5. Utility, Productivity and Distribution
In contrast to the Smith-Ricardo mainstream of Smithians who set forth the labor theory
or at very best the cost of production theory of value, J.B. Say firmly reestablished the
Scholastic Continental French Utility Analysis It is utility and utility alone that gives
rise to exchange value, and Say settled the value paradox to his own satisfaction by disposing
of use-value altogether as not being relevant to the world of exchange.
Not only that, Say adopted a subjective value theory, since he believed that value rests
Depends on Acts of Valuation by the Consumers. In addition to being subjective, these degrees
of valuation are relative, since the value of one good or service is always being compared
against another. These values, or utilities, depend on all manner of wants, desires and
knowledge on the part of individuals, upon the moral and physical nature of man, the
and the climate he lives in, and on the manner and legislation of his country.
He has wants of the body, wants of the mind, and of the soul, wants for himself,
others for his family, others still as a member of society.
Political economy, say Sagely pointed out, must take these values and preferences of people as givens,
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.
At some points, Say went up to the edge of discovering the marginal utility concept without ever quite doing so.
Thus, he saw that relative valuations of goods depends on degrees of estimation in the mind
of the valuer.
But since he did not discover the marginal concept, he could not fully solve the value
paradox.
In fact, he did far less well at solving it than his continental predecessors.
And so, Say simply dismissed use-value and the value paradox altogether, and decided
to Concentrate on Exchange Value.
As a result, however, he could, no more than Smith and his British successors, devote much
energy to analyzing consumption or consumer behavior.
But whereas Say simply discarded use value, Ricardo made the value paradox and the unfortunate
split between use and exchange value the key to his value theory.
For Ricardo, iron was worth less than gold because the labor cost of digging and producing
gold was greater than the labor cost of producing iron.
Ricardo admitted that utility is certainly the foundation of value, but this was apparently
of only remote interest, since the degree of utility can never be the measure by which
to estimate its value.
All too true.
But Ricardo failed to see the absurdity of looking for such a measure in the first place.
His second absurdity, as we shall see further below, was in thinking that labor cost provided
such a true and invariable measure of value.
As Say wrote in his annotations on the French translation of Ricardo's Principles, an invariable
A reasonable measure of value is a pure chimera. Smith and still more Ricardo were pushed into
their labor cost theory by concentrating on the long-run natural price of products. Say's
analysis was aided greatly by his realistic concentration on the explanation of real market
Price.
Costs of course are intimately related to the pricing of factors of production.
One question that cost-value theorists have difficulty answering is if, indeed, costs
are determining, where do they come from?
Are they mandated by divine revelation?
One of the anomalies of Say's discussion is that even though a subjective value and utility
Theorist, he uncomprehendingly rejected the insight of Genovese and of his own ideologue
forebear, Kondiak, that people exchange one thing for another because they value the thing
they acquire more than what they give up, so that exchange always benefits both parties.
And in denying this mutual gain, Say is inconsistent with much of his own position on utility.
In spurning Kondiak, Say is being not only ungenerous, but almost willfully obtuse.
First, he notes that Kondiak maintains that commodities, which are worth less to the seller
than to the buyer, increase in value from the mere act of transfer from one hand to
another.
But, Kondiak insists, for example, that equal value is really given for equal value, so
So that when Spanish wine is bought in Paris, the money paid by the buyer and the wine he
receives are worth one another.
To which we might ask, to whom?
He then admits that the self-same wine is worth more in Paris than it had been when
grown in Spain.
But he insists that the increase in the value of the wine took place not at the moment of
of handing over the wine to the consumer, but comes from the transport.
But St. Clair tangently takes say to task.
In reality, the transfer to the consumer is the essence of the transaction.
The long transport is subsidiary to this purpose.
The change of locality is merely a means to this end, and would not have been necessary
if consumers willing to buy the same quantity and pay the same price could have been found
on the spot.
Say continues obstinately to assault Kondiak's insight.
The seller is not a professional cheat, nor the buyer a dupe, and Kondiak is not justified
in saying that if the values exchanged were always equal, neither party would gain anything
by exchange.
But in reality, of course, Condiac was perfectly right.
Why should anyone bother exchanging X for Y of equal value?
St. Clair reacts brilliantly in exasperation.
Lord, how these economists do misunderstand one another.
Condiac does not suggest that the wine merchant is a rogue and the customer a fool.
He does not suggest that the merchant robs either the consumer or the producer.
His doctrine is that products increase in utility and value by being transferred from
the producer to the consumer, and that both parties benefit by the intervention of the
merchant who brings about the exchange.
To the producer, the merchant is a consumer finder.
To the consumer, he is a commodity finder. With the merchant as medium of exchange, the
producer gets a better price for his produce and the buyer better value for his money.
One of Say's great contributions was to apply utility theory to the theory of distribution,
in brief by discovering the productivity theory of the pricing and hence the income accruing
to Factors of Production.
In the first place, Say pointed out that in contrast to Smith, all labor, not just labor
embodied in material objects, is productive.
Indeed, Say brilliantly pointed out that all the services of factors of production, whether
they be land, labor or capital, are immaterial, even though they might result in a material
product.
Mises, in short, provide immaterial services in the process of production.
That process, as Say pointed out clearly for the first time, was not the creation of material
products.
Man cannot create matter.
He can only transform it into different shapes and molds in order to satisfy his wants more
fully.
Production is this very transformation process.
In the sense of such transformation, all labor is productive because it concurs in the creation
of a product, or, metaphorically, in the creation of utilities.
If as can happen, labor has been expended to no ultimate benefit, then the result is
error, folly, or waste in the person bestowing the labor.
One example of unproductive labor is crime, not only a non- but an anti-market activity.
Their trouble, effort, is directed to the stripping another person of the goods in his
possession by means of fraud or violence.
It degenerates to absolute criminality, and their results no production, but only a forcible
transfer of wealth from one individual to another.
J. B. Say also put clearly for the first time the insight that wants are unlimited. Wrote
Say, There is no object of pleasure or utility whereof the mere desire may not be unlimited,
since every body is always ready to receive whatever can contribute to his benefit or
gratification. Say denounced the proto-Galbraithian position of the British mercantilist Sir James
as Stuart, in extolling an ascetic reduction of wants as a solution to desires outpacing
production.
Say heaps proper scorn on this doctrine.
Upon this principle, it would be the very acme of perfection to produce nothing and
to have no wants, that is to say, to annihilate human existence.
Unfortunately, Say proceeds to fall prey to this very Galbraithian trap by attacking
by maintaining luxury and ostentation, and by maintaining that real wants are more important
to the community than artificial wants.
Say hastens to add, however, that government intervention is not the proper road to achieving
proper affluence.
On the valuing or pricing of the services of the factors, or as Say would put it, agents
of Production, Say adopted the Proto-Austrian in direct contrast to the Smith-Ricardo tradition.
For since subjective human desire for any object creates its value and reflects its
utility, productive factors receive value because of their ability to create the utility
wherein originates that desire.
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.
In contrast, Say declares, the current value of productive exertion is founded upon the
value of an infinity of products compared one with another, which value is proportionate
to the importance of its cooperation in the business of production.
In contrast to consumer goods, Say points out, the demand for productive factors does
does not originate in immediate enjoyment, but rather in the value of the product they
are capable of raising, which itself originates in the utility of that product, or the satisfaction
it may be capable of affording.
In short, the value of factors is determined by the value of their products, which in turn
is conferred by consumer valuations and demands.
The causal chain, for say, as for the later Austrians, is from consumer valuations to
consumer goods prices to the pricing of productive factors, that is, to costs of production.
In contrast, the Smithian and especially the Ricardian causal chain is from cost of production
and Especially Labor Cost to Consumer Goods Prices.
By speaking of the proportionate value of each factor, Say once again comes to the edge
of a marginal productivity theory of imputation of consumer to factor valuations, and to the
edge of a variable proportions analysis.
But he does not reach it.
Say did not rest content with a general, even if pioneering, analysis of the pricing of
productive factors.
He goes on to virtually create the famous triad of classical economics, land or natural
agents, labor or industry for say, and capital.
Labor works on or employs natural agents to create capital, which is then used to multiply
by Productivity in Collaboration with Land and Labor.
Although capital is the previous creation of labor, once in existence it is used by
labor to increase production.
If there are classes of factors of production, what easier trap to fall into than to maintain
that each class receives the kind of income attributed to it in common parlance?
That is, labor receives wages, land receives rent, and capital receives interest.
Surely a common-sense approach.
And so, Say adopted it.
While useful as a first attempt, excepting the forgotten Turgot, to clarify production
theory out of Adam Smith's muddle, this superficial clarity comes at the expense of deep fallacy
that would not be uncovered until the Austrians.
In the first place, these three rigidly separated categories already begin to break down in
Say's interesting insight that laborers lend their services to owners of capital and land
and earn wages thereby, that landowners lend their land to capital and labor and earn rent,
And that capitalists lend their capital to earn interest.
For how exactly do these payments differ?
How does rent as a loan price compare with interest as a loan?
And how do wages differ from interest or rent?
In fact, the muddle is even worse.
For workers and landowners don't lend their services, they are not creditors.
On the contrary, in a deep sense, capitalists lend them money by giving the money in advance
of selling the product to the consumers.
And so, workers and landowners are debtors to the capitalists and pay them a natural
rate of interest.
And finally, this classical triad rests on a basic equivocation, as Boehm-Bawerk would
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.
Like all other factors, capital goods earn a price, a price per unit of time for their
services.
If you will, capital goods, land and laborers all earn such prices, in the sense of rents,
defining a rental price as a price of any good per unit of time.
This price is determined by the productivity of each factor.
But then, where does interest on capital funds come from?
Thus in grappling with the problem of interest, Say criticizes Smith and the Smithians for
focusing on labor as the sole factor of production and neglecting the cooperating role of capital.
Tackling the Smith-Ricardian and what would later be the Marxian riposte, that capital
Capital is simply accumulated labor, say replies, yes, but the services of capital once built
are there and continue anew and must be paid for.
While satisfactory enough on one level, the answer does not solve the problem of where
the net return on capital funds comes from, a return which Turgot and then the Austrians
is explained as the price of time preference, of the fact, in short, that capital is not
only accumulated labor, but also accumulated time.
Despite the lack of resolution of the problem of interest, Say set forth an excellent analysis
of capital in the sense of capital goods and its crucial role in production and in increasing
economic wealth.
Man, he pointed out, transforms natural agents into capital to work further with nature to arrive at consumer goods.
The more he has built capital goods, the more tools and machinery, the more can man harness nature to make labor increasingly productive.
More machinery means an increase in productivity of labor and a fall in the cost of production.
Production. Such increase in capital is particularly beneficial to the mass of consumers, for competition
lowers the price of product as well as the cost of production. Furthermore, increased
machinery permits a superior quality of product and allows the creation of new products which
would not have been available under handicraft production. The enormous increase in production
and Rise in the Standard of Living releases human energies from the scramble for subsistence
to permit cultivation of the arts, even of frivolity and, most importantly, for the cultivation
of the intellectual faculties.
Say follows Smith in his discussion of the division of labor and in pointing out that
the degree of that division is limited by the extent of the market.
But Say's discussion is far sounder.
He shows first that expanding the division of labor needs a great deal of capital, so
that investment of capital becomes the crucial point, rather than its division per se.
He also points out that in contrast to Smith, the crucial specialization of labor is not
simply within a factory, as in Smith's famous pin factory, but ranges over the entire economy
and forms the basis for all exchange between producers.
Say also saw that the essence of investing capital is advancing money payments to factors
of production, an advance that is repaid later by the consumer.
Thus, the capital employed on a productive operation is always a mere advance made for
payment of a productive service and reimbursed by the value of their resulting product.
Here he captured the essence of the Austrian insight into capital as a process over time
and one that involves payment in advance for production.
Say also anticipated the Austrian concept of stages of production.
He pointed out that instead of waiting a long time for reimbursement by the consumer, the
capitalist at each stage of production purchases the product of the previous stage and thereby
reimburses the previous set of capitalists.
As Say lucidly puts it, the miner extracts the ore from the bowels of the earth.
The Iron Founder pays him for it.
Here ends the miner's production, which is paid for by an advance out of the capital
of the iron founder.
This latter next smelts the ore, refines and makes it into steel, which he sells to the
cutler.
Thus is the production of the founder paid, and his advance reimbursed by a second advance
on the part of the cutler, made in the price of the steel.
This again the cutler works up into razor blades, the price for which replaces his advance of
capital and at the same time pays for his productive agency.
Generalizing each successive producer makes the advance to his precursor of the then value
of the product including the labor already expended upon it.
His successor in the order of production reimburses him in turn, with the addition of such value
as the product may have received in passing through his hands.
Finally, the last producer, who is generally the retail dealer, is compensated by the consumer
for the aggregate of all these advances, plus the concluding operation performed by himself
upon the product.
In the end, the money paid by the consumers for the final product, say razorblades, repays
capitalists for their previous advances for the various services of the factors of production.
Turning to wages and the labor market, Say pointed out that wages will be highest relative
to the price of capital and land, where labor is scarcest relative to the other two factors.
Wages will be either whenever land is virtually unlimited in supply, and or when an abundance
of capital creates a great demand for labor.
Furthermore, wage rates will be proportionate to the danger, trouble or obnoxiousness of
the work, to the irregularity of the employment, to the length of training, and to the degree
of skill or talent.
As Say puts it, every one of these causes tends to diminish the quantity of labor in
circulation in each department, and consequently to vary its wage rate.
In recognizing the differences of natural talent, Say advanced far beyond the egalitarianism
of Adam Smith and of neoclassical economics since Smith's day.
In the long run, capital will earn the same return in all firms and industries.
But this is only true in the long run, since for one thing there are inevitable immobilities
of land, labor and capital.
To say the profits or interest on capital stems from its productive services.
Again, a fundamental confusion between capital as a fund which earns interest and capital
Federal goods, which are productive factors and earn prices and incomes for their productivity.
But despite this basic error, Say had many shrewd things to say about interest.
He was possibly the first economist, for example, to show that risk premiums are added to the
basic interest rate, so that riskier debtors will pay higher interest.
Risk, he pointed out, depends on expected safety of the investment, the personal credit
and character of the borrower, the past record of the borrower, and the ability or willingness
of the government of the debtor's country to enforce the payment of debt.
Furthermore, Say introduced an innovation theory of profit by stating that since new methods
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.
A champion of freedom of the loan market. Usury is no worse morally than rent or wages.
He also demonstrated that it was a fallacy that the quantity of money either lowers or raises the
rate of interest. Say perceptively pointed out that it is an abuse of words to talk of the interest
of Money. It is really interest on savings, not money, and loans can and do occur in kind
as well as in money. Roth say, the abundance or scarcity of money or of its substitutes
no more affects the rate of interest than the abundance or scarcity of cinnamon or wheat
or of silk.
6. The Entrepreneur
If Adam Smith purged economic thought of the very existence of the entrepreneur, J. B.
Say, to his everlasting credit, brought him back.
Not quite as far back, to be sure, as in the days of Catillon and Torgot, but enough to
continue fitfully and underground in continental economic thought, even though absent from
and the dominant mainstream of British classicism.
Emphasis on the real world rather than on long-run equilibrium almost forced a return
to the study of the entrepreneur.
For say, the entrepreneur, the linchpin of the economy, takes on himself the responsibility,
the conduct and the risk of running his firm.
He almost always owns some of the firm's capital, say being familiar with the fact that the
dominant entrepreneur and risk-taker in the economy is the one who is also a capitalist,
an owner of capital.
The owner of capital or land or personal service hires these services out to the renter or
entrepreneur.
In return for fixed payments to these factors, the entrepreneur takes upon himself the speculative
risk of gaining profit or suffering loss.
It is a sort of speculative bargain wherein the renter takes the risk of profit and loss
according to the revenue he may realize, or the product obtained by the agency transferred
shall exceed or fall short of the rent or hire he is to pay.
The entrepreneur, Say adds, acts as a broker between sellers and buyers, applying productive
factors proportionate to the demand for the products.
The demand for the products, in turn, is proportionate to their utilities and to the quantity of other
products exchanging for them.
The entrepreneur constantly compares the selling prices of products with their costs of production.
If he decides to produce more, his demand for productive factors will rise.
Part of the profits accruing to the capitalist entrepreneur will be the standard return on
capital.
But apart from that, Say declared, there will be a return to the peculiar character of the
entrepreneur.
The entrepreneur is a manager of the business, but his role is also broader in Say's view.
The entrepreneur must have judgment, perseverance and a knowledge of the world as well as of
business, as he applies knowledge to the process of creating consumer goods.
He must employ laborers, purchase raw material, attempt to keep costs low and find consumers
for his product.
Above all, he must estimate the importance of the product, the probable demand for it,
and the availability of the means of production.
And finally, he must have a ready knack of calculation to compare the charges of production
with the probable value of the product when completed and brought to market.
Those who lack these qualities will be unsuccessful as entrepreneurs and suffer losses and bankruptcies.
Those who remain will be the skillful and successful ones earning profits.
Say was critical of Smith and the Smithians for failing to distinguish the category of entrepreneurial profit from the profit of capital,
both of which are mixed together in the profits of real-world enterprises.
Say also appreciated entrepreneurship as the driving force of the allocations and adjustments of the market economy.
He summed up those workings of the market by stating that the wants of consumers determine what will be produced.
The product most wanted is most in demand and that which is most in demand yields the largest profit to industry, capital and land,
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
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.
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.
From his analysis of capital, entrepreneurship and the market, J.B. Say concluded for laissez-faire,
The producers themselves are the only competent judges of the transformation, export and import
of these various matters and commodities, and every government which interferes, every system
calculated to influence production, can only do mischief.
7. Say's Law of Markets
While J.B. Say has been almost totally ignored by mainstream economists and historians of
economic thought, this is not true for one relatively minor facet of his thought that
became known as Say's Law of Markets. The one point of his doctrine that the active
One of the most active and aggressive British Ricardians got out of Say was this law.
James Mill, the Lenin of the Ricardian movement, appropriated the law in his Commerce Defended, 1808,
and Ricardo adopted it from his discoverer and mentor.
Say's law is simple and almost truistic and self-evident, and it is hard to escape the conviction
has stirred up a series of storms only because of its obvious political implications and consequences.
Essentially, Say's law is a stern and proper response to the various economic ignoramuses,
as well as self-seekers, who, in every economic recession or crisis, begin to complain loudly about the terrible problem of general overproduction,
Overproduction means production in excess of consumption, that is, production is too
great in general compared to consumption, and hence products cannot be sold in the market.
If production is too large in relation to consumption, then obviously this is a problem
Some of what is now called market failure, a failure which must be compensated by the
intervention of government.
Intervention would have to take one or both of the following forms, reduce production
or artificially stimulate consumption.
The American New Deal in the 1930s did both, with no success in relieving the alleged problem.
Intervention can be reduced, as in the case of the New Deal, by the government's organizing
compulsory cartels of business to force a cut in their output.
Stimulating consumer demand has long been the particularly favored program of interventionists.
Generally, this is done by the government and its central bank, inflating the money
supply and or by the government incurring heavy deficits, its spending passing for a
for Surrogate Consumption. Indeed, government deficits would seem to be ideal for the overproduction
under consumptionists. For if the problem is too much production and or too little consumer
spending, then the solution is to stimulate a lot of unproductive consumption. And who
is better at that than government, which by its very nature is unproductive and even counterproductive?
Say, understandably, reacted in horror to this analysis and to the prescription.
In the first place, he pointed out, the wants of man are unlimited and will continue to
be until we achieve genuine, general superabundance, a world marked by the prices of all goods
and services falling to zero.
But at that point, there would be no problem of finding consumer demand, or indeed any
Thus, Say postulates a situation where all costs of production are at last reduced to
zero, in which case it is evident there can no longer be rent for land, interest upon
on Capital or Wages on Labor, and consequently no longer any revenue to the productive classes.
What will happen then?
What then, I say, these classes would no longer exist?
Every object of human want would stand in the same predicament as the air or the water,
which are consumed without the necessity of being either produced or purchased.
In like manner, as every one is rich enough to provide himself with air, so would he be
to provide himself with every other imaginable product.
This would be the very acme of wealth.
Political economy would no longer be a science.
We should have no occasion to learn the mode of acquiring wealth, for we should find it
ready-made to our hands.
Since apart from the Garden of Eden, production always falls short of man's wants.
This means that there is no need to worry about any lack of consumption.
The problem that limits wealth and living standards is a deficiency of production.
On the market, Say points out, producers exchange their products for money, and they use the
money to buy the products of others.
That is the essence of the exchange or market economy.
Therefore, the supply of one good constitutes, at bottom, the demand for other goods.
Consumption demand is simply the embodiment of the supply of other products, whose owners are seeking to purchase the products in question.
Far better to have demand emerging from the supply of other products, as on the free market,
For the government to stimulate consumption by itself is no benefit to commerce.
For the difficulty lies in supplying the means, not in stimulating the desire for consumption.
And we have seen that production alone furnishes the means.
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.
A value once created is not augmented by being seized and expanded by the government, instead of by an individual.
The man that lives upon the productions of other people originates no demand for those productions.
He merely puts himself in the place of the producer, to the great injury of production.
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?
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.
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.
There can never be any problem of overproduction or underconsumption on the free market, because
prices can always fall until the markets are cleared.
While Say did not always put the matter in these precise terms, he saw it clearly enough,
particularly in his letters to Malthus, in his controversy with the Reverend Thomas Robert
Malthus over Say's law.
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.
The question should always be, production or sales at what price? Demand or consumption at what price?
There is never any genuine unsold surplus or glut, whether specific or general, over the
whole economy, if prices are free to fall to clear the market and eliminate the surplus.
Moreover, Say wrote in his letters to Malthus, if the quantity set in the slightest degree
exceeds the want, it is sufficient to alter the price considerably.
It is this notion of what we would now call elasticity and resulting sharp changes in
price that, for say, leads many people to mistake a slight excess of supply for an excessive
abundance.
The policy implications of attending to the price system are crucial.
It means that to cure a glut, whether specific or pervasive, the remedy is not for the government
to spend or create money, it is to allow prices to fall so that the market will be cleared.
In his letters to Malthus, Say offers the following example, 100 sacks of wheat are
produced and exchanged for 100 pieces of cloth, or rather each is exchanged for money and
then for the other commodity.
Notice that productivity and output of each is doubled, and now 200 sacks of wheat are
exchanged for 200 pieces of cloth.
How is superabundance or overproduction going to affect either or both commodities?
And if by producing 100 units of each product the producer made 30 francs profit, why couldn't
But the resulting increase of production and fall in the price of each product still reap
30 francs profit for each seller.
And how can general glut arise?
Yet Malthus would have to maintain that part of the new production of cloth would find
no buyers.
Say then notes that Malthus in a sense conceded the point about prices falling due to increased
Production and then fell back on a second line of defense, that productions will fall
to too low a price to pay for the labor necessary to their production.
Here we come to the nub of the over-productionist, under-consumptionist complaints.
If we can get past their foggy, aggregative concepts and their real or seeming neglect
of the fact that a lower price of any product can always clear the market.
In reply, Say noted that Malthus, having unfortunately adopted the labor theory of value, neglected
to add the productive services of land and capital to labor in the costs of production,
so that the assertion is that selling prices will fall below the costs of production.
But where do costs come from? And why are they somehow fixed, exogenous to the market
system itself? How are they determined? Although Ricardo joined with, say, on the question
of overproduction, it was easy for a British follower of Smith and Ricardo, such as Malthus,
on cost theories of value to fall into this trap, and to assume that costs are somehow
Fixed and Invariant
Say believing as we have seen that costs are determined by selling price rather than the
other way round, was impelled to a far clearer and more correct picture of the entire matter.
Returning to his example, Say points out that if the wheat and cloth producers double the
quantity produced with the same productive services, this means not only that the prices
Losses of wheat and cloth will fall, but also that factor productivity has risen in both
industries. A rise of factor productivity means a lowering of cost. But this means that
an increase in output will not only lower selling price, it will also lower costs. So
there is no reason to assume grievous losses or even a lessening of profit if prices fall.
Apparently, Say continued, Malthus is worried about the prices of productive services remaining
high and therefore keeping costs too high as production increases.
But here, Say brings in a brilliantly perceptive point.
Prices of productive factors must be high for a reason.
They are not preordained to be high.
But this high wage or rent in itself precisely denotes that what we seek for exists.
That is to say, that there is a mode of employing them so as to make the produce sufficient
to repay what they cost.
In short, factor prices being high means that they have been bid up to that height by alternative
uses for them.
If the costs of these factors seriously impinge upon, or erase the profits of a firm or industry,
this is because these factors are more productive elsewhere, and have been bid up to reflect
that vital fact.
Say's reasoning is strikingly similar to the modern free trade reply to the cheap labor
argument for protective tariffs.
The reason why labor is more expensive, say in the United States or other industrialized
countries is that other American industries have bid up these labor costs.
These industries are therefore more efficient than the industry suffering from competition
and hence the latter should cut back or shut down and allow resources to shift to more
efficient and productive fields.
In more peripheral but still relevant areas, J.B. Say engaged in some lovely and powerful
examples of reductio ad absurdum argument.
Thus, on the importance of demand vis-a-vis supply and on the question of gluts, he asked,
what would have happened if a merchant shipped a current cargo to the site of New York City
in the early 17th century?
Clearly, he wouldn't have been able to sell his cargo.
Why not?
by this glut, because no one in the New York area was producing enough other goods to exchange
for this cargo.
And why would this merchant be sure to sell his cargo nowadays in New York City?
Because there are now enough producers in the New York area to make and import products
by the means of which they acquire that which is offered to them by others.
It would have been absurd to state that the problem about the 17th century cargo was there
were too many producers and not enough consumers.
Say adds that the only real consumers are those who produce on their part, because they
alone can buy the produce of others, while barren consumers can buy nothing except by
the means of value created by producers.
He concludes eloquently that it is the capability of production which makes the difference between
a country and a desert.
The other potent reductio also in his letters to Malthus is part of his defense of innovation
and machinery against charges of overproduction.
Malthus, Say notes, concedes that machinery is beneficial when the production of the product
is so increased that employment in that field increases also.
But, Say adds, new machinery is advantageous even in the seeming worst case, when production
of the particular good is not increased and laborers are discharged.
For first, in the latter case as well as the former, productivity increases, selling prices
fall and standards of living rise.
Besides, Wright say, bringing in the reductio, tools are vital to mankind.
To propose, as Malthus does, to limit and restrain the introduction of new machinery,
is to argue implicitly that we ought, retrograding rather than advancing the career of civilization,
successively to renounce all the discoveries we have already made, and to render our arts
It's more imperfect in order to multiply our labor by diminishing our enjoyments.
As to laborers disemployed by the introduction of new machinery, Say writes that they can
and will move elsewhere.
After all, he adds caustically, the employer who brings in new machinery does not compel
them, the laborers, to remain unemployed, but only to seek another occupation.
And many employment opportunities will open up for these laborers, since income in society
has increased due to the new machinery and product.
Echoing Turgot, Say also counters the Malthus Sismondi worry about the leaking out of savings
from vital spendings, pointing out that savings do not remain unspent.
They are simply spent on other productive or reproductive factors, rather than consumption.
Rather than injuring consumption, saving is invested, and thereby increases future consumer
spending.
Historically, savings and consumption thereby grow together, and just as there is no necessary
limit to production, so there is no limit to investment and the accumulation of capital.
A produce created was a vent opened for another produce, and this is true whether the value
of it is spent on consumption or added to savings. Conceding that sometimes the savings
might be hoarded, Say was for once less than satisfactory. He pointed out correctly that
eventually the hoard will be spent, either on consumption or investment, since after
After all, that is what money is for. Yet he admitted that he too deplored hoarding.
And yet, as Torgot had hinted, hoarded cash balances that reduce spending will have the
same effect as overproduction at too high a price. The lower demand will reduce prices
all round. Real cash balances will rise and all markets will again be cleared. Unfortunately,
Say did not grasp this point.
Say, however, was again powerful and hard-hitting in his critique of Malthus' belief in the
importance of maintaining unproductive consumption by government.
Income and consumption by government officials, soldiers and state pensioners.
Say argued that these people live off production, whereas productive consumers add to the supply
and the Supply of Goods and Services.
Say continued sardonically,
I cannot think that those who pay taxes would be at a loss what to do with their money
if the collector did not come to their assistance.
Either their wants would be more amply satisfied
or they would employ the same money in a reproductive manner.
In contrast to his opponents who wished the government to stimulate consumer demand,
He believed that problems of glut, as well as poverty in general, could be solved by
increasing production.
And so he invaded in many passages against excessive taxation, which raised the costs
and prices of goods, and crippled production and economic growth.
In essence, J.B. Say countered the statist proposals of the under-consumptionists Malthus
Malthus and Sismondi by an activist program of his own, the libertarian one of slashing
taxation.
Say combined his anti-tax insights with his critique of Malthus' fondness for government
spending via a trenchant attack on Malthus and the public debt.
Say noted that Malthus still convinced that there are classes who render service to society
simply by consuming without producing, would consider it a misfortune if the whole or a
great part of the English national debt were paid off.
On the contrary, rebutted Say, this would be a highly beneficial event for England,
for the result would be that the stockholders, government bondholders being paid off, would
obtain some income from their capital, that those who pay taxes would themselves spend
and the 40 million sterling which they now pay to the creditors of the state.
That the 40 millions of taxes being taken off, all productions would be cheaper, and
the consumption would considerably increase.
That it would give work to the laborer in place of saber cuts, which are now dealt out
to them.
And I confess that these consequences do not appear to me of a nature to terrify the friends
of Public Welfare.