Tuesday, July 22, 2008

Personal Economics--The Third Law--Say's Law

The third law of personal economics comes from Jean Baptiste Say and says in essence that we are able to consume only after we, or someone else, has produced. In a primitive economy this is obvious, so much so, that those who in the present day evoke this "Law of the Markets" are often accused of practicing "Crusoe Economics". This insight of Say was considered the backbone or basic principle of classical economics, but it has always been the bane of collectivists. Both Marx and Keynes denied it's validity and Keynes made that denial the basis of his "new economics". Since the time of Keynes economists generally have ceased to call it The Law of Markets, but refer to it as "Say's Law", as if to say that what they really mean is that is really "Say's Opinion."

There is almost never a day goes by that a cursory reading of the paper reminds us that politicians, political pundits, and media people believe that Say's Law is not applicable to our economy. The idea that a "sagging economy" needs a "stimulus package" of cash placed willy-nilly in the hands of consumers, or that the government can "Jump-start" the economy with an increase of government spending stems from the belief that our economy has outgrown Say's Opinion. The concept of the "multiplier" stems from this same fallacy, instantly exploded if we follow Say's advice and look at consumer spending, not in terms of money--a medium or facilitator of exchange--but in terms of produced goods. When the government opens up a air force base in a community, sure, now there are additional grocery stores, gas stations, and new houses to facilitate the new employees in the community, but how many additional goods and useful services are available in the total economy because we have a new air force base? The answer is, of course, none. There are, in fact, fewer, because precious resources that would have been used for the production of useful goods and services have been extracted from the economy. The real "multiplier", whenever politicians, political activists, or media pundits refer to it, is always in the denominator.

Some years ago Tip O'Neal, who was then the equivalent of Nancy Pellosi in our government today, (and about as well informed in matters of economics), was asked why we were entering a recession. "I'll tell you why with a concrete example," he replied in an angry tone of voice. "The Republicans (Nixon was in the White House, but the Democrats controlled the congress--just as today) have cut back spending (Mr. O'Neal flunked Government 101 in which you are taught that the House controls the purse-strings), and everyone is afraid to spend any money. I visited my daughter and asked here how her new refrigerator has worked out. And you know what she told me? She told me that because she's worried about the economy she decided not to postpone buying the new refrigerator. And that's why the country is in a recession." It was precisely this sort of thinking that Ronald Reagen was parodying with the comment that "we have been trying to spend our way into prosperity". The classical economist would say that if you don't absolutely need a new refrigerator, don't buy one. It will be better for you and better for the economy because the saving can be used to purchase new tools that ultimately will increase the standard of living.

Indeed, it is partially this denial of the validity of Say's law, that has made modern political economy so much a matter of mathematics. Just as the belief in "overpopulation" implies an optimum population which should be (but never is mathematically determined), so the belief that Say's Law is not valid for advanced economies implies an optimum balance of production and consumption. And just as when we look at some African country with a population density of a few people per square mile and note the horrible poverty of it people and then contrast that with Hong Kong with its density of thousands per square mile and relative affluence, we begin to suspect that population is probably not the whole problem, maybe not even a tiny part of the problem. So also when we look at that same African country with an unemployment rate of 60 to 80% and contrast that again with countries with high savings rate, we suspect that underconsumption is not the whole problem. It is this fact that has turned so much of modern political economy into mathematical exercises. Obviously, there must be some production. Also, the "Paradox of Thrift" cannot be a total paradox, i. e. if no one ever saves anything then economic progress grinds to a halt and quickly goes into reverse. Hence, the political economist finds himself, like the business economist (who does so legitimately), dealing in charts, tables, statistics, equations to determine the optimum values of production and consumption, saving and spending. The result, of course, entails a great deal of government force, and the results are never very satisfactory.

But, while denying the validity of Say's Law has been unfortunate for the economy as a whole, for many of those who make up that economy, it has been absolutely disastrous. The reason is not hard to find. Almost everyone, at some time in his/her life expresses the sentiment, "I don't want to be a burden on others." Unfortunately, the economics on Keynes, makes it so no one is a burden as long as they are consumers. The result is that those on welfare, those who live by preditation, criminal or legal, those who live off gambling winnings, those who are supported because they are disabled or handicapped, those who have government sinecures feel that they are no burden and, hence, there number is multiplying. When I first started going to my Church, there was one handicapped parking stall. It was placed there to accomodate an elderly gentleman who had been in a wheelchair since being crippled in childhood by polio. Today there are two rows or handicapped parking stalls. People pull into them and proudly point to their handicap stickers or license plates as they hop out of their cars and skip into church.

Say's Law is really the economic expression of the scriptural admonition, "By their fruits shall ye know them" and the admonition to be "profitable servants". Until it becomes a part of our personal resolve there can be little success or happiness in the fullest sense, and until it is reinstated as a social value there can be little peace or prosperity.

1 comment:

Gavin said...

this is great! I remember when Gardner was working for the economic planning of Utah and they would use Keynes "Multiplier" to determine the number of jobs that would be gained by building a new soccer stadium. I guess it shows when people in government are eager to use an "economic tool" then that tool is either being misused or isn't valid at all.