1. J.B. Say: The French Tradition in Smithian Clothing (continued)

0:005. 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.

0:45Not 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.

1:36Political 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.

2:24In 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.

3:18Ricardo 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.

4:23Costs 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.

5:11And 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.

5:57To 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.

6:49Say 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.

7:36He 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.

8:31In 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.

9:23Production 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.

10:10It 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.

11:00Say 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.

11:55For 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.

12:48In 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.

13:39In 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.

14:36Labor 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.

15:23While 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.

16:09For 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.

17:16Like 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.

18:03Tackling 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.

18:48Despite 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

20:11of 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.

21:01Say 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.

22:02As 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.

22:52Generalizing 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.

23:46Turning 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.

24:39In 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.

25:29But 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.

26:40A 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.

27:276. 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.

28:21He 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.

29:16The 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.

30:05The 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.

30:56Those 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.

31:42The 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.

32:38From 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.

33:39James 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.

34:47If 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.

35:36Generally, 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.

36:22In 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.

37:14What 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.

38:01This 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.

39:03For 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.

39:49But, 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.

40:45While 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.

41:38Moreover, 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.

42:27In 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.

43:19And 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.

44:08In 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.

45:12Returning 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.

46:07But 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.

47:01Say'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.

47:49Thus, 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.

48:36It 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.

49:23Malthus, 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.

50:32As 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.

51:23Rather 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.

52:18And 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.

53:10Say 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.

53:55In 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.

55:03That 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.