Friday, July 10, 2009

Personal Economics--Rule III

Unto every one that hath shall be given, and he shall have abundance; but from him that hath not shall be taken away even that he hath. And cast ye the unprofitable servant into outer darkness.
It is the aim of good governments to stimulate production, of bad governments to encourage consumption.
Jean-Baptiste Say
Rule III used to be known as the law of markets. It says basically that production proceeds consumption, or, in other words, that we pay for what we consume from what we--or someone else--has produced. In our day, it has been renamed "Say’s Law" because the basis of Keynesian economics is essentially a denial of the validity of this law, so, in essence, Keynes rechristened it as "Say’s Opinion." Keynes, in referring to it often quoted James Mill’s attempt at an abbreviation--"supply creates its own demand." This seems to imply that anything that is produced will be sold, which, of course, is clearly not true, at least, not true if we mean by being sold "covering at least the cost of production". But the basic rule is, that production must proceed consumption and we pay for our consumption out of something that someone has produced. For Say, the critical problem is production. For Keynes it is consumption. Indeed, when listening to modern Keynesian economists, you get the feeling that they feel that production is automatic--it takes care of itself. Of course, this isn’t true and even the most die-hard Keynes disciple has to acknowledge that at some point things must be produced; hence part of the reason that modern economics is so laden with mathematics. Economists are busy calculating, using ever increasing sophisticated tools, just exactly when we need to begin to worry about production.
The effect of the denial of Say’s Law in our day is devastating and we see it all around us in a hundred different ways. At the slightest hint of a recession the headline scream, "Consumer confidence is down." Like Elvis Presley, we’ll have a "Blue Christmas" if the retail sales figures early in December indicate that people are spending less than they did the previous year. To get out of, or even to prevent, a downturn in the economy, politicians call for measures to "jump-start the economy" or to "prime the pump". They pass out stimulation money. They start government make-work projects. Anything and everything to "get money moving in the economy". Congressmen fight endlessly to keep defense plants open even if they are building archaic weapons. Military bases and installations that serve almost no useful function e.g. Fort Douglas in my own town, are somehow argued to be vital, if not to the defense of the nation, at least, to its economic welfare.
But most devastating is the effect on individuals, for two reasons. First, they lose the wealth that would have been created if all this spending had been done on productive enterprises, but even more destructive is the idea that we are serving a useful purpose just by consuming and spending.
My own favorite statement of Say’s Law on a personal level came in a graduation speech at my daughter, Natasha’s, graduation from Skyline High School. Lyn Davidson, a member of the Granite School board who had spoken at the two previous graduations I attended because older sons were graduating, admitted that he had run out of things to say on such occasions so he had asked his 90 year old mother what he could say. She responded, "You tell those young people what I told you when you graduated from high school."
"Mom," Mr Davidson complained, "that was a long time ago. I really don’t remember what you told me then. Could you remind me?"
"Well," the mother replied, "if you don’t remember that then tell them what I told you when you graduated from college."
"Mom," he protested, "that was almost as long ago. I really don’t remember."
"What I told you when you graduated from high school, " she said with great emphasis, "is what I told you when you turned 18, what I told you when you turned 21, and what I told you when you graduated from college. It isn’t turning a certain age, or getting a diploma or a degree, or a certificate or a license that makes you an adult. You don’t become an adult until you start producing more than you consume."
On that basis many Americans never become adults. Unfortunately, we don’t even expect it any more. It was with something like this in mind that our forefathers thought it was essential, even if they were famous and making most of their income from political activity, to be able to claim as a profession something in the free market. Daniel Webster, for example, was one of America’s most successful lawyers and a leader in the US Senate, but he always claimed to be a farmer. The same is true of his associates Henry Clay and John C. Calhoun.
Many Americans are eager to get on welfare roles in manner possible, partially, because they see themselves as performing a service by being consumers. Years ago when I was working as a volunteer employment specialist, a neighbor came to me asking me to help him apply for a job that had been listed. "That job is a government subsidized job that can only be given to someone who is handicapped," I informed him.
"I am handicapped." he responded.
"I’m sorry to hear that. I wasn’t aware of it. What’s your handicap?"
He responded so seriously that I didn’t dare laugh, but it took all my self-control not to. "I can’t spell", he said almost in tears. "You can’t imagine what a handicap that’s been to me."
That is an extreme example, but I am always amazed to see how eagerly people of my acquaintance claim handicapped status. I think it happens largely because it excuses them from the rigors of productive work and, after all, they are told repeatedly that what we really need in this country in this Keynesian age, is consumers. They qualify.
Rule III is, therefore, "I pay for what I consume with what I--or someone else--produces. The corollary is that except in very special circumstances if it is someone else, you never really grow up.

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