Jean-Baptiste Say

Jean-Baptiste Say (January 5, 1767 – November 15, 1832) was a French economist and businessman. He had classically liberal views and argued in favour of competition, free trade and lifting restraints on business.

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Jean-Baptiste Say.

Biography

Jean-Baptiste Say was born in Lyons in 1767 to a family of textile merchants of Huguenot extraction. In 1787, after spending two years in England apprenticed to a merchant, Say took a job at an insurance company in Paris run by Clavière (later to become Minister of Finance).

It was around this time that Say read Adam Smith 's book and the work of and fell into with a group of laissez-faire economists, known as the ideologues who sought to relaunch the spirit of Enlightenment liberalism in republican France. Indeed, Say was the first editor of La Decade Philosophique, a journal published by the group. Say's eminence grew such that he was nominated to the Tribunate in 1799, sitting in the finance section.

The radical laissez-faire notions expounded in his 1803 Treatise caught the attention of Napoleon Bonaparte himself who demanded that Say rewrite parts of the Treatise to conform with Bonaparte’s views. Say refused. Thus, Napoleon proscribed the Treatise and had Say ousted from the Tribunate in 1804.

The Bourbon restoration government showered Say with numerous dignities and honors. In 1816, he was invited him to deliver a course of lectures on economics at l'Athénée Royale, a private college. In 1819, he was appointed as Chair of Industrial Economy at the Conservatoire National des Arts et Metiers. His popular lectures were published in 1828. In 1831, Say was granted a chair (the first in economics) at the prestigious Collège de France. He died in Paris in 1832.

Say’s work in macro-economics

In 1803, Say published his most famous work, Treatise on Political Economy. Say's distinctive approach to economics was an outcome of the muddled marriage of Condillac’s utility theory of demand and Adam Smith's cost theory of supply.

Value, Say claimed, was the outcome of the interaction of these two. In this respect, it departs considerably from the Classical Ricardian School, where value is determined purely from the cost side. Say's approach was taken up by French Liberal School and he can be considered a precursor of the Marginalist Revolution. Like Cantillon before him and the Austrian School after him, Say also placed great emphasis on the risk-taking entrepreneur and even tried to include him as the "fourth" factor of production in his analysis.

J.B. Say brings him back to life and to the center of the stage. What do these entrepreneurs do? They use their "industry" (a term Say prefers to "labor") to organize and direct the factors of production so as to achieve the "satisfaction of human wants." But they are not merely managers. They are forecasters, project appraisers, and risk-takers as well. Out of their own financial capital, or that borrowed from someone else, they advance funds to the owners of labor, natural resources ("land"), and machinery ("tools").( Say, Treatise, p.83 )

For Say, the foundation of value is utility or the capacity of a good or service to satisfy some human desire. Those desires and the preferences, expectations, and customs that lie behind them must be taken as givens, as data, by the analyst. The task is to reason from those data. Say is most emphatic in denying the claims of Adam Smith, David Ricardo, and others that the basis for value is labor, or "productive agency"(Treatise,p.348).

Nowhere is Say's radicalism more evident than in his critique of government intervention into the economy. Most succinctly stated, he declares that self-interest and the search for profits will push entrepreneurs toward satisfying consumer demand. "......The nature of the products is always regulated by the wants of society... ( therefore )... legislative interference is superfluous altogether....."( Treatise, p.144).

It was also in the Treatise that Say outlined his famous "Law of Markets" ( or "Say's Law" ). Roughly stated, Say's Law claims that total demand in an economy cannot exceed or fall below total supply in that economy or as James Mill was to restate it, "…supply creates its own demand……"

In Say's language, "….products are paid for with products…." ( Say 1803, p.153) or "….a glut can take place only when there are too many means of production applied to one kind of product and not enough to another….."( Say 1803, p.178-9.).

Say’s Law

Let’s start with a historical event. Herbert Hoover and Franklin Roosevelt thought that people simply did not have enough money to buy the output of industry. In a sense that was true, but the program that such a theory evidently called for, raising wages and protecting jobs, which would presumably give people the extra money needed to buy all industrial production, had disastrous results: Unemployment hovered around 20% for a decade, despite all the “bells and whistles” of the New Deal.

In fact, public policies including everything from protective tariffs and "fair trade" to unionism and the minimum wage are based on the principle of "how to achieve sufficient demand to absorb available production" .

These kinds of ideas in the post-World War II world are usually identified with John Maynard Keynes, whose biographer, Robert Skidelsky, says that Keynes's "....aim was simply to ensure a level of aggregate demand sufficient to enable market-clearing real wages to be established without price inflation...." But Hoover, Roosevelt, and Keynes seemed to miscalculate a bit there, omitting "Say's Law," that claimed: "supply creates demand."( Sowel 1972 ).

Say's Law in a few easy examples and principles

If inventory doesn't sell, then prices will be cut until it does. Or, if a manufacturer wants to sell to a mass market, he knows that he can't wait until everyone can afford something expensive; he knows that he has to market his product at a low enough price that it will begin to sell. When industrial production increases and more goods become available, some old goods will go unsold as money moves over to the new goods, and prices will have to fall right across the board.

That is called "deflation," and it is what happened in the United States from the end of the Civil War until 1896, while the United States grew into the largest economy in the world. Money became more valuable, and wages continued to buy as much as was desired of total production. Hence, the reason why there hasn’t been any deflation since World War II, even though the U.S. economy has grown vastly since then, was that deflation will only happen if the money supply does not grow fast enough as production increases. Prices will remain stable or even increase (inflation) if the money supply grows as fast or faster than production.

If the money supply does not increase, the "wage and price spiral" runs out of money. If a business raises prices to offset wage increases, less of its production will be sold. If enough is sold that revenue actually increases, as desired, this will have two effects: (1) people are getting less for their money from this business, which decreases the value going to consumers; and (2) money is drawn from elsewhere in the economy, which means that there is less money left to buy the production of other businesses. Somebody gets the short end of the stick. Somebody has to cut prices. Then there is this “real wages” vs. “nominal wages” paradox.

The reason why real wages would rise as nominal wages fell may be sketched by a simple consideration. Expanded production will always mean expanded demand for labor. Drawing off labor to produce new goods bids up the value of labor, which would offset the downward tendency of deflation. This all lead to following conclusion:

Wages that are not allowed to naturally seek a market clearing level will produce the same results as any other kind of price fixing scheme: when wages (prices) are too low, a shortage results; and when wages (prices) are too high, a surplus results. A surplus in the labor market is called "unemployment." Hoover and Roosevelt thus engineered, not greater demand and prosperity, but greater unemployment and unchecked Depression (Sowel 1972 ).

Another way to understand the “real wages” is to note that what wages will buy depends on the value of money, while the value of money depends on the transactions the money supply must cover, i.e. the output of the economy.

Thus, what wages will buy depends on what the economy produces, and Say's Law means that the value of money will rise to a market clearing level, that is, until production may be purchased by the money held by consumers.

The magic question here, with cutting prices in the deflation of a growing economy but inability to cut wages to the same degree, is this:

"..….What is going to restore the profit margin..."?

The answer is “greater productivity”. If the workers with higher real wages produce proportionally more for those wages, then the balance of revenue and expenses will be restored ( Say 1971) .

Thus, again, once Say's Law is understood, it is obvious that growth in production takes care of demand, as long as wages are allowed to maintain market-clearing levels. What happens to the money supply is secondary, though it helps to avoid falling wages, since people are not going to like that, whether it really makes any difference or not (and it will increase the value of debt). Price deflation is acceptable as long as wages do not also fall, but that is a tough target to hit. Growth in productivity, not just growth in production, is ultimately what makes life better and increases wealth for everyone.

Say’s legacy

Jean-Baptiste Say has much to offer any reader, whether Austrian or not, whether an economist or not. He saw many important truths with clarity, and wrote of them with passion and lucidity. Say once called economics "…..this beautiful, and above all, useful science…..." (Say, Treatise, p. 450 ). He left economics both more beautiful and more useful than he had found it.

The paradox of Say's Law is thus that capital, the "supply side," is the only real means of improving the human condition — both the capital to create new production and the capital to create greater productivity — while "social" spending or regulation to artificially promote demand through high wages, the "demand side," can easily produce, or perpetuate, widespread poverty and misery.

Thus as the Soviet Union and the Marxian-based economic system reproduced the economic poverty as well as the political privilege of a mediaeval state, the mythology of the New Deal and the Keynesian rejection of Say's Law may have deeply affected and even distorted American politics and economic thoughts for years to come.

And in biblical simplicity we should recognize Say by his fruits: “supply side policies”, whereby supply creates its own demand ( given the preconditions are fulfilled ).

As one could formulate it today, Say asks for a constitution and policy for stable money to prevent distortions of the mechanism of relative prices. He asks for security of private property, free prices, and competition on open markets as sustainable incentives for entrepreneurs to discover better solutions of new and old problems, to signal entrepreneurs correctly what people demand: what to produce, how, where and when. And Say asks for low taxes and balanced budgets to finance the necessary legal and institutional framework of the market economy, always leaving citizens and their children enough of the fruits of their industry. Today we would add: to live a life in freedom and self-responsibility.

References

ISBN links support NWE through referral fees

• Palmer, R.R., J.B. Say: An Economist in Troubled Times, Princeton University Press, Princeton, N.J 1997
• Say, Jean-Baptiste, [ orig.1803], A Treatise on Political Economy: or the Production, Distribution and Consumption of Wealth, (translated by C.R. Prinsep and Clement C. Biddle) Augustus M. Kelley, New York 1971
• Say, Jean-Baptiste, Petit volume contenant quelques aperçus des hommes et de la société, 1817
• Say, Jean-Baptiste, Des canaux de navigation dans l'état actuel de la France, 1818
• Say, Jean-Baptiste, "Letters to Thomas Robert Malthus on Political Economy and Stagnation of Commerce <http://socserv2.socsci.mcmaster.ca:80/~econ/ugcm/3ll3/say/letter.html>", 1821, (transl. of 1820), The Pamphleteer
• Say, Jean-Baptiste, "Sur la balance des consommations avec les productions", Revue Encyclopédique,1824 *Say, Jean-Baptiste, "Examen Critique du discours de M. MacCulloch sur l'économie politique", Revue Encyclopédique, 1825
• Say, Jean-Baptiste, "De l'économie politique moderne, esquisse générale de cette science, de sa nomenclature, de son histoire et de sa bibliographie", Encylopédie progressive, 1826
• Say, Jean-Baptiste, "De la crise commerciale", Revue Encyclopédique, 1826
• Say, Jean-Baptiste, "Compte rendu de Malthus "Definitions in Political Economy", Revue Encyclopédique 1827
• Say, Jean Baptiste, Cours complet d´economie politique pratique, Paris 1828/1829
• Sowell, Thomas, Say's Law: An Historical Analysis, Princeton University Press, Princeton, N.J 1972

External links

• Say's Law and Economic Growth
• Bio from the Mises Institute
• Federal Reserve Bank of Dallas Ecomomic Insights article (Volume 11, Number 1)

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