. . . instead of making people work for profits. Which, frankly, is a bad way of putting it, for there is no reason to work at all if there is no profit in it. What we mean (after titling this blog in a way we hope will catch your eye and keep you glued to the screen), is that — consistent with Say’s Law of Markets — production and consumption should be in balance.
Thus (so Jean-Baptiste
Say’s reasoning went), the aggregate profit in an economy should be exactly
equal to aggregate consumption. For
example —
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| Jean-Baptiste Say |
A Producer/Consumer
(Say assumed that every producer is a consumer, and every consumer is a
producer) desires, wants, or needs to consume 100 Pazoozas’ worth of goods and
services in a year. In order to do so,
P/C must produce 100 Pazoozas’ worth of goods and services, either for his own
consumption, or to trade with other P/Cs for the goods and services they
produce.
If what P/C
produces doesn’t cost him anything, and he sells everything for cash, he only
has to produce goods and services to the value of 100 Pazoozas. If, however, what P/C produces costs him 50
Pazoozas to produce, then he needs to sell what he produces for 150 Pazoozas to
cover his costs and realize enough profit to meet his living expenses.
And so on, down
the line. Thus, if P/C A sells 100 Pazoozas’
worth of stuff that cost him no cash outlay to B, and B uses it to produce
something B sells to C for 200 Pazoozas, then C must be able to sell what he
produces for 300 Pazoozas in order to make the same profit as A and B, and
thereby meet his living expenses.
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| Cattle were once currency and the standard of value. |
If the economy in
our example consists of only A, B, and C, it is easy to see how everything
stays in balance in accordance with Say’s Law:
A’s cost of
production is zero, and he buys 100 Pazoozas’ worth of stuff from C to consume,
using the 100 Pazoozas he received selling what he produced to B. A’s income and outgo are equal at 100
Pazoozas.
B purchases 100
Pazoozas’ worth of stuff from A to produce stuff, and another 100 Pazoozas’
worth from C to consume, using the 200 Pazoozas he received selling what he
produced to C. B’s income and outgo are
equal at 200 Pazoozas.
C purchases 200
Pazoozas’ worth of stuff from B to produce stuff, and keeps 100 Pazoozas’ worth
of stuff he produced for his own consumption.
He pays for the 200 Pazoozas’ worth of stuff he purchased from B with
the 100 Pazoozas he received from A, and the 100 Pazoozas he received from
B. C’s income and outgo are equal at 300
Pazoozas.
You can keep
adding more people and more complicated transactions, but it boils down to
Say’s Law of Markets: production equals income, and supply generates its own
demand, and demand, its own supply . . . in aggregate, even if the “aggregate”
is an economy in which GDP is 600 Pazoozas, as in our example.
Of course, the
above example assumes that human labor is the only factor of production. What happens if you add in capital, that is,
land and technology?
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| Capital increases production. |
Well . . .
nothing — if by “nothing” we mean that the basic scenario remains the same. You’re adding one cost, but usually taking
away another one (or why would you be using technology in the first place, if
it wasn’t more productive than labor?), so that production either increases
with the same inputs, or stays the same with fewer inputs.
To illustrate, in
the above example C produced the consumer goods he, A, and B required to meet
their consumption needs, using the input he purchased from B, that B produced
with the input he purchased from A. Now
let’s add D, who produces the capital good necessary to make A’s production
more efficient:
A purchases 100
Pazoozas’ worth of capital from D, and 100 Pazoozas’ worth of consumer goods
from C, paying for both of them by signing a promissory note that he will pay C
and D 100 Pazoozas each after he produces 200 Pazoozas’ worth of stuff that he
expects to sell to B. A does so, making
his production equal his consumption, or his income equal his outgo.
B purchases 200
Pazoozas’ worth of stuff from A, which he turns into 400 Pazoozas’ worth of
stuff that he sells to C. B pays A 200 Pazoozas
and — doubling his consumption (he just got married because he could now afford
to) — pays C 200 Pazoozas. B’s income
and outgo are also equal.
A takes the 200
Pazoozas he got from B, and pays C and D each 100 Pazoozas, redeeming his
promissory note.
C purchases 400
Pazoozas’ worth of stuff from B, which he turns into 800 Pazoozas’ worth of consumer
goods, of which he sells to A, B, and D (all of whom could now afford to get
married because of the increase in production resulting from the capital D
provided), and keeps 200 Pazoozas’ worth for himself, because he got married
and doubled his consumption, too. C’s
income and outgo also balance.
D purchases 200
Pazoozas’ worth of consumption goods from C using the 100 Pazoozas he got from
A in payment of the capital he sold A earlier, and a promissory note backed by
the value of the 100 Pazoozas’ worth of capital he expects to sell to B, to be
redeemed when B pays him.
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| Henry Dunning Macleod |
Obviously, no
economy in the world works in such a simplified manner. There are too few people for one thing, and
too few products. A, B, C, and D need a
lot more people to buy what they produce, but the example is only intended to
illustrate the principle of Say’s Law of Markets: that production equals
income, and therefore supply generates its own demand, and demand, its own
supply.
Also, it becomes
obvious that money and credit are (or should be) “self-regulating.” Money and credit are actually the same thing.
As Scottish lawyer, banker, and "maverick economist" Henry Dunning Macleod noted more than
a century ago, “Money and Credit are essentially of the same nature; Money
being only the highest and most general form of Credit.” (Henry Dunning
Macleod, The Theory of Credit.
Longmans, Green and Co., 1894, 82.)
Money — and therefore
credit — is legally defined as “anything that can be accepted in settlement of
a debt.” More specifically, money is “All
things transferred in commerce.” When A,
B, C, and D produce something for use or sale, they create money. They can either trade what they produce
directly (barter money), or — more likely — “pre-trade” using credit, that is,
promises to deliver actual goods or a claim on actual goods in the future. The “money” is legitimate either way.
What happens,
however, when somebody who doesn’t produce anything starts issuing “money,”
that is, starts making promises that he doesn’t have the capacity to keep? We’ll look at that tomorrow.
#30#
