Poor J. B. Say! The great luminary, Karl Marx, devoted some time to refute him. Who can withstand the fiery blasts from that old dragon?
I find reading Marx unpleasant. Such hatred, such projection in the Freudian sense, such venom. Luckily, we don’t have to read ole Marx himself, because the good Steve Keen has graced us with his explication of how Marx has relegated Say’s Law “to the dustbin of the history of economic thought”. Meaning tossed the thing in the garbage.
If you don’t know what Says’ Law is, you can either do a search on this very site for my previous articles about it, or rely on Steve Keen’s concise and accurate summary. Yes, Keen understood Say’s Law, as did Marx. But they both thought they found a flaw in it.
First, the link to Keen’s article:
Now for a short introductory remark. That Say’s Law is true even when people are “hoarding” money has been shown very nicely by Hazlitt and Rothbard and Mill, quoted at length in earlier articles here. A search will show you where they are. The point of this article is to show how Steve Keen’s article is a total mess, making absurd assumptions and statements. And the point of that is to have fun. I mean, Marx loved talking about internal contradictions of Capitalism. So we, in the same spirit, are going to talk about internal contradictions of Steve Keen’s thesis.
Now for the gist of his argument: Say was 100% correct in a barter economy, where people make things either to use themselves or to trade for other things. But sadly, with the appearance of money, some people do not make things to use, or to trade for useful objects, but to make more and more money. They make a chair, say, and sell it. They use the money from the sale to make more chairs, and more chairs, and more chairs, all for the goal of having more money to stash under their mattress.
Say assumed explicitly that the goal of making money is to ultimately buy something with it. How naive he was, writes Marx. Say did not understand that there exists a type of person who makes money for its own sake, to just fill his house with gold coins and dollar bills, never to be spent.
You see the problem. This fellow who makes chairs and keeps the cash is basically flooding the market with chairs, and taking little to nothing out of the market in return [except for cash]. If we have enough of these guys doing the same thing, the market will be flooded not only with chairs, but with all kinds of other stuff. Thus a general glut is not only possible, but inevitable, if there are enough of those kind of people around.
Marx and Keen even have a formula to describe this process M->C-> M+. Which means converting Money [M] to Chairs [C] to More Money [M+].
Here’s the quote from Marx [get your barf bag ready]:
The expansion of value, which is the objective basis or main-spring of the
circulation M-C-M, becomes his subjective aim, and it is only is so far as the
appropriation of ever more and more wealth in the abstract becomes the sole
motive of his operations, that he functions as a capitalist . . . Use-values must
therefore never be looked upon as the real aim of the capitalist. Neither must the
profit on any single transaction. The restless never-ending process of profit making alone is what he aims at. This boundless greed after riches, this passionate chase after exchange-value, is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser. The never ending augmentation of exchange value, which the miser strives after, by seeking to save his money from circulation, is attained by the more acute capitalist, by constantly throwing it afresh into circulation. (Marx 1867: 151)
Keen then goes on to explain all the horrors that follow from people not spending all the money they make. Loyal readers of our humble blog may remember our decisive refutations of this thesis, here [= https://smilingdavesblog.wordpress.com/2013/02/14/how-mises-dismissed-that-whole-keynesian-thing-with-a-decisive-one-liner/] and here [=https://smilingdavesblog.wordpress.com/2013/06/24/where-will-the-money-come-from-to-replace-hoarded-money/] and other places.
But again, the point of this article is not show why Keen and Marx are wrong about hoarding, because we’ve done that in those other places, but that Keen was asleep at the wheel when he wrote his article. It’s full of internal contradictions, which we are about to elaborate on.
The bottom line of all these bad things that come from hoarding, what they all lead up to, continues Keen, is “a potential for instability”. And what are these dread Horsemen that will bring on the Instability Apocalypse?
Leading the charge is “speculative overproduction”.
Then comes the Profit Twins, namely, “excessive and insufficient expectations of profit”.
Neck and neck with the others is “maldistribution of income”.
Bringing up the rear is “excessive debt”.
And, like the hordes of peasants who always follow the knights on horseback, we have “the whole panoply of macroeconomic issues that believers in Say’s Law cannot comprehend”.
And since Say did not understand any of this, Keen concludes that Say did not understand Capitalism. Capitalism, where people exist who hoard money for its own sake. Capitalism, where those hoarders will create a big fat glut of products and sleep on big bags of money.
Here’s the quote:
With the presence of a circuit dominated by the desire to accumulate, the
simple harmony of commodity production and consumption (vulnerable only
to disproportionality) gives way to the potential for instability arising from
speculative overproduction, excessive and insufficient expectations of profit,
maldistribution of income, excessive debt, and the whole panoply of
macroeconomic issues that believers in Say’s Law cannot comprehend. Say’s
‘Law’ therefore, is not a recondite insight into the nature of a market
economy, but evidence of a basic failure to comprehend capitalism.
OK, let’s take them one at a time. Here are the evils that exist in a money economy, but not in a barter economy, according to Keen:
1. Speculative overproduction. Since the chair maker is interested in making money, and the only way to make money [for him] is to make chairs, he is going to spend day and night in the shop, making chair after chair after chair, hoping he can sell them [=speculating]. But he might make too many chairs [=overproduction].
Foolish Say did not grasp that in a barter economy, the chair maker only wants to make one chair, enough to trade for a pair of pants. He won’t make more and more chairs, hoping to trade them for a pair of pants, and a shirt, and a pair of shoes, etc. etc. Nope, he is not a greedy capitalist, and he is content to sit around half naked and barefoot, because there exists no money.
Only in an economy where there is money, only then does the chairmaker get greedy. He still is happy to sit around in a pair of pants only [=underconsumes], but he makes more and more chairs because he wants cash. Cash, do you hear me? CASH! For its own sake, not to spend. That’s Steve Keen’s explanation of why Say’s law is true in a barter economy, but false in a money economy.
Can there be anything more absurd than such a proposition? To think that people in a barter economy have finite limited desires, and only the existence of money makes them want more? Even in a barter economy, that chairmaker will work as hard as he can, because there are plenty of good things to be had.
2. Excessive and insufficient expectations of profit. Keen explains this later on:
Euphoric expectations during a boom may lead capitalists to produce
too much of everything relative to the future ability of the system to finance
their sale at a profit [=excessive expectation of profit] …while …depressed expectations during a slump may lead to a self-fulfilling spiral into depression [=insufficient expectations of profit].
In other words, that poor chairmaker, and all his pals, are bound to miscalculate, surely. As Keen puts it…
In an uncertain world, expectations of what and how much to
produce will necessarily be sectorally and in the aggregate incorrect to at
least some degree.
Can anyone really know exactly how many chairs to make, how many suits, how many anything? Of course not. So that either that chairmaker will make too many chairs, or too few. In either case, the balance that Say postulated, that supply and demand are equal by definition, is just wrong.
…whereas exchange in the C-M-C’ sphere has its own guarantee of overall balance ,[=Say’s Law is true in a barter economy, because then the chairmaker and everyone else knows exactly how many chairs to make always. Not only that, the hens know exactly how many eggs to lay, the cows exactly how much milk to give, the very earth knows exactly how much corn to produce.], no such guarantee exists for exchange done within the M-C-M+ circuit [=where there is money in the economy, then and only then does the chairmaker and everyone else suddenly have no clue how much to make. The glitter of gold and the greenness of dollars makes him and the hens and the cows suddenly not understand what they grasped when there was no money]. That’s a summary of Keen’s argument.
I mean, seriously, folks. Who is paying Keen for producing this drivel? What idiots out there think he is saying something of meaning? People are actually linking to his paper, not to mock it, but thinking it somehow refutes Austrian Economics. The mind boggles.
3. Maldistribution of income. In a barter economy, everybody makes their fair share. You work, you make one chair, you trade it for one pair of pants, everything is fairly distributed. But in a capitalist economy, some people are making much more money than they should be. And why? Keen doesn’t say. He doesn’t say how he knows what the proper amount is that one “should” make. He also doesn’t say why only in a money economy do people make more money than they “should”.
Now, it could be that Keen is a Marxist and believes in the labor theory of value [=workers are exploited by their employers], as did Marx. If that is the case, then refuting him is beyond the scope of this humble article. There are plenty of books and articles over at mises.org showing how stupid that theory is.
But even if we accept the labor theory of value for the sake of argument, and accept that hiring workers creates a maldistribution of income, it is silly to posit that one can only hire workers in an economy that has money. One can hire workers in a barter economy as well. Duh. So if Say’s Law is fine and correct in a barter economy, despite there being workers hired by someone else, it is also correct in a money economy. So if that’s what Keen means, he is not being very keen.
But maybe he isn’t a Marxist. Maybe he understands that the labor theory of value is silly. Maybe what he means by maldistribution of income is that in a money economy there are bankers, who make money unfairly, charging interest and stuff. Here’s the quote from Keen’s article that makes me think this:
…a monetary production economy has a triangular relationship
between a seller at one apex, a buyer at another, and a bank at the third that
records the transaction as a debit to the buyer and a credit to the seller, and
charges and pays differential interest.
Again, this is why Keen thinks that in a barter economy there is no maldistribution of income, but in a money economy there is. Because in a money economy there exists interest.
Here, too, Keen forgets that you don’t need money to charge interest.The chairmaker needs wood. He goes to his neighbor who has some trees. the cahirmaker borrows some wood, promising to return it plus 5% more at the end of the year. What’s so hard to understand?
4. Excessive debt. He gets this one from Minsky. Here’s the quote:
If income is to grow, the financial markets, where the various plans to save and
invest are reconciled, must generate an aggregate demand that, aside from brief
intervals, is ever rising. For real aggregate demand to be increasing, . . . it is
necessary that current spending plans, summed over all sectors, be greater than
current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. (Minsky 1963 : 6)
Well, I guess we can’t blame Keen for swallowing Keynes’ nonsense. Whole generations have been brainwashed into thinking that a country gets richer by going into debt, as opposed to by increasing production. But again, this is as true [or false] of a barter economy as it is of a money economy.
Bottom line, if Say’s Law is true in a barter economy, which Keen grants, nothing has changed by having money in the economy. At least none of the four things Keen mentioned. And if Keen’s four Horsemen will come wreak havoc in a money economy, they will also do so in a barter economy. Keen’s distinctions may exist in Bizzaro World, but not in this world.
Originally I was bothered by the simple question, “What was Keen thinking? Isn’t he smart enough to know when he is being foolish? Are the rebuttals to his arguments so subtle his mind can’t grasp them?”
But thinking it over, I’ve decided, who cares? Perhaps a professor of Abnormal Psychology will find an answer. Smiling Dave’s humble task is merely to expose the flaws in Keen’s very flawed economics.