Adam Smith and Say's Law.

I've already pointed out that many ideas that eventually became central to economic theory were to be found in Adam Smith's "The Wealth of Nations".

The so-called Say's Law is one of them.

In Chapter II.3 ("Of the Accumulation of Capital, or of Productive and Unproductive Labour") Smith discusses his theory of capital accumulation. For Smith, the foremost feature of an economy was its capacity to grow, to produce increasing physical surplus (i.e. outputs in excess of inputs).

Adam Smith, engraving
by John Kay (1790). [A]

According to Smith, why do capitals grow?

"Capitals are increased by parsimony, and diminished by prodigality and misconduct.
"Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so (...)."

So, savings was, in Smith's view, what makes capital grow: what's not consumed is saved. Note carefully: Smith defines savings as non-consumption; hoarding was ruled out by hypothesis.

But how does it work?

Whether consumed or invested, profits are used to pay for labour, goods and services.

If invested:

 "(...) That portion which he annually saves, as, for the sake of the profit, it is immediately employed as a capital, is consumed in the same manner, and nearly in the same time too, but by a different set of people: by labourers, manufacturers, and artificers, who reproduce, with a profit, the value of their annual consumption."

If it is consumed, "there is nothing behind them in return for their consumption". If idle consumption were excessive, there would be little left for investment, and the economy would slow or even stagnate.

This idea encapsulates what would later be known as Say's Law.

(Incidentally, you see why the chapter referred to unproductive and productive labour: labour employed in increasing production was called "productive". That's where landowners played a major role: in Smith's views they had a distressing tendency to engage in high living, employing non-productive labour.).

To reiterate, the unstated and unexamined assumption was that hoarding was, by definition, ruled out. Presumably, Smith thought hoarding was always, invariably, irrational and, thus, outside economic theorizing.

But if in Smith the assumption can only be inferred, J.B. Say ("A Treatise in Political Economy", Book I, Chaper XV, "Of the Demand for Market Products") gives it
explicitly:

Jean-Baptiste Say [B]

"When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other."

That's why Say considered "that it is production which opens a demand for products": "money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another."

So, for Say it was out of the question that a producer would hoard produce or money: both were perishable and could lose value. Say assumed it was always irrational to hoard either money or commodities, presumably as Smith did.

Unlike some critics claim, neither Smith nor Say were considering a barter economy in any literal sense. To believe otherwise is absurd, as both men lived in a (mostly) monetary economy and were theorizing on that basis.

In practice, however, their model of this monetary economy acted like a barter economy, due to the assumption that is was irrational to hoard: money and stocks of commodities were hot potatoes, and no one holds a hot potato for long.

Image Credits:
[A] Adam Smith, engraving by John Kay (1790). Public domain. Wikipedia.
[B] Jean-Baptiste Say. Public domain. Wikipedia.

Update:
Prof. Nick Rowe (Carleton University, Ottawa, Canada) is a fairly conservative, mainstream economist.

I've found a relatively recent post ("Why 'saving' should be abolished", January 11) where he deals with some of the subjects treated here.

In my opinion, it's a bit of a mixed bag. But I can't help but agree with this:

"An individual's saving means anything he does with his income except spend it on newly-produced consumption.
"Saving isn't a thing, it's a non-thing. It's a residual. It's defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption. He must be increasing something else, but we don't know what it is he is increasing. We know (in this model) that he must be: buying more investment; buying more antiques; or hoarding more money. But we don't know which. And it really matters which. As I shall show." (my emphasis)

I only wish he was consistent with this, particularly in the first part of the post. Oh, well!

Selling Kidneys, God and Primitive Capital Accumulation.

"The Lord gave, and the Lord hath taken away; blessed be the name of the Lord". Job 1:21 (KJV)

That was the word of the Lord.

Hökarpanna, Swedish pork
and kidney stew. [A]

 

----------

"Make organ sales legal
"Your editorial states paying for organs 'devalues the dignity of life' ('Encouraging more to donate organs not without difficulties', April 9). What devalues the dignity of life is for some to impose disability and suffering on others when a cure is available. Australians should have the right to sell their kidneys. This would help assist some out of poverty, reduce the burden on the budget and most importantly remove the psychological slavery of what it means to be 'married' to a dialysis machine. It's about time the Australian government kept its nose out of the operating rooms of this country." Peter Lloyd, Asquith (Letters to the Editor, SMH, April 10, see here; emphasis added)

----------

Perhaps God acts like the quote from Job says: giving, first, and only later taking it away.

The Divine Market, however, is wiser. It takes away your livelihood, first; then it throws you into the scrap heap, making sure you stay there, and only then it gives you the freedom -indeed, the right!- to sell yourself, piece by piece.

And among those requiring merely your labour, or even your spare parts -and the Omniscient Market and his prophets know there are many- only those truly deserving, anointed by the Market itself, will receive your kidney, being able to afford it.

----------

Marx identified in British history a similar process, the enclosure process, when the landowners, striving to become capitalists, evicted their, until then, serfs. He called it primitive capitalist accumulation:

"The immediate producer, the labourer, could only dispose of his own person after he had ceased to be attached to the soil and ceased to be the slave, serf, or bondsman of another. To become a free seller of labour power, who carries his commodity wherever he finds a market, he must further have escaped from the regime of the guilds, their rules for apprentices and journeymen, and the impediments of their labour regulations. Hence, the historical movement which changes the producers into wage-workers, appears, on the one hand, as their emancipation from serfdom and from the fetters of the guilds, and this side alone exists for our bourgeois historians. But, on the other hand, these new freedmen became sellers of themselves only after they had been robbed of all their own means of production, and of all the guarantees of existence afforded by the old feudal arrangements. And the history of this, their expropriation, is written in the annals of mankind in letters of blood and fire". (See here)

Of course, most readers, being as knowledgeable about economics as they are, don't need to read that old fool. They know him mistaken without reading him.

Neither would they read modern authors, like Mathew Forstater (University of Missouri-Kansas City), who identified a similar process elsewhere. I mean, people like Forstater only embarrass themselves by reading Marx.

----------

But, in all fairness, Marx was only partially right. In his optimism, he was speaking metaphorically of people selling their bodies.

People (I suspect wealthy people) have reached the stage of talking very literally about your right to let them buy your body, bit by bit. Like a pig carcass.

Try to find that in your economics textbooks.


Image Credits:
[A] "Hökarpanna, Swedish pork and kidney stew". File licensed under the Creative Commons Attribution-Share Alike 3.0 Unported, 2.5 Generic, 2.0 Generic and 1.0 Generic license. Wikipedia. Author: Jonathan Koertge. My use of the file does not in any way suggests its author endorses me or my use of the work.

EU to Portugal: ...Or Else

After the Portuguese Constitutional Court ruled that 4 out of 9 austerity measures included by Pedro Passos Coelho (centre-right PSD/PPD) in the 2013 budget were unconstitutional (see here), the European Commission, headed by José M. Barroso (former Portuguese PM, 2002-04, PSD/PPD) issued the following memo:

"Brussels, 7 April 2013
"Statement by the European Commission on Portugal
"The European Commission welcomes that, following the decision of the Portuguese Constitutional Court on the 2013 state budget, the Portuguese Government has confirmed its commitment to the adjustment programme, including its fiscal targets and timeline. Any departure from the programme's objectives, or their re-negotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens, namely the growing investor confidence in Portugal, and prolong the difficulties from the adjustment.
"The Commission therefore trusts that the Portuguese Government will swiftly identify the measures necessary to adapt the 2013 budget in a way that respects the revised fiscal target as requested by the Portuguese Government and supported by the Troika in the 7th review of the programme.
"Continued and determined implementation of the programme offers the best way to restore sustainable economic growth and to improve employment opportunities in Portugal. At the same time, it is a precondition for a decision on the lengthening of the maturities of the financial assistance to Portugal, which would facilitate Portugal's return to the financial markets and the attainment of the programme's objectives. The Commission supports that such a decision be taken soon.
"The Commission will continue to work constructively with the Portuguese authorities within the parameters agreed to alleviate the social consequences of the crisis.
"The Commission reiterates that a strong consensus around the programme will contribute to its successful implementation. In this respect, it is essential that Portugal's key political institutions are united in their support". (Emphasis added. See here)

----------

The masters spoke. Now it's up to the Portuguese: they either stand tall or shit their pants. What's gonna be?

Austerity Measures Unconstitutional: Portugal.

Pedro Passos Coelho. [A]

The Portuguese Constitutional Court repealed last Friday (March 5) 4 of the 9 austerity measures included by conservative PM, Pedro Passos Coelho (from the singularly called Social Democrat Party of Portugal) in the 2013 budget.

"The measures are declared unconstitutional and, therefore, lose effect since the moment of their application, in this case, since January 1", declared Joaquim Sousa Ribeiro, president of the CC. (See here, my translation from Portuguese)

The cuts involved further reductions to unemployment benefits, to age pension and to public servants' wages, for a total of EUR1.5bn and come after, three months ago, the conservative President of the Republic, Aníbal Cavaco Silva, formally asked the court to rule about the budget's fairness, under the terms of the country's constitution. (See here)

Apart from the find of unconstitutionality, the CC criticized the Finance Minister, Vítor Gaspar, for the so-called "exceptional" austerity measures, which have repeatedly and for third consecutive year target retirees and public servants.

The Portuguese parliamentary opposition and groups protesting the Troika-imposed austerity demanded Passos Coelho's resignation, while Luís Marques Mendes, secretary of State, accused the CC of threatening the country's financial stability. The Portuguese government was tipped to ask for an extension of the repayment schedule, in the upcoming Berlin meeting of finance ministers. (See here, from Spanish)

Portugal was considered a successful example of the Troika-fostered austerity, having warned the Greek public against voting for Syriza last year.

The Portuguese unemployment figures reached 17.6% last January, the third highest in the Eurozone, after Spain and Greece, and "most Portuguese workers, the annual tax rises are equivalent to more than a month's wages. The standard income tax rate is rising from 24.5% to 28.5%" (See here)

Image Credits:
[A] Pedro Passos Coelho. File licensed under the Creative Commons Attribution-Share Alike 3.0 unported licence. Wikipedia. Author: Cruckz. My use of the file does not in any way suggests its author endorses me or my use of the work.