EKIP– Expert Club for Economics and Politics A Different Opinion
Ludwig von Mises, original title in English: "Lord Keynes and Say's law"
I
Lord Keynes 's chief contribution to economic thought lies not in the development of new ideas, but in "the escape from the old," as he declares at the end of the preface to his "General Theory." Keynesians tell us that his famous achievement consists in the complete refutation of what is known as the "law of markets" or " Say's law. " The rejection of this law, they declare, is the essence of Keynes's doctrine; all his other propositions logically follow from this fundamental idea, and if the absurdity of his attack on Say's law is demonstrated, they collapse.
It is important to understand at once that what is called Say's law was first designed as a refutation of the popular doctrines held for centuries preceding the development of economics as a branch of human knowledge. It is not an integral part of classical economic theory. Rather, it is a preparation for the exposure and removal of the distorted and untenable ideas which cloud the minds of men and are a serious obstacle to a reasonable analysis of conditions.
Whenever a business went badly, the average merchant had two explanations: the evil was caused by a shortage of money or by general overproduction. Adam Smith, in a famous passage from The Wealth of Nations, refuted the first myth. Say devoted almost his entire life to the refutation of the second.
While something is still an economic good and not a “free good,” its supply is of course not in absolute abundance. There are still unsatisfied needs that a greater supply of the good could satisfy. There are still people who would be happy to receive more of the good than they actually receive. With regard to economic goods, there can never be absolute overproduction (the science of economics deals only with economic goods that are not “free goods,” such as air; which are not the subject of purposeful human activity, and therefore are not produced, and for which the use of terms such as scarcity and overproduction is simply meaningless).
There can only be relative overproduction in economic goods. When consumers demand certain quantities of shirts and shoes, producers have produced, say, more shoes and fewer shirts than were demanded. This is not general overproduction. There is an overproduction of shoes, but there is a corresponding shortage of shirts. The result, therefore, cannot be a general crisis in all branches of the economy. The result that follows from this situation is a change in the ratio of exchange between shoes and shirts. Whereas previously one could buy one pair of shoes for four shirts, now only three shirts can be bought. The business of shoemakers is in crisis, but that of shirtmakers is not. Therefore, attempts to explain the crisis state by invoking claims of overproduction are false.
According to Say, the price of goods is ultimately paid not in money but in other goods. Money is simply a medium of exchange; it acts as an intermediary. What the seller ultimately wants to receive in exchange for his goods is another good.
Therefore, every good produced is a price in relation to other goods produced. The condition of the producer of any good is improved by an increase in the production of other goods. What can harm the producer of a particular good is his inability to correctly predict the state of the market. He overestimates the demand for his good and underestimates the demand for other goods. Consumers do not benefit from such an entrepreneur; they buy his products at prices at which he makes a loss and if he does not correct his mistakes in time, bankruptcy and exit from the market follow. On the other hand, those entrepreneurs who are better able to predict public demand profit and are able to expand their activities. According to Say, this is the truth behind the confused statements of businessmen that the main difficulty is not in production but in sales. It would be more appropriate to state that the first and main problem of business is to find a way to produce in the best and cheapest way those goods that will satisfy the most urgent of all the unsatisfied needs of society.
Thus Smith and Say destroyed the oldest and most naive explanation of the business cycle by inefficient traders. They refuted the belief that the recurrence of depressions was caused by a shortage of money or overproduction. But they failed to create a complete theory of the business cycle. The first explanation of this phenomenon was given by the British Monetary School later in the 19th century.
The most important contributions of Smith and Say are not entirely new and original. The history of economic thought can trace some of their main points of support to earlier writers. This in no way diminishes their contributions to economic theory. They were the first to develop a systematic method of analysis and to apply their conclusions to the problem of economic depressions. They are therefore the first targets of the proponents of the false popular doctrine.
II
Jean-Baptiste Say emerged victorious from his polemics with Thomas Malthus and Jean Charles Léonard Simon de Sismondi. He proved his point while his opponents failed. From that moment on, throughout the rest of the nineteenth century, the hallmark of the economist was the recognition of the truth contained in Say's law. Those authors and politicians who claimed that the scarcity of money was responsible for all evils and considered inflation a panacea were no longer considered economists but "monetary charlatans."
The struggle between the defenders of commodity money and those of fiat money (so-called inflationists, because they want to print money) has been going on for many decades. But it is no longer seen as a contradiction between different schools of economics, but as a conflict between economists and anti-economists, between reasonable men and ignorant fanatics. The moment all civilized countries adopted a gold or gold-currency standard, inflation seemed to have been eliminated forever.
Economic science is not satisfied with the contributions of Smith and Say alone. It develops an integrated system of theorems that convincingly demonstrate the absurdity of inflationary sophisms. Thus, the inevitable consequences of the increase in the quantity of money in circulation and of credit expansion are explained in detail. The monetary theory of the business cycle is developed, which clearly shows how the recurrence of depression is caused by repeated attempts to "stimulate" business through credit expansion. In this way, it is convincingly proven that the economic decline, which according to inflationists is due to a shortage in the money supply, is the inevitable consequence of the attempts of these same inflationists to prevent this same shortage in the money supply through credit expansion.
Economists have not disputed the fact that credit expansion in its initial stage creates an economic boom. But they point out how this artificial boom inevitably collapses after a while and leads to depression. This statement is attractive to statesmen whose intentions are aimed at maintaining the long-term well-being of their fellow citizens. It does not, however, appeal to demagogues who worry about nothing but their success in the upcoming election campaign and are not in the least disturbed by what will happen later. But it is precisely these demagogues who are becoming the masters of political life in the present age of wars and revolutions. Inflation and credit expansion are becoming the first principles of economic policy, in defiance of all economic doctrines. Almost all governments adopt policies of reckless levels of spending, as well as financing their deficits by issuing additional quantities of non-refundable paper money and unlimited credit expansion.
The great economists are the harbingers of new ideas. The economic policies they recommend are at odds with the policies implemented by contemporary governments and political parties. Many years, even decades, pass before public opinion accepts the new ideas and the necessary reforms are implemented in the corresponding policies.
It was different with Lord Keynes's "new economics." The policies he advocated were precisely those that almost all governments, including the British one, had already adopted many years before the publication of his "General Theory." Keynes is not an innovator or advocate of new methods of conducting economic affairs. His contribution consists rather in providing a justification for policies that are popular with those in power, despite the fact that all economists regard them as disastrous. His achievement lies in the rationalization of policies already practiced. He is not a "revolutionary." The "Keynesian revolution" took place long before Keynes endorsed it and assembled it with a pseudoscientific justification. What he is really doing is writing an apology for prevailing government policies.
This explains the rapid success of his book. It was greeted with enthusiasm by governments and ruling political parties. The new group of intellectuals, the government economists, was particularly delighted. They had a bad conscience. They were aware of the fact that they were pursuing policies that all economists condemned as disastrous. The “new economy” restored their moral equilibrium. They were no longer ashamed of being servants of bad policies. They became prophets of the new economic creed.
III
The lavish epithets heaped upon Keynes by these admirers cannot obscure the fact that he does not refute Say's law. He rejects it emotionally and does not present a single substantial argument to prove its invalidity.
He does not even attempt to refute in a deductively way the doctrines of modern (in his time) economics. He simply ignores them. He never succeeds in making any criticism of the theorem that an increased quantity of money can accomplish nothing but benefit some groups at the expense of others, while at the same time encouraging capital malinvestment and capital loss. And when he tries to formulate a solid argument with which to refute the monetary theory of the business cycle, all he achieves is to revive the contradictory dogmas of the various inflationist sects. He adds nothing to the empty presumptions of his predecessors, from the Birmingham School to Silvio Gesell. All he succeeds in doing is to translate their sophisms (which have been refuted a hundred times) into the dubious language of mathematical economics. Keynes does not mention any of the objections of economists like Jevons, Walras, or Wicksell who oppose the outpourings of inflationists.
It is the same with his disciples. They think that calling those who are not moved to admiration for Keynes's genius by epithets like "dumb" or "narrow-minded fanatic" is tantamount to making a solid economic argument. They believe that they have proved their point by calling their opponents "orthodox" or "neoclassical." They reveal their extreme ignorance by thinking that their teaching is correct simply because it is new.
In fact, inflationism is the oldest of all economic fallacies. It was very popular even long before the time of Smith, Say, and Ricardo, against whose doctrines the Keynesians have no other objection than that they are old.
IV
The unprecedented success of Keynesianism is due to the fact that it provides a seeming justification for the deficit-financing policies of modern governments. It is the pseudo-philosophy of those who can do nothing but squander the capital accumulated by previous generations.
And yet no one's outpourings, even of the most brilliant authors, can change the eternal economic laws. They are in force always and everywhere. Regardless of the passionate rhetoric of state apologists, the inevitable consequences of inflationism sooner or later occur. And then, very late indeed, even the ordinary individual will discover that Keynes did not bequeath to us the miracle of how to "turn stones into bread", but the completely unmiraculous procedure of consuming the grain intended for sowing.
The translation was originally published on the author's blog.
