WEBVTT NOTE 1. J.B. Say: The French Tradition in Smithian Clothing (continued) 1 00:00:00.000 --> 00:00:07.480 5. Utility, Productivity and Distribution 2 00:00:07.480 --> 00:00:13.960 In contrast to the Smith-Ricardo mainstream of Smithians who set forth the labor theory 3 00:00:13.960 --> 00:00:21.760 or at very best the cost of production theory of value, J.B. Say firmly reestablished the 4 00:00:21.760 --> 00:00:30.920 Scholastic Continental French Utility Analysis It is utility and utility alone that gives 5 00:00:30.920 --> 00:00:38.880 rise to exchange value, and Say settled the value paradox to his own satisfaction by disposing 6 00:00:38.880 --> 00:00:45.200 of use-value altogether as not being relevant to the world of exchange. 7 00:00:45.200 --> 00:00:51.680 Not only that, Say adopted a subjective value theory, since he believed that value rests 8 00:00:51.680 --> 00:00:58.680 Depends on Acts of Valuation by the Consumers. In addition to being subjective, these degrees 9 00:00:58.680 --> 00:01:05.200 of valuation are relative, since the value of one good or service is always being compared 10 00:01:05.200 --> 00:01:13.200 against another. These values, or utilities, depend on all manner of wants, desires and 11 00:01:13.200 --> 00:01:19.120 knowledge on the part of individuals, upon the moral and physical nature of man, the 12 00:01:19.120 --> 00:01:25.120 and the climate he lives in, and on the manner and legislation of his country. 13 00:01:25.120 --> 00:01:31.120 He has wants of the body, wants of the mind, and of the soul, wants for himself, 14 00:01:31.120 --> 00:01:36.120 others for his family, others still as a member of society. 15 00:01:36.120 --> 00:01:44.120 Political economy, say Sagely pointed out, must take these values and preferences of people as givens, 16 00:01:44.120 --> 00:01:59.120 as one of the data of its reasonings, leaving to the moralist and the practical man the several duties of enlightening and of guiding their fellow creatures, as well in this as in other particulars of human conduct. 17 00:01:59.120 --> 00:02:08.120 At some points, Say went up to the edge of discovering the marginal utility concept without ever quite doing so. 18 00:02:08.120 --> 00:02:15.520 Thus, he saw that relative valuations of goods depends on degrees of estimation in the mind 19 00:02:15.520 --> 00:02:17.360 of the valuer. 20 00:02:17.360 --> 00:02:22.800 But since he did not discover the marginal concept, he could not fully solve the value 21 00:02:22.800 --> 00:02:24.600 paradox. 22 00:02:24.600 --> 00:02:30.380 In fact, he did far less well at solving it than his continental predecessors. 23 00:02:30.380 --> 00:02:36.840 And so, Say simply dismissed use-value and the value paradox altogether, and decided 24 00:02:36.840 --> 00:02:40.520 to Concentrate on Exchange Value. 25 00:02:40.520 --> 00:02:46.340 As a result, however, he could, no more than Smith and his British successors, devote much 26 00:02:46.340 --> 00:02:52.000 energy to analyzing consumption or consumer behavior. 27 00:02:52.000 --> 00:02:59.580 But whereas Say simply discarded use value, Ricardo made the value paradox and the unfortunate 28 00:02:59.580 --> 00:03:06.260 split between use and exchange value the key to his value theory. 29 00:03:06.260 --> 00:03:12.780 For Ricardo, iron was worth less than gold because the labor cost of digging and producing 30 00:03:12.780 --> 00:03:18.300 gold was greater than the labor cost of producing iron. 31 00:03:18.300 --> 00:03:23.940 Ricardo admitted that utility is certainly the foundation of value, but this was apparently 32 00:03:23.940 --> 00:03:30.060 of only remote interest, since the degree of utility can never be the measure by which 33 00:03:30.060 --> 00:03:32.900 to estimate its value. 34 00:03:32.900 --> 00:03:34.500 All too true. 35 00:03:34.500 --> 00:03:40.900 But Ricardo failed to see the absurdity of looking for such a measure in the first place. 36 00:03:40.900 --> 00:03:46.980 His second absurdity, as we shall see further below, was in thinking that labor cost provided 37 00:03:46.980 --> 00:03:51.680 such a true and invariable measure of value. 38 00:03:51.680 --> 00:03:58.420 As Say wrote in his annotations on the French translation of Ricardo's Principles, an invariable 39 00:03:58.420 --> 00:04:06.120 A reasonable measure of value is a pure chimera. Smith and still more Ricardo were pushed into 40 00:04:06.120 --> 00:04:13.800 their labor cost theory by concentrating on the long-run natural price of products. Say's 41 00:04:13.800 --> 00:04:20.720 analysis was aided greatly by his realistic concentration on the explanation of real market 42 00:04:20.720 --> 00:04:23.160 Price. 43 00:04:23.160 --> 00:04:29.080 Costs of course are intimately related to the pricing of factors of production. 44 00:04:29.080 --> 00:04:35.540 One question that cost-value theorists have difficulty answering is if, indeed, costs 45 00:04:35.540 --> 00:04:39.240 are determining, where do they come from? 46 00:04:39.240 --> 00:04:43.020 Are they mandated by divine revelation? 47 00:04:43.020 --> 00:04:49.040 One of the anomalies of Say's discussion is that even though a subjective value and utility 48 00:04:49.040 --> 00:04:56.360 Theorist, he uncomprehendingly rejected the insight of Genovese and of his own ideologue 49 00:04:56.360 --> 00:05:03.240 forebear, Kondiak, that people exchange one thing for another because they value the thing 50 00:05:03.240 --> 00:05:11.320 they acquire more than what they give up, so that exchange always benefits both parties. 51 00:05:11.320 --> 00:05:17.800 And in denying this mutual gain, Say is inconsistent with much of his own position on utility. 52 00:05:19.040 --> 00:05:25.760 In spurning Kondiak, Say is being not only ungenerous, but almost willfully obtuse. 53 00:05:25.760 --> 00:05:32.600 First, he notes that Kondiak maintains that commodities, which are worth less to the seller 54 00:05:32.600 --> 00:05:39.160 than to the buyer, increase in value from the mere act of transfer from one hand to 55 00:05:39.160 --> 00:05:40.160 another. 56 00:05:40.160 --> 00:05:48.400 But, Kondiak insists, for example, that equal value is really given for equal value, so 57 00:05:48.400 --> 00:05:54.380 So that when Spanish wine is bought in Paris, the money paid by the buyer and the wine he 58 00:05:54.380 --> 00:05:57.200 receives are worth one another. 59 00:05:57.200 --> 00:06:00.760 To which we might ask, to whom? 60 00:06:00.760 --> 00:06:06.280 He then admits that the self-same wine is worth more in Paris than it had been when 61 00:06:06.280 --> 00:06:08.400 grown in Spain. 62 00:06:08.400 --> 00:06:14.240 But he insists that the increase in the value of the wine took place not at the moment of 63 00:06:14.240 --> 00:06:20.680 of handing over the wine to the consumer, but comes from the transport. 64 00:06:20.680 --> 00:06:24.900 But St. Clair tangently takes say to task. 65 00:06:24.900 --> 00:06:30.840 In reality, the transfer to the consumer is the essence of the transaction. 66 00:06:30.840 --> 00:06:34.680 The long transport is subsidiary to this purpose. 67 00:06:34.680 --> 00:06:40.640 The change of locality is merely a means to this end, and would not have been necessary 68 00:06:40.640 --> 00:06:47.080 if consumers willing to buy the same quantity and pay the same price could have been found 69 00:06:47.080 --> 00:06:49.440 on the spot. 70 00:06:49.440 --> 00:06:54.520 Say continues obstinately to assault Kondiak's insight. 71 00:06:54.520 --> 00:07:01.560 The seller is not a professional cheat, nor the buyer a dupe, and Kondiak is not justified 72 00:07:01.560 --> 00:07:08.000 in saying that if the values exchanged were always equal, neither party would gain anything 73 00:07:08.000 --> 00:07:10.600 by exchange. 74 00:07:10.600 --> 00:07:15.440 But in reality, of course, Condiac was perfectly right. 75 00:07:15.440 --> 00:07:22.200 Why should anyone bother exchanging X for Y of equal value? 76 00:07:22.200 --> 00:07:25.920 St. Clair reacts brilliantly in exasperation. 77 00:07:25.920 --> 00:07:31.480 Lord, how these economists do misunderstand one another. 78 00:07:31.480 --> 00:07:36.800 Condiac does not suggest that the wine merchant is a rogue and the customer a fool. 79 00:07:36.800 --> 00:07:42.100 He does not suggest that the merchant robs either the consumer or the producer. 80 00:07:42.100 --> 00:07:48.720 His doctrine is that products increase in utility and value by being transferred from 81 00:07:48.720 --> 00:07:54.280 the producer to the consumer, and that both parties benefit by the intervention of the 82 00:07:54.280 --> 00:07:57.680 merchant who brings about the exchange. 83 00:07:57.680 --> 00:08:01.620 To the producer, the merchant is a consumer finder. 84 00:08:01.620 --> 00:08:07.980 To the consumer, he is a commodity finder. With the merchant as medium of exchange, the 85 00:08:07.980 --> 00:08:15.020 producer gets a better price for his produce and the buyer better value for his money. 86 00:08:15.020 --> 00:08:21.620 One of Say's great contributions was to apply utility theory to the theory of distribution, 87 00:08:21.620 --> 00:08:28.700 in brief by discovering the productivity theory of the pricing and hence the income accruing 88 00:08:28.700 --> 00:08:31.380 to Factors of Production. 89 00:08:31.380 --> 00:08:38.380 In the first place, Say pointed out that in contrast to Smith, all labor, not just labor 90 00:08:38.380 --> 00:08:42.380 embodied in material objects, is productive. 91 00:08:42.380 --> 00:08:49.040 Indeed, Say brilliantly pointed out that all the services of factors of production, whether 92 00:08:49.040 --> 00:08:56.420 they be land, labor or capital, are immaterial, even though they might result in a material 93 00:08:56.420 --> 00:08:58.620 product. 94 00:08:58.620 --> 00:09:04.700 Mises, in short, provide immaterial services in the process of production. 95 00:09:04.700 --> 00:09:11.220 That process, as Say pointed out clearly for the first time, was not the creation of material 96 00:09:11.220 --> 00:09:13.020 products. 97 00:09:13.020 --> 00:09:15.460 Man cannot create matter. 98 00:09:15.460 --> 00:09:22.420 He can only transform it into different shapes and molds in order to satisfy his wants more 99 00:09:22.420 --> 00:09:23.900 fully. 100 00:09:23.900 --> 00:09:28.060 Production is this very transformation process. 101 00:09:28.060 --> 00:09:35.180 In the sense of such transformation, all labor is productive because it concurs in the creation 102 00:09:35.180 --> 00:09:41.580 of a product, or, metaphorically, in the creation of utilities. 103 00:09:41.580 --> 00:09:47.740 If as can happen, labor has been expended to no ultimate benefit, then the result is 104 00:09:47.740 --> 00:09:53.240 error, folly, or waste in the person bestowing the labor. 105 00:09:53.240 --> 00:10:01.400 One example of unproductive labor is crime, not only a non- but an anti-market activity. 106 00:10:01.400 --> 00:10:06.900 Their trouble, effort, is directed to the stripping another person of the goods in his 107 00:10:06.900 --> 00:10:10.680 possession by means of fraud or violence. 108 00:10:10.680 --> 00:10:17.800 It degenerates to absolute criminality, and their results no production, but only a forcible 109 00:10:17.800 --> 00:10:22.720 transfer of wealth from one individual to another. 110 00:10:22.720 --> 00:10:30.120 J. B. Say also put clearly for the first time the insight that wants are unlimited. Wrote 111 00:10:30.120 --> 00:10:38.480 Say, There is no object of pleasure or utility whereof the mere desire may not be unlimited, 112 00:10:38.480 --> 00:10:44.480 since every body is always ready to receive whatever can contribute to his benefit or 113 00:10:44.480 --> 00:10:52.080 gratification. Say denounced the proto-Galbraithian position of the British mercantilist Sir James 114 00:10:52.080 --> 00:10:59.040 as Stuart, in extolling an ascetic reduction of wants as a solution to desires outpacing 115 00:10:59.040 --> 00:11:00.720 production. 116 00:11:00.720 --> 00:11:04.480 Say heaps proper scorn on this doctrine. 117 00:11:04.480 --> 00:11:09.440 Upon this principle, it would be the very acme of perfection to produce nothing and 118 00:11:09.440 --> 00:11:14.880 to have no wants, that is to say, to annihilate human existence. 119 00:11:14.880 --> 00:11:21.680 Unfortunately, Say proceeds to fall prey to this very Galbraithian trap by attacking 120 00:11:21.680 --> 00:11:27.920 by maintaining luxury and ostentation, and by maintaining that real wants are more important 121 00:11:27.920 --> 00:11:31.960 to the community than artificial wants. 122 00:11:31.960 --> 00:11:37.640 Say hastens to add, however, that government intervention is not the proper road to achieving 123 00:11:37.640 --> 00:11:40.400 proper affluence. 124 00:11:40.400 --> 00:11:46.720 On the valuing or pricing of the services of the factors, or as Say would put it, agents 125 00:11:46.720 --> 00:11:55.120 of Production, Say adopted the Proto-Austrian in direct contrast to the Smith-Ricardo tradition. 126 00:11:55.120 --> 00:12:01.760 For since subjective human desire for any object creates its value and reflects its 127 00:12:01.760 --> 00:12:09.240 utility, productive factors receive value because of their ability to create the utility 128 00:12:09.240 --> 00:12:12.320 wherein originates that desire. 129 00:12:12.320 --> 00:12:29.320 Ricardo, writes Say, believes that the value of products is founded upon that of productive agency, that is, that the value of products is determined by the value of their productive factors, or their cost of production. 130 00:12:29.320 --> 00:12:35.840 In contrast, Say declares, the current value of productive exertion is founded upon the 131 00:12:35.840 --> 00:12:42.680 value of an infinity of products compared one with another, which value is proportionate 132 00:12:42.680 --> 00:12:48.240 to the importance of its cooperation in the business of production. 133 00:12:48.240 --> 00:12:54.520 In contrast to consumer goods, Say points out, the demand for productive factors does 134 00:12:54.520 --> 00:13:00.200 does not originate in immediate enjoyment, but rather in the value of the product they 135 00:13:00.200 --> 00:13:07.840 are capable of raising, which itself originates in the utility of that product, or the satisfaction 136 00:13:07.840 --> 00:13:11.000 it may be capable of affording. 137 00:13:11.000 --> 00:13:17.720 In short, the value of factors is determined by the value of their products, which in turn 138 00:13:17.720 --> 00:13:22.480 is conferred by consumer valuations and demands. 139 00:13:22.480 --> 00:13:30.600 The causal chain, for say, as for the later Austrians, is from consumer valuations to 140 00:13:30.600 --> 00:13:39.800 consumer goods prices to the pricing of productive factors, that is, to costs of production. 141 00:13:39.800 --> 00:13:47.800 In contrast, the Smithian and especially the Ricardian causal chain is from cost of production 142 00:13:47.800 --> 00:13:53.160 and Especially Labor Cost to Consumer Goods Prices. 143 00:13:53.160 --> 00:13:59.400 By speaking of the proportionate value of each factor, Say once again comes to the edge 144 00:13:59.400 --> 00:14:06.960 of a marginal productivity theory of imputation of consumer to factor valuations, and to the 145 00:14:06.960 --> 00:14:10.840 edge of a variable proportions analysis. 146 00:14:10.840 --> 00:14:13.920 But he does not reach it. 147 00:14:13.920 --> 00:14:19.880 Say did not rest content with a general, even if pioneering, analysis of the pricing of 148 00:14:19.880 --> 00:14:22.080 productive factors. 149 00:14:22.080 --> 00:14:29.600 He goes on to virtually create the famous triad of classical economics, land or natural 150 00:14:29.600 --> 00:14:36.200 agents, labor or industry for say, and capital. 151 00:14:36.200 --> 00:14:43.180 Labor works on or employs natural agents to create capital, which is then used to multiply 152 00:14:43.180 --> 00:14:48.480 by Productivity in Collaboration with Land and Labor. 153 00:14:48.480 --> 00:14:54.500 Although capital is the previous creation of labor, once in existence it is used by 154 00:14:54.500 --> 00:14:57.780 labor to increase production. 155 00:14:57.780 --> 00:15:04.300 If there are classes of factors of production, what easier trap to fall into than to maintain 156 00:15:04.300 --> 00:15:10.840 that each class receives the kind of income attributed to it in common parlance? 157 00:15:10.840 --> 00:15:18.360 That is, labor receives wages, land receives rent, and capital receives interest. 158 00:15:18.360 --> 00:15:21.040 Surely a common-sense approach. 159 00:15:21.040 --> 00:15:23.720 And so, Say adopted it. 160 00:15:23.720 --> 00:15:29.800 While useful as a first attempt, excepting the forgotten Turgot, to clarify production 161 00:15:29.800 --> 00:15:37.300 theory out of Adam Smith's muddle, this superficial clarity comes at the expense of deep fallacy 162 00:15:37.300 --> 00:15:41.140 that would not be uncovered until the Austrians. 163 00:15:41.140 --> 00:15:47.900 In the first place, these three rigidly separated categories already begin to break down in 164 00:15:47.900 --> 00:15:55.500 Say's interesting insight that laborers lend their services to owners of capital and land 165 00:15:55.500 --> 00:16:04.300 and earn wages thereby, that landowners lend their land to capital and labor and earn rent, 166 00:16:04.300 --> 00:16:09.120 And that capitalists lend their capital to earn interest. 167 00:16:09.120 --> 00:16:12.500 For how exactly do these payments differ? 168 00:16:12.500 --> 00:16:18.200 How does rent as a loan price compare with interest as a loan? 169 00:16:18.200 --> 00:16:22.400 And how do wages differ from interest or rent? 170 00:16:22.400 --> 00:16:25.380 In fact, the muddle is even worse. 171 00:16:25.380 --> 00:16:31.200 For workers and landowners don't lend their services, they are not creditors. 172 00:16:31.200 --> 00:16:38.440 On the contrary, in a deep sense, capitalists lend them money by giving the money in advance 173 00:16:38.440 --> 00:16:41.640 of selling the product to the consumers. 174 00:16:41.640 --> 00:16:48.020 And so, workers and landowners are debtors to the capitalists and pay them a natural 175 00:16:48.020 --> 00:16:50.520 rate of interest. 176 00:16:50.520 --> 00:16:57.240 And finally, this classical triad rests on a basic equivocation, as Boehm-Bawerk would 177 00:16:57.240 --> 00:17:16.240 Capital as a fund of savings or lending may earn interest, but capital goods, which are the real physical factors of production rather than money funds, do not earn interest. 178 00:17:16.240 --> 00:17:23.160 Like all other factors, capital goods earn a price, a price per unit of time for their 179 00:17:23.160 --> 00:17:24.880 services. 180 00:17:24.880 --> 00:17:33.120 If you will, capital goods, land and laborers all earn such prices, in the sense of rents, 181 00:17:33.120 --> 00:17:39.040 defining a rental price as a price of any good per unit of time. 182 00:17:39.040 --> 00:17:43.400 This price is determined by the productivity of each factor. 183 00:17:43.400 --> 00:17:48.760 But then, where does interest on capital funds come from? 184 00:17:48.760 --> 00:17:54.920 Thus in grappling with the problem of interest, Say criticizes Smith and the Smithians for 185 00:17:54.920 --> 00:18:03.120 focusing on labor as the sole factor of production and neglecting the cooperating role of capital. 186 00:18:03.120 --> 00:18:09.520 Tackling the Smith-Ricardian and what would later be the Marxian riposte, that capital 187 00:18:09.520 --> 00:18:17.260 Capital is simply accumulated labor, say replies, yes, but the services of capital once built 188 00:18:17.260 --> 00:18:22.440 are there and continue anew and must be paid for. 189 00:18:22.440 --> 00:18:28.000 While satisfactory enough on one level, the answer does not solve the problem of where 190 00:18:28.000 --> 00:18:35.520 the net return on capital funds comes from, a return which Turgot and then the Austrians 191 00:18:35.520 --> 00:18:41.760 is explained as the price of time preference, of the fact, in short, that capital is not 192 00:18:41.760 --> 00:18:48.200 only accumulated labor, but also accumulated time. 193 00:18:48.200 --> 00:18:53.680 Despite the lack of resolution of the problem of interest, Say set forth an excellent analysis 194 00:18:53.680 --> 00:19:00.440 of capital in the sense of capital goods and its crucial role in production and in increasing 195 00:19:00.440 --> 00:19:02.240 economic wealth. 196 00:19:02.240 --> 00:19:11.240 Man, he pointed out, transforms natural agents into capital to work further with nature to arrive at consumer goods. 197 00:19:11.240 --> 00:19:22.240 The more he has built capital goods, the more tools and machinery, the more can man harness nature to make labor increasingly productive. 198 00:19:22.240 --> 00:19:29.240 More machinery means an increase in productivity of labor and a fall in the cost of production. 199 00:19:29.240 --> 00:19:37.000 Production. Such increase in capital is particularly beneficial to the mass of consumers, for competition 200 00:19:37.000 --> 00:19:44.180 lowers the price of product as well as the cost of production. Furthermore, increased 201 00:19:44.180 --> 00:19:51.280 machinery permits a superior quality of product and allows the creation of new products which 202 00:19:51.280 --> 00:19:58.320 would not have been available under handicraft production. The enormous increase in production 203 00:19:58.320 --> 00:20:04.520 and Rise in the Standard of Living releases human energies from the scramble for subsistence 204 00:20:04.520 --> 00:20:11.360 to permit cultivation of the arts, even of frivolity and, most importantly, for the cultivation 205 00:20:11.360 --> 00:20:14.800 of the intellectual faculties. 206 00:20:14.800 --> 00:20:20.000 Say follows Smith in his discussion of the division of labor and in pointing out that 207 00:20:20.000 --> 00:20:25.360 the degree of that division is limited by the extent of the market. 208 00:20:25.360 --> 00:20:28.440 But Say's discussion is far sounder. 209 00:20:28.440 --> 00:20:34.560 He shows first that expanding the division of labor needs a great deal of capital, so 210 00:20:34.560 --> 00:20:41.640 that investment of capital becomes the crucial point, rather than its division per se. 211 00:20:41.640 --> 00:20:47.960 He also points out that in contrast to Smith, the crucial specialization of labor is not 212 00:20:47.960 --> 00:20:56.280 simply within a factory, as in Smith's famous pin factory, but ranges over the entire economy 213 00:20:56.280 --> 00:21:01.880 and forms the basis for all exchange between producers. 214 00:21:01.880 --> 00:21:08.960 Say also saw that the essence of investing capital is advancing money payments to factors 215 00:21:08.960 --> 00:21:14.240 of production, an advance that is repaid later by the consumer. 216 00:21:14.240 --> 00:21:21.320 Thus, the capital employed on a productive operation is always a mere advance made for 217 00:21:21.320 --> 00:21:28.600 payment of a productive service and reimbursed by the value of their resulting product. 218 00:21:28.600 --> 00:21:35.120 Here he captured the essence of the Austrian insight into capital as a process over time 219 00:21:35.120 --> 00:21:39.920 and one that involves payment in advance for production. 220 00:21:39.920 --> 00:21:45.580 Say also anticipated the Austrian concept of stages of production. 221 00:21:45.580 --> 00:21:51.520 He pointed out that instead of waiting a long time for reimbursement by the consumer, the 222 00:21:51.520 --> 00:21:58.440 capitalist at each stage of production purchases the product of the previous stage and thereby 223 00:21:58.440 --> 00:22:02.680 reimburses the previous set of capitalists. 224 00:22:02.680 --> 00:22:09.320 As Say lucidly puts it, the miner extracts the ore from the bowels of the earth. 225 00:22:09.320 --> 00:22:12.280 The Iron Founder pays him for it. 226 00:22:12.280 --> 00:22:17.600 Here ends the miner's production, which is paid for by an advance out of the capital 227 00:22:17.600 --> 00:22:19.920 of the iron founder. 228 00:22:19.920 --> 00:22:26.320 This latter next smelts the ore, refines and makes it into steel, which he sells to the 229 00:22:26.320 --> 00:22:27.320 cutler. 230 00:22:27.320 --> 00:22:33.940 Thus is the production of the founder paid, and his advance reimbursed by a second advance 231 00:22:33.940 --> 00:22:38.600 on the part of the cutler, made in the price of the steel. 232 00:22:38.600 --> 00:22:45.000 This again the cutler works up into razor blades, the price for which replaces his advance of 233 00:22:45.000 --> 00:22:52.320 capital and at the same time pays for his productive agency. 234 00:22:52.320 --> 00:22:58.800 Generalizing each successive producer makes the advance to his precursor of the then value 235 00:22:58.800 --> 00:23:04.160 of the product including the labor already expended upon it. 236 00:23:04.160 --> 00:23:11.000 His successor in the order of production reimburses him in turn, with the addition of such value 237 00:23:11.000 --> 00:23:15.400 as the product may have received in passing through his hands. 238 00:23:15.400 --> 00:23:22.340 Finally, the last producer, who is generally the retail dealer, is compensated by the consumer 239 00:23:22.340 --> 00:23:29.360 for the aggregate of all these advances, plus the concluding operation performed by himself 240 00:23:29.360 --> 00:23:31.840 upon the product. 241 00:23:31.840 --> 00:23:38.640 In the end, the money paid by the consumers for the final product, say razorblades, repays 242 00:23:38.640 --> 00:23:46.640 capitalists for their previous advances for the various services of the factors of production. 243 00:23:46.640 --> 00:23:52.380 Turning to wages and the labor market, Say pointed out that wages will be highest relative 244 00:23:52.380 --> 00:24:00.380 to the price of capital and land, where labor is scarcest relative to the other two factors. 245 00:24:00.380 --> 00:24:07.360 Wages will be either whenever land is virtually unlimited in supply, and or when an abundance 246 00:24:07.360 --> 00:24:11.300 of capital creates a great demand for labor. 247 00:24:11.300 --> 00:24:17.580 Furthermore, wage rates will be proportionate to the danger, trouble or obnoxiousness of 248 00:24:17.580 --> 00:24:23.740 the work, to the irregularity of the employment, to the length of training, and to the degree 249 00:24:23.740 --> 00:24:26.560 of skill or talent. 250 00:24:26.560 --> 00:24:32.320 As Say puts it, every one of these causes tends to diminish the quantity of labor in 251 00:24:32.320 --> 00:24:39.160 circulation in each department, and consequently to vary its wage rate. 252 00:24:39.160 --> 00:24:45.800 In recognizing the differences of natural talent, Say advanced far beyond the egalitarianism 253 00:24:45.800 --> 00:24:52.300 of Adam Smith and of neoclassical economics since Smith's day. 254 00:24:52.300 --> 00:24:58.480 In the long run, capital will earn the same return in all firms and industries. 255 00:24:58.480 --> 00:25:04.860 But this is only true in the long run, since for one thing there are inevitable immobilities 256 00:25:04.860 --> 00:25:08.300 of land, labor and capital. 257 00:25:08.300 --> 00:25:14.940 To say the profits or interest on capital stems from its productive services. 258 00:25:14.940 --> 00:25:22.060 Again, a fundamental confusion between capital as a fund which earns interest and capital 259 00:25:22.060 --> 00:25:29.720 Federal goods, which are productive factors and earn prices and incomes for their productivity. 260 00:25:29.720 --> 00:25:35.860 But despite this basic error, Say had many shrewd things to say about interest. 261 00:25:35.860 --> 00:25:41.860 He was possibly the first economist, for example, to show that risk premiums are added to the 262 00:25:41.860 --> 00:25:47.460 basic interest rate, so that riskier debtors will pay higher interest. 263 00:25:47.460 --> 00:25:54.460 Risk, he pointed out, depends on expected safety of the investment, the personal credit 264 00:25:54.460 --> 00:26:00.780 and character of the borrower, the past record of the borrower, and the ability or willingness 265 00:26:00.780 --> 00:26:05.740 of the government of the debtor's country to enforce the payment of debt. 266 00:26:05.740 --> 00:26:12.540 Furthermore, Say introduced an innovation theory of profit by stating that since new methods 267 00:26:12.540 --> 00:26:40.540 Say was also insistent that interest on the loan market is determined by the demand for capital to which it is directly proportional and the supply of capital inversely proportional. 268 00:26:40.540 --> 00:26:46.940 A champion of freedom of the loan market. Usury is no worse morally than rent or wages. 269 00:26:47.580 --> 00:26:54.300 He also demonstrated that it was a fallacy that the quantity of money either lowers or raises the 270 00:26:54.300 --> 00:27:02.140 rate of interest. Say perceptively pointed out that it is an abuse of words to talk of the interest 271 00:27:02.140 --> 00:27:10.500 of Money. It is really interest on savings, not money, and loans can and do occur in kind 272 00:27:10.500 --> 00:27:18.500 as well as in money. Roth say, the abundance or scarcity of money or of its substitutes 273 00:27:18.500 --> 00:27:24.740 no more affects the rate of interest than the abundance or scarcity of cinnamon or wheat 274 00:27:24.740 --> 00:27:27.340 or of silk. 275 00:27:27.340 --> 00:27:30.700 6. The Entrepreneur 276 00:27:30.700 --> 00:27:39.420 If Adam Smith purged economic thought of the very existence of the entrepreneur, J. B. 277 00:27:39.420 --> 00:27:43.740 Say, to his everlasting credit, brought him back. 278 00:27:43.740 --> 00:27:49.740 Not quite as far back, to be sure, as in the days of Catillon and Torgot, but enough to 279 00:27:49.740 --> 00:27:56.500 continue fitfully and underground in continental economic thought, even though absent from 280 00:27:56.500 --> 00:28:01.220 and the dominant mainstream of British classicism. 281 00:28:01.220 --> 00:28:07.220 Emphasis on the real world rather than on long-run equilibrium almost forced a return 282 00:28:07.220 --> 00:28:10.200 to the study of the entrepreneur. 283 00:28:10.200 --> 00:28:17.420 For say, the entrepreneur, the linchpin of the economy, takes on himself the responsibility, 284 00:28:17.420 --> 00:28:21.280 the conduct and the risk of running his firm. 285 00:28:21.280 --> 00:28:27.600 He almost always owns some of the firm's capital, say being familiar with the fact that the 286 00:28:27.600 --> 00:28:34.480 dominant entrepreneur and risk-taker in the economy is the one who is also a capitalist, 287 00:28:34.480 --> 00:28:36.880 an owner of capital. 288 00:28:36.880 --> 00:28:43.900 The owner of capital or land or personal service hires these services out to the renter or 289 00:28:43.900 --> 00:28:45.940 entrepreneur. 290 00:28:45.940 --> 00:28:52.420 In return for fixed payments to these factors, the entrepreneur takes upon himself the speculative 291 00:28:52.420 --> 00:28:56.980 risk of gaining profit or suffering loss. 292 00:28:56.980 --> 00:29:03.180 It is a sort of speculative bargain wherein the renter takes the risk of profit and loss 293 00:29:03.180 --> 00:29:10.100 according to the revenue he may realize, or the product obtained by the agency transferred 294 00:29:10.100 --> 00:29:16.260 shall exceed or fall short of the rent or hire he is to pay. 295 00:29:16.260 --> 00:29:23.140 The entrepreneur, Say adds, acts as a broker between sellers and buyers, applying productive 296 00:29:23.140 --> 00:29:27.220 factors proportionate to the demand for the products. 297 00:29:27.220 --> 00:29:33.540 The demand for the products, in turn, is proportionate to their utilities and to the quantity of other 298 00:29:33.540 --> 00:29:36.520 products exchanging for them. 299 00:29:36.520 --> 00:29:43.940 The entrepreneur constantly compares the selling prices of products with their costs of production. 300 00:29:43.940 --> 00:29:50.720 If he decides to produce more, his demand for productive factors will rise. 301 00:29:50.720 --> 00:29:56.980 Part of the profits accruing to the capitalist entrepreneur will be the standard return on 302 00:29:56.980 --> 00:29:57.980 capital. 303 00:29:57.980 --> 00:30:04.620 But apart from that, Say declared, there will be a return to the peculiar character of the 304 00:30:04.620 --> 00:30:05.740 entrepreneur. 305 00:30:05.740 --> 00:30:12.580 The entrepreneur is a manager of the business, but his role is also broader in Say's view. 306 00:30:12.580 --> 00:30:18.220 The entrepreneur must have judgment, perseverance and a knowledge of the world as well as of 307 00:30:18.220 --> 00:30:24.860 business, as he applies knowledge to the process of creating consumer goods. 308 00:30:24.860 --> 00:30:32.040 He must employ laborers, purchase raw material, attempt to keep costs low and find consumers 309 00:30:32.040 --> 00:30:33.980 for his product. 310 00:30:33.980 --> 00:30:40.580 Above all, he must estimate the importance of the product, the probable demand for it, 311 00:30:40.580 --> 00:30:44.060 and the availability of the means of production. 312 00:30:44.060 --> 00:30:50.500 And finally, he must have a ready knack of calculation to compare the charges of production 313 00:30:50.500 --> 00:30:56.900 with the probable value of the product when completed and brought to market. 314 00:30:56.900 --> 00:31:03.900 Those who lack these qualities will be unsuccessful as entrepreneurs and suffer losses and bankruptcies. 315 00:31:03.900 --> 00:31:09.900 Those who remain will be the skillful and successful ones earning profits. 316 00:31:09.900 --> 00:31:19.900 Say was critical of Smith and the Smithians for failing to distinguish the category of entrepreneurial profit from the profit of capital, 317 00:31:19.900 --> 00:31:25.900 both of which are mixed together in the profits of real-world enterprises. 318 00:31:25.900 --> 00:31:34.900 Say also appreciated entrepreneurship as the driving force of the allocations and adjustments of the market economy. 319 00:31:34.900 --> 00:31:42.900 He summed up those workings of the market by stating that the wants of consumers determine what will be produced. 320 00:31:42.900 --> 00:31:52.900 The product most wanted is most in demand and that which is most in demand yields the largest profit to industry, capital and land, 321 00:31:52.900 --> 00:32:12.900 Such astute analysts as Schumpeter and Hebert are critical of, say, as having a view of the entrepreneur as a static manager and organizer, rather than as a 322 00:32:12.900 --> 00:32:25.900 Schumpeter and Hebert are critical of Say as having a view of the entrepreneur as a static manager and organizer, rather than as a dynamic bearer of risk and uncertainty. 323 00:32:26.900 --> 00:32:38.900 We cannot share that view. It seems to us that Say is instead foursquare in the Cantillon-Tourgaux tradition of the entrepreneur as forecaster and risk bearer. 324 00:32:38.900 --> 00:32:47.380 From his analysis of capital, entrepreneurship and the market, J.B. Say concluded for laissez-faire, 325 00:32:47.380 --> 00:32:55.540 The producers themselves are the only competent judges of the transformation, export and import 326 00:32:55.540 --> 00:33:02.580 of these various matters and commodities, and every government which interferes, every system 327 00:33:02.580 --> 00:33:07.300 calculated to influence production, can only do mischief. 328 00:33:08.900 --> 00:33:14.980 7. Say's Law of Markets 329 00:33:14.980 --> 00:33:21.340 While J.B. Say has been almost totally ignored by mainstream economists and historians of 330 00:33:21.340 --> 00:33:27.940 economic thought, this is not true for one relatively minor facet of his thought that 331 00:33:27.940 --> 00:33:34.880 became known as Say's Law of Markets. The one point of his doctrine that the active 332 00:33:34.880 --> 00:33:39.880 One of the most active and aggressive British Ricardians got out of Say was this law. 333 00:33:39.880 --> 00:33:48.880 James Mill, the Lenin of the Ricardian movement, appropriated the law in his Commerce Defended, 1808, 334 00:33:48.880 --> 00:33:53.880 and Ricardo adopted it from his discoverer and mentor. 335 00:33:53.880 --> 00:34:00.880 Say's law is simple and almost truistic and self-evident, and it is hard to escape the conviction 336 00:34:00.880 --> 00:34:08.880 has stirred up a series of storms only because of its obvious political implications and consequences. 337 00:34:08.880 --> 00:34:14.880 Essentially, Say's law is a stern and proper response to the various economic ignoramuses, 338 00:34:14.880 --> 00:34:26.880 as well as self-seekers, who, in every economic recession or crisis, begin to complain loudly about the terrible problem of general overproduction, 339 00:34:26.880 --> 00:34:39.640 Overproduction means production in excess of consumption, that is, production is too 340 00:34:39.640 --> 00:34:47.200 great in general compared to consumption, and hence products cannot be sold in the market. 341 00:34:47.200 --> 00:34:53.080 If production is too large in relation to consumption, then obviously this is a problem 342 00:34:53.080 --> 00:34:58.680 Some of what is now called market failure, a failure which must be compensated by the 343 00:34:58.680 --> 00:35:01.680 intervention of government. 344 00:35:01.680 --> 00:35:07.120 Intervention would have to take one or both of the following forms, reduce production 345 00:35:07.120 --> 00:35:10.660 or artificially stimulate consumption. 346 00:35:10.660 --> 00:35:18.640 The American New Deal in the 1930s did both, with no success in relieving the alleged problem. 347 00:35:18.640 --> 00:35:23.640 Intervention can be reduced, as in the case of the New Deal, by the government's organizing 348 00:35:23.640 --> 00:35:30.480 compulsory cartels of business to force a cut in their output. 349 00:35:30.480 --> 00:35:36.240 Stimulating consumer demand has long been the particularly favored program of interventionists. 350 00:35:36.240 --> 00:35:41.540 Generally, this is done by the government and its central bank, inflating the money 351 00:35:41.540 --> 00:35:48.140 supply and or by the government incurring heavy deficits, its spending passing for a 352 00:35:48.140 --> 00:35:55.140 for Surrogate Consumption. Indeed, government deficits would seem to be ideal for the overproduction 353 00:35:55.140 --> 00:36:02.140 under consumptionists. For if the problem is too much production and or too little consumer 354 00:36:02.140 --> 00:36:08.180 spending, then the solution is to stimulate a lot of unproductive consumption. And who 355 00:36:08.180 --> 00:36:15.180 is better at that than government, which by its very nature is unproductive and even counterproductive? 356 00:36:15.180 --> 00:36:22.540 Say, understandably, reacted in horror to this analysis and to the prescription. 357 00:36:22.540 --> 00:36:27.840 In the first place, he pointed out, the wants of man are unlimited and will continue to 358 00:36:27.840 --> 00:36:35.020 be until we achieve genuine, general superabundance, a world marked by the prices of all goods 359 00:36:35.020 --> 00:36:38.220 and services falling to zero. 360 00:36:38.220 --> 00:36:43.620 But at that point, there would be no problem of finding consumer demand, or indeed any 361 00:36:43.620 --> 00:37:00.580 Thus, Say postulates a situation where all costs of production are at last reduced to 362 00:37:00.580 --> 00:37:07.060 zero, in which case it is evident there can no longer be rent for land, interest upon 363 00:37:07.060 --> 00:37:14.060 on Capital or Wages on Labor, and consequently no longer any revenue to the productive classes. 364 00:37:14.060 --> 00:37:16.340 What will happen then? 365 00:37:16.340 --> 00:37:20.980 What then, I say, these classes would no longer exist? 366 00:37:20.980 --> 00:37:26.420 Every object of human want would stand in the same predicament as the air or the water, 367 00:37:26.420 --> 00:37:31.340 which are consumed without the necessity of being either produced or purchased. 368 00:37:31.340 --> 00:37:36.680 In like manner, as every one is rich enough to provide himself with air, so would he be 369 00:37:36.680 --> 00:37:41.020 to provide himself with every other imaginable product. 370 00:37:41.020 --> 00:37:44.400 This would be the very acme of wealth. 371 00:37:44.400 --> 00:37:47.280 Political economy would no longer be a science. 372 00:37:47.280 --> 00:37:52.120 We should have no occasion to learn the mode of acquiring wealth, for we should find it 373 00:37:52.120 --> 00:37:55.960 ready-made to our hands. 374 00:37:55.960 --> 00:38:01.980 Since apart from the Garden of Eden, production always falls short of man's wants. 375 00:38:01.980 --> 00:38:07.720 This means that there is no need to worry about any lack of consumption. 376 00:38:07.720 --> 00:38:13.980 The problem that limits wealth and living standards is a deficiency of production. 377 00:38:13.980 --> 00:38:20.140 On the market, Say points out, producers exchange their products for money, and they use the 378 00:38:20.140 --> 00:38:23.140 money to buy the products of others. 379 00:38:23.140 --> 00:38:27.220 That is the essence of the exchange or market economy. 380 00:38:27.220 --> 00:38:34.200 Therefore, the supply of one good constitutes, at bottom, the demand for other goods. 381 00:38:34.200 --> 00:38:44.200 Consumption demand is simply the embodiment of the supply of other products, whose owners are seeking to purchase the products in question. 382 00:38:44.200 --> 00:38:50.200 Far better to have demand emerging from the supply of other products, as on the free market, 383 00:38:50.200 --> 00:39:03.200 For the government to stimulate consumption by itself is no benefit to commerce. 384 00:39:03.200 --> 00:39:10.200 For the difficulty lies in supplying the means, not in stimulating the desire for consumption. 385 00:39:10.200 --> 00:39:15.200 And we have seen that production alone furnishes the means. 386 00:39:15.200 --> 00:39:27.200 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. 387 00:39:27.200 --> 00:39:36.200 A value once created is not augmented by being seized and expanded by the government, instead of by an individual. 388 00:39:36.200 --> 00:39:43.200 The man that lives upon the productions of other people originates no demand for those productions. 389 00:39:43.200 --> 00:39:49.200 He merely puts himself in the place of the producer, to the great injury of production. 390 00:39:49.200 --> 00:40:01.200 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? 391 00:40:01.200 --> 00:40:12.200 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. 392 00:40:12.200 --> 00:40:32.200 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. 393 00:40:32.200 --> 00:40:39.960 There can never be any problem of overproduction or underconsumption on the free market, because 394 00:40:39.960 --> 00:40:45.320 prices can always fall until the markets are cleared. 395 00:40:45.320 --> 00:40:51.640 While Say did not always put the matter in these precise terms, he saw it clearly enough, 396 00:40:51.640 --> 00:40:57.280 particularly in his letters to Malthus, in his controversy with the Reverend Thomas Robert 397 00:40:57.280 --> 00:41:00.440 Malthus over Say's law. 398 00:41:00.440 --> 00:41:14.000 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. 399 00:41:14.000 --> 00:41:24.540 The question should always be, production or sales at what price? Demand or consumption at what price? 400 00:41:24.540 --> 00:41:31.500 There is never any genuine unsold surplus or glut, whether specific or general, over the 401 00:41:31.500 --> 00:41:38.980 whole economy, if prices are free to fall to clear the market and eliminate the surplus. 402 00:41:38.980 --> 00:41:45.740 Moreover, Say wrote in his letters to Malthus, if the quantity set in the slightest degree 403 00:41:45.740 --> 00:41:51.680 exceeds the want, it is sufficient to alter the price considerably. 404 00:41:51.680 --> 00:41:57.880 It is this notion of what we would now call elasticity and resulting sharp changes in 405 00:41:57.880 --> 00:42:05.560 price that, for say, leads many people to mistake a slight excess of supply for an excessive 406 00:42:05.560 --> 00:42:07.720 abundance. 407 00:42:07.720 --> 00:42:12.540 The policy implications of attending to the price system are crucial. 408 00:42:12.540 --> 00:42:19.360 It means that to cure a glut, whether specific or pervasive, the remedy is not for the government 409 00:42:19.360 --> 00:42:27.720 to spend or create money, it is to allow prices to fall so that the market will be cleared. 410 00:42:27.720 --> 00:42:33.760 In his letters to Malthus, Say offers the following example, 100 sacks of wheat are 411 00:42:33.760 --> 00:42:41.040 produced and exchanged for 100 pieces of cloth, or rather each is exchanged for money and 412 00:42:41.040 --> 00:42:44.120 then for the other commodity. 413 00:42:44.120 --> 00:42:50.840 Notice that productivity and output of each is doubled, and now 200 sacks of wheat are 414 00:42:50.840 --> 00:42:54.660 exchanged for 200 pieces of cloth. 415 00:42:54.660 --> 00:43:02.000 How is superabundance or overproduction going to affect either or both commodities? 416 00:43:02.000 --> 00:43:09.480 And if by producing 100 units of each product the producer made 30 francs profit, why couldn't 417 00:43:09.480 --> 00:43:15.880 But the resulting increase of production and fall in the price of each product still reap 418 00:43:15.880 --> 00:43:19.120 30 francs profit for each seller. 419 00:43:19.120 --> 00:43:23.080 And how can general glut arise? 420 00:43:23.080 --> 00:43:28.180 Yet Malthus would have to maintain that part of the new production of cloth would find 421 00:43:28.180 --> 00:43:30.520 no buyers. 422 00:43:30.520 --> 00:43:36.960 Say then notes that Malthus in a sense conceded the point about prices falling due to increased 423 00:43:36.960 --> 00:43:43.400 Production and then fell back on a second line of defense, that productions will fall 424 00:43:43.400 --> 00:43:49.600 to too low a price to pay for the labor necessary to their production. 425 00:43:49.600 --> 00:43:56.060 Here we come to the nub of the over-productionist, under-consumptionist complaints. 426 00:43:56.060 --> 00:44:02.000 If we can get past their foggy, aggregative concepts and their real or seeming neglect 427 00:44:02.000 --> 00:44:08.360 of the fact that a lower price of any product can always clear the market. 428 00:44:08.360 --> 00:44:15.600 In reply, Say noted that Malthus, having unfortunately adopted the labor theory of value, neglected 429 00:44:15.600 --> 00:44:22.480 to add the productive services of land and capital to labor in the costs of production, 430 00:44:22.480 --> 00:44:29.240 so that the assertion is that selling prices will fall below the costs of production. 431 00:44:29.240 --> 00:44:35.820 But where do costs come from? And why are they somehow fixed, exogenous to the market 432 00:44:35.820 --> 00:44:42.620 system itself? How are they determined? Although Ricardo joined with, say, on the question 433 00:44:42.620 --> 00:44:49.300 of overproduction, it was easy for a British follower of Smith and Ricardo, such as Malthus, 434 00:44:49.300 --> 00:44:56.120 on cost theories of value to fall into this trap, and to assume that costs are somehow 435 00:44:56.120 --> 00:44:58.960 Fixed and Invariant 436 00:44:58.960 --> 00:45:04.760 Say believing as we have seen that costs are determined by selling price rather than the 437 00:45:04.760 --> 00:45:12.920 other way round, was impelled to a far clearer and more correct picture of the entire matter. 438 00:45:12.920 --> 00:45:18.400 Returning to his example, Say points out that if the wheat and cloth producers double the 439 00:45:18.400 --> 00:45:24.640 quantity produced with the same productive services, this means not only that the prices 440 00:45:24.640 --> 00:45:31.560 Losses of wheat and cloth will fall, but also that factor productivity has risen in both 441 00:45:31.560 --> 00:45:38.960 industries. A rise of factor productivity means a lowering of cost. But this means that 442 00:45:38.960 --> 00:45:46.440 an increase in output will not only lower selling price, it will also lower costs. So 443 00:45:46.440 --> 00:45:54.560 there is no reason to assume grievous losses or even a lessening of profit if prices fall. 444 00:45:54.560 --> 00:46:01.080 Apparently, Say continued, Malthus is worried about the prices of productive services remaining 445 00:46:01.080 --> 00:46:07.480 high and therefore keeping costs too high as production increases. 446 00:46:07.480 --> 00:46:12.840 But here, Say brings in a brilliantly perceptive point. 447 00:46:12.840 --> 00:46:17.880 Prices of productive factors must be high for a reason. 448 00:46:17.880 --> 00:46:21.040 They are not preordained to be high. 449 00:46:21.040 --> 00:46:28.640 But this high wage or rent in itself precisely denotes that what we seek for exists. 450 00:46:28.640 --> 00:46:34.720 That is to say, that there is a mode of employing them so as to make the produce sufficient 451 00:46:34.720 --> 00:46:37.560 to repay what they cost. 452 00:46:37.560 --> 00:46:44.480 In short, factor prices being high means that they have been bid up to that height by alternative 453 00:46:44.480 --> 00:46:46.440 uses for them. 454 00:46:46.440 --> 00:46:53.840 If the costs of these factors seriously impinge upon, or erase the profits of a firm or industry, 455 00:46:53.840 --> 00:46:59.960 this is because these factors are more productive elsewhere, and have been bid up to reflect 456 00:46:59.960 --> 00:47:01.800 that vital fact. 457 00:47:01.800 --> 00:47:08.200 Say's reasoning is strikingly similar to the modern free trade reply to the cheap labor 458 00:47:08.200 --> 00:47:11.020 argument for protective tariffs. 459 00:47:11.020 --> 00:47:17.300 The reason why labor is more expensive, say in the United States or other industrialized 460 00:47:17.300 --> 00:47:23.660 countries is that other American industries have bid up these labor costs. 461 00:47:23.660 --> 00:47:29.420 These industries are therefore more efficient than the industry suffering from competition 462 00:47:29.420 --> 00:47:36.020 and hence the latter should cut back or shut down and allow resources to shift to more 463 00:47:36.020 --> 00:47:39.420 efficient and productive fields. 464 00:47:39.420 --> 00:47:45.860 In more peripheral but still relevant areas, J.B. Say engaged in some lovely and powerful 465 00:47:45.860 --> 00:47:49.180 examples of reductio ad absurdum argument. 466 00:47:49.180 --> 00:47:56.780 Thus, on the importance of demand vis-a-vis supply and on the question of gluts, he asked, 467 00:47:56.780 --> 00:48:02.020 what would have happened if a merchant shipped a current cargo to the site of New York City 468 00:48:02.020 --> 00:48:04.540 in the early 17th century? 469 00:48:04.540 --> 00:48:07.940 Clearly, he wouldn't have been able to sell his cargo. 470 00:48:07.940 --> 00:48:09.080 Why not? 471 00:48:09.080 --> 00:48:16.680 by this glut, because no one in the New York area was producing enough other goods to exchange 472 00:48:16.680 --> 00:48:18.640 for this cargo. 473 00:48:18.640 --> 00:48:24.120 And why would this merchant be sure to sell his cargo nowadays in New York City? 474 00:48:24.120 --> 00:48:30.160 Because there are now enough producers in the New York area to make and import products 475 00:48:30.160 --> 00:48:36.120 by the means of which they acquire that which is offered to them by others. 476 00:48:36.120 --> 00:48:41.820 It would have been absurd to state that the problem about the 17th century cargo was there 477 00:48:41.820 --> 00:48:47.120 were too many producers and not enough consumers. 478 00:48:47.120 --> 00:48:53.340 Say adds that the only real consumers are those who produce on their part, because they 479 00:48:53.340 --> 00:48:59.740 alone can buy the produce of others, while barren consumers can buy nothing except by 480 00:48:59.740 --> 00:49:04.140 the means of value created by producers. 481 00:49:04.140 --> 00:49:10.180 He concludes eloquently that it is the capability of production which makes the difference between 482 00:49:10.180 --> 00:49:13.060 a country and a desert. 483 00:49:13.060 --> 00:49:19.300 The other potent reductio also in his letters to Malthus is part of his defense of innovation 484 00:49:19.300 --> 00:49:23.380 and machinery against charges of overproduction. 485 00:49:23.380 --> 00:49:29.700 Malthus, Say notes, concedes that machinery is beneficial when the production of the product 486 00:49:29.700 --> 00:49:35.220 is so increased that employment in that field increases also. 487 00:49:35.220 --> 00:49:41.980 But, Say adds, new machinery is advantageous even in the seeming worst case, when production 488 00:49:41.980 --> 00:49:48.020 of the particular good is not increased and laborers are discharged. 489 00:49:48.020 --> 00:49:54.940 For first, in the latter case as well as the former, productivity increases, selling prices 490 00:49:54.940 --> 00:49:58.460 fall and standards of living rise. 491 00:49:58.460 --> 00:50:05.460 Besides, Wright say, bringing in the reductio, tools are vital to mankind. 492 00:50:05.460 --> 00:50:11.700 To propose, as Malthus does, to limit and restrain the introduction of new machinery, 493 00:50:11.700 --> 00:50:19.460 is to argue implicitly that we ought, retrograding rather than advancing the career of civilization, 494 00:50:19.460 --> 00:50:25.660 successively to renounce all the discoveries we have already made, and to render our arts 495 00:50:25.660 --> 00:50:32.620 It's more imperfect in order to multiply our labor by diminishing our enjoyments. 496 00:50:32.620 --> 00:50:38.260 As to laborers disemployed by the introduction of new machinery, Say writes that they can 497 00:50:38.260 --> 00:50:40.660 and will move elsewhere. 498 00:50:40.660 --> 00:50:46.380 After all, he adds caustically, the employer who brings in new machinery does not compel 499 00:50:46.380 --> 00:50:52.380 them, the laborers, to remain unemployed, but only to seek another occupation. 500 00:50:52.380 --> 00:50:58.160 And many employment opportunities will open up for these laborers, since income in society 501 00:50:58.160 --> 00:51:03.160 has increased due to the new machinery and product. 502 00:51:03.160 --> 00:51:10.500 Echoing Turgot, Say also counters the Malthus Sismondi worry about the leaking out of savings 503 00:51:10.500 --> 00:51:16.360 from vital spendings, pointing out that savings do not remain unspent. 504 00:51:16.360 --> 00:51:23.920 They are simply spent on other productive or reproductive factors, rather than consumption. 505 00:51:23.920 --> 00:51:30.400 Rather than injuring consumption, saving is invested, and thereby increases future consumer 506 00:51:30.400 --> 00:51:31.400 spending. 507 00:51:31.400 --> 00:51:38.380 Historically, savings and consumption thereby grow together, and just as there is no necessary 508 00:51:38.380 --> 00:51:45.120 limit to production, so there is no limit to investment and the accumulation of capital. 509 00:51:45.120 --> 00:51:52.020 A produce created was a vent opened for another produce, and this is true whether the value 510 00:51:52.020 --> 00:51:59.280 of it is spent on consumption or added to savings. Conceding that sometimes the savings 511 00:51:59.280 --> 00:52:06.060 might be hoarded, Say was for once less than satisfactory. He pointed out correctly that 512 00:52:06.060 --> 00:52:11.800 eventually the hoard will be spent, either on consumption or investment, since after 513 00:52:11.800 --> 00:52:18.520 After all, that is what money is for. Yet he admitted that he too deplored hoarding. 514 00:52:18.520 --> 00:52:24.820 And yet, as Torgot had hinted, hoarded cash balances that reduce spending will have the 515 00:52:24.820 --> 00:52:31.480 same effect as overproduction at too high a price. The lower demand will reduce prices 516 00:52:31.480 --> 00:52:39.620 all round. Real cash balances will rise and all markets will again be cleared. Unfortunately, 517 00:52:39.620 --> 00:52:42.860 Say did not grasp this point. 518 00:52:42.860 --> 00:52:48.780 Say, however, was again powerful and hard-hitting in his critique of Malthus' belief in the 519 00:52:48.780 --> 00:52:54.660 importance of maintaining unproductive consumption by government. 520 00:52:54.660 --> 00:53:00.500 Income and consumption by government officials, soldiers and state pensioners. 521 00:53:00.500 --> 00:53:07.220 Say argued that these people live off production, whereas productive consumers add to the supply 522 00:53:07.220 --> 00:53:10.220 and the Supply of Goods and Services. 523 00:53:10.220 --> 00:53:12.220 Say continued sardonically, 524 00:53:12.220 --> 00:53:18.220 I cannot think that those who pay taxes would be at a loss what to do with their money 525 00:53:18.220 --> 00:53:21.220 if the collector did not come to their assistance. 526 00:53:21.220 --> 00:53:24.220 Either their wants would be more amply satisfied 527 00:53:24.220 --> 00:53:29.220 or they would employ the same money in a reproductive manner. 528 00:53:29.220 --> 00:53:35.220 In contrast to his opponents who wished the government to stimulate consumer demand, 529 00:53:35.220 --> 00:53:40.860 He believed that problems of glut, as well as poverty in general, could be solved by 530 00:53:40.860 --> 00:53:43.420 increasing production. 531 00:53:43.420 --> 00:53:49.620 And so he invaded in many passages against excessive taxation, which raised the costs 532 00:53:49.620 --> 00:53:55.840 and prices of goods, and crippled production and economic growth. 533 00:53:55.840 --> 00:54:02.180 In essence, J.B. Say countered the statist proposals of the under-consumptionists Malthus 534 00:54:02.180 --> 00:54:08.900 Malthus and Sismondi by an activist program of his own, the libertarian one of slashing 535 00:54:08.900 --> 00:54:11.300 taxation. 536 00:54:11.300 --> 00:54:17.080 Say combined his anti-tax insights with his critique of Malthus' fondness for government 537 00:54:17.080 --> 00:54:23.060 spending via a trenchant attack on Malthus and the public debt. 538 00:54:23.060 --> 00:54:29.320 Say noted that Malthus still convinced that there are classes who render service to society 539 00:54:29.320 --> 00:54:35.240 simply by consuming without producing, would consider it a misfortune if the whole or a 540 00:54:35.240 --> 00:54:39.820 great part of the English national debt were paid off. 541 00:54:39.820 --> 00:54:45.820 On the contrary, rebutted Say, this would be a highly beneficial event for England, 542 00:54:45.820 --> 00:54:51.700 for the result would be that the stockholders, government bondholders being paid off, would 543 00:54:51.700 --> 00:54:57.840 obtain some income from their capital, that those who pay taxes would themselves spend 544 00:54:57.840 --> 00:55:03.360 and the 40 million sterling which they now pay to the creditors of the state. 545 00:55:03.360 --> 00:55:09.200 That the 40 millions of taxes being taken off, all productions would be cheaper, and 546 00:55:09.200 --> 00:55:12.520 the consumption would considerably increase. 547 00:55:12.520 --> 00:55:17.360 That it would give work to the laborer in place of saber cuts, which are now dealt out 548 00:55:17.360 --> 00:55:18.560 to them. 549 00:55:18.560 --> 00:55:25.000 And I confess that these consequences do not appear to me of a nature to terrify the friends 550 00:55:25.000 --> 00:55:26.280 of Public Welfare.