, and on the question of gluts, he
asked what would have happened if a merchant shipped a current cargo to the
site of New York City in the early 17th century. Clearly, he wouldn't have been
able to sell his cargo. Why not? Why this glut? Because no one in the New York
area was producing enough other goods to
exchange for this cargo. And why would this merchant be sure to sell his cargo
nowadays in New York City? Because there are now enough producers in the New
York area to make and import products, "by the means of which they acquire
that which is offered to them by others."
It would have been absurd to state that the problem
about the 17th century cargo was there was too many producers
and not enough consumers. Say adds that "the only
real consumers are those who produce on their part, because they alone can buy
the produce of others, [while] … barren consumers can buy nothing except by the
means of value created by producers." He concludes eloquently that
"it is the capability of production which makes the difference between a
country and a desert."
The other potent reductio, also
in his Letters to Malthus, is part of his defense of
innovation and machinery against charges of overproduction. Malthus, Say notes,
concedes that machinery is beneficial when the production of the product is so
increased that employment in that field increases also. But, Say adds, new
machinery is advantageous even in the seeming worst case, when production of
the particular good is not increased and laborers are discharged. For, first,
in the latter case as well as the former, productivity increases, selling
prices fall, and standards of living rise. Besides, writes Say, bringing in the reductio, tools are vital to mankind. To propose,
as Malthus does, to limit and restrain the introduction of new machinery is to
argue implicitly that
we ought (retrograding rather than advancing the
career of civilization) successively to renounce all the discoveries we have
already made, and to render our arts more imperfect in order to multiply our
labour by diminishing our enjoyments.
As to laborers disemployed by the introduction of new
machinery, Say writes that they can and will move elsewhere. After all, he adds
caustically, the employer who brings in new machinery "does not compel
them [the laborers] to remain unemployed, but only to seek another occupation."
And many employment opportunities will open up for these laborers, since income
in society has increased due to the new machinery and product.
Echoing Turgot, Say also counters the Malthus-Sismondi
worry about the leaking out of savings from vital spendings, pointing out that
savings do not remain unspent; they are simply spent on other productive (or
reproductive) factors rather than consumption. Rather than injuring
consumption, saving is invested and thereby increases future consumer spending.
Historically, savings and consumption thereby grow together. And just as there
is no necessary limit to production, so there is no limit to investment and the
accumulation of capital. "A produce created was a vent opened for another
produce, and this is true whether the value of it is spent" on consumption
or added to savings.
Conceding that sometimes the savings might be hoarded,
Say was for once less than satisfactory. He pointed out correctly that
eventually the hoard will be spent, either on consumption or investment, since
after all that is what money is for. Yet he admitted that he too deplored
hoarding. And yet, as Turgot had hinted, hoarded cash balances that reduce
spending will have the same effect as "overproduction" at too high a
price: the lower demand will reduce prices all round, real cash balances will
rise, and all markets will again be cleared. Unfortunately, Say did not grasp
this point.[3]
Say, however, was again powerful and hard-hitting in
his critique of Malthus's belief in the importance of maintaining unproductive
consumption by government: income and consumption by government officials,
soldiers, and state pensioners. Say argued that these people live off
production, whereas productive consumers add to the supply of goods and
services. Say continued sardonically: "I cannot think that those who pay
taxes would be at a loss what to do with their money if the collector did not
come to their assistance; either their wants would be more amply satisfied, or
they would employ the same money in a reproductive manner."
In contrast to his opponents, who wished the
government to stimulate consumer demand, Say believed that problems of glut, as
well as poverty in general, could be solved by increasing production. And so he
inveighed in many passages against excessive taxation, which raised the costs
and prices of goods, and crippled production and economic growth. In essence,
J.B. Say countered the statist proposals of the underconsumptionists Malthus
and Sismondi by an activist program of his own: the libertarian one of slashing
taxation.
Say combined his antitax insights with his critique of
Malthus's fondness for government spending via a trenchant attack on Malthus
and the public debt. Say noted that Malthus, "still convinced that there
are classes who render service to society simply by consuming without
producing, would consider it a misfortune if the whole or a great part of the
English national debt were paid off." On the contrary, rebutted Say, this
would be a highly beneficial event for England. For the result would be that
the stock-holders [government bond-holders], being paid off, would obtain some
income from their capital. That those who pay taxes would themselves spend the
40 millions sterling which they now pay to the creditors of the State. That the
40 millions of taxes being taken off, all productions would be cheaper, and the
consumption would considerably increase; that it would give work to the
labourer, in place of sabre cuts, which are now dealt out to them; and I
confess that these consequences do not appear to me of a nature to terrify the
friends of public welfare.
Notes
[1] In the
first annotated biography of economics ever written, John R. McCulloch, along
with James Mill, the leading British Ricardian, noted of Say that he was a
lucid writer but stubbornly refused to accept all the great advances of
Ricardo. The only creative insight McCulloch credited to Say was his law. John
Ramsay McCulloch, The Literature of Political Economy (1845,
London: London School of Economics, 1938), pp. 21–2.
[2] Discussion
of Say's law is made more complicated by the fact that Say, of course, did not
set aside some particular passage or sentence and call it "my law."
The locus classicus of Say's law is generally held to
be Book 1, Chapter XV of the Treatise, and
it indeed has been anthologized as "the" statement of the law. Treatise, pp. 132–40. Actually, there are
important and relevant passages scattered throughout the Treatise, especially pp. 109–19, 287–8, and pp.
303–41.
Moreover, almost all of Say's Letters to Malthus, in particular pp. 1–68, are
taken up with defense of Say's law and his critique of Malthus's (and the
Frenchman Simonde de Sismondi's) worry about general overproduction and
complaint about alleged underconsumption. Historians of economic thought have
often found Say's Letterssuperficial and erroneous,
but in fact his being forced to give attention to the law carried him to the
heart of the differences and led him to express his views in a lucid and
pungent manner. See J.B. Say, Letters to Mr. Malthus(1821,
New York: M. Kelley, 1967).
For an anthologizing of Book I, Chapter XV as the statement of Say's law, see Henry Hazlitt
(ed.), The Critics of Keynesian Economics (1960, New
Rochelle, New York: Arlington House, 1977), pp. 12–22.
[3] But
Schumpeter and other historians are grossly unfair in ridiculing one of Say's
arguments against Malthus: that there cannot be overproduction because "to
create a thing, the want of which does not exist, is to create a thing without
value; this would not be production. Now from the moment it has a value, the
producer can find means to exchange it for those articles he wants." While
this appears to eliminate the problem by defining it out of existence, there
are two comments that may be made on Say's behalf. First, this is indeed a
charming but unconvincing argument, but it is tangential, and does not vitiate
the value of Say's law or its creator's crushing arguments on its behalf. In
the heat of debate, Say, like many another intellectual combatant, sometimes
used any argument that came to hand. But second, this point is not wholly
valueless. For it focuses attention on a key question which Say raised but did
not fully answer: why in the world did the producers
make goods that, it turned out later, the consumers did not want to buy -at
least at profitable prices? Needless to say, Say's opponents provided no
satisfactory answer. For Schumpeter's attitude, see Schumpeter, op. cit„ note
10, pp. 619–20.
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