MANY economists, journalists, and publicists spread the
view after World War II that we now know how to prevent depressions. The
claim was that the government could prevent depression by manipulating
the money supply, altering the tax structure, providing employment, and
"stimulating" the economy. If these, and like measures, were undertaken
judiciously, depressions were supposed to be avoidable. The evidence is
mounting that such is not the case. The United States has been in the
throes of depression for most of the 1970s, a depression, which
threatens to deepen and shows no signs of going away. All the devices
which were supposed to prevent depression have been extensively
employed, but to little or no avail. In fact, there is good reason to
believe that the every measures supposed to prevent depression are
prolonging and deepening it. But to grasp the full implications of this
we need a new or different concept. I suggest we view what is happening
to us as "Permanent Depression." And we may look to Soviet Russia,
Communist China, Castro's Cuba to see where that road leads.
Permanent Depression is that condition which exists
when there is involuntary underemployment of land, labor, and
capital to satisfy human wants. Permanent Depression may be great or
small. It may be so small that its direct effects would be experienced
by only a few people. Or, it may be so massive as to erupt in what will
be recognized as a Great Depression engulfing peoples around the world.
But whether massive or tiny, whether apparent to everyone or knowable
only as potentiality, Permanent Depression exists wherever there are
obstacles which result in involuntary underemployment of land, labor,
and capital to satisfy human wants. It is a depression because less is
produced than otherwise might have been. Goods are less plentiful than
they might have been. Prices are higher than they might have been. Human
wants go unsatisfied, and to the extent that the condition is
involuntary it is a depression.
Why not simply "underemployment it may be asked? It is
true that any underemployment of resources would result in less than
full production. But if the satisfaction of human wants is the goal of
the activity, voluntary underemployment must be permitted. Saving,
leisure, and possession for convenience and enjoyment are human wants -
any of which may occasion underemployment. To formulate the matter
otherwise would involve the contradiction of sacrificing the wants of
some to satisfy the wants of others. So long as the wants of all are in
play, there is no reason for describing the resulting condition as
depression. Whereas, if the underemployment is involuntary, the
satisfaction of wants is clearly being reduced, i.e., depressed.
This brings us, too, to the cause of the Permanent
Depression. The cause is implicit in the word "involuntary." The cause
is that force has been intruded into human activity so as to place
obstacles in the way of production. Force in one form or another is the
only plausible explanation of involuntary activity or inactivity.
Although the use of force may be variously motivated and be used for any
number of objects, it can have only two origins. It must either be
exerted by outlaws or through the agency of government. Since it is the
business of government to apprehend and restrain outlaws, the proximate
cause of Permanent Depression is government, either through failure to
perform its function or by positive acts of compulsion.
Discouraging Production
Governments can and do cause Permanent Depression.
Indeed, they are directly the usual cause and the only bodies who could
make it permanent. Nothing is easier to accomplish than for government
to bring on Permanent Depression. All it has to do is to adopt measures
which have the effect of discouraging production. A review of the
history of the world would show that as soon as any government has
consolidated its power over a people gained a monopoly of power - it has
in one way or the other gone about the task of discouraging production.
In our era, governments have not only discouraged production but also
encouraged consumption, thus deepening and broadening the Permanent
Depression. The movement to do this is now world-wide, but let us
restrict our account largely to the United States.
For several decades now - indeed, for the better part
of a century - the leaders of the United States have been acting on the
basis of a profound economic error. It is not a new error, but it has
been given impressive academic credentials over the past century. The
error can be stated this way, though it is not usually put so bluntly or
directly: The way to prosperity and national felicity is to discourage
production and encourage consumption. Stated so generally and baldly,
the fallacy of the proposition may show through. But that is not how we
ordinarily confront it. It is usually advanced in some particular
application, and down where each of us lives, the proposition has great
appeal.
Let me illustrate, Every man is usually firmly
convinced that he knows the solution to his economic problem, if he has
one. The problem is this, as he sees it: There are too many producers of
the goods he produces or too many providers of the services he provides.
Which of us is immune to this notion? I know - don't argue with me on
this one - that there are too many writers. No doubt, I would know with
equal clarity if I were a real estate salesman that there are too many
of those. In like manner, the managers of Chrysler Corporation can see
that too many automobiles are being produced. Or, to turn the problem
around, there are too few customers for the goods and services we have
to offer. The solution is obvious. Have government discourage production
- at least that of the others - and encourage consumption - at the least
of whatever it is I have to offer.
Say's Law
The error in these beliefs is by no means obvious,
certainly not in the particular applications. Yet it is a prescription
for Permanent Depression. That measures based on the error would lead to
depression was pointed out nearly two centuries ago by J. B. Say. The
corrective to the error was stated in what has come to be known as Say's
Law.
J. B. Say was a French economist, a contemporary, more
or less, of Adam Smith. His economic treatises were published in the
early years of the nineteenth century. His works never attained the
renown of Smith's. Today he is remembered, if at all, for the economic
law which is joined to his name. And even the law has fallen into
disrepute among many economists, for reasons that may be apparent when
it has been examined. Various claims have been made to its refutation,
but that is easier said than done.
Say's Law is usually stated this way: "Production
creates its own demand."1 I know of no general law more
infelicitously stated. It is subject to all sorts of misinterpretations.
It must be immediately qualified in order to get to its meaning. To wit:
The act of production does not create demand. It is only when what has
been produced is offered in the market that it becomes demand. Even that
is not obvious. Moreover, not just anything that is produced and offered
in the market becomes demand. Only those commodities or that labor which
is wanted will become demand. Nonetheless, that production creates its
own demand may be the most direct and effective way to state the law.
Some propositions which undergird Say's Law need to be
stated in order to establish its validity. The most important is this.
In the absence of a medium of exchange, or money, if you will, supply is
demand and demand is supply. This can be readily demonstrated by a
simple barter situation. Suppose that I grow tomatoes and my neighbor
grows bell peppers. My family having set up a clamor for bell peppers, I
approach my neighbor with the proposal that I will give him twelve of my
tomatoes for twelve of his peppers. He consents, and the exchange is
made. Clearly, my supply of tomatoes constituted the demand for his
peppers. In like manner, his supply of peppers constituted his demand
for my tomatoes. It is not difficult to see, either, that it was my
production of the tomatoes that created the effective demand for the
peppers.
The Use of Money in Trade
It was Say's contention that the use of money in
effecting exchanges does not fundamentally alter the situation.
Fundamental they may not be, but there can be no doubt that the use of
money changes some things. When money is used in transactions, supply
and demand assume separate guises. It becomes possible to calculate
price levels. Demand comes to be expressed as money and supply as goods.
An opening occurs for monetarist illusions that demand can be increased
by increasing the money supply. Even so, Say maintained that it is only
an illusion that money is ever anything more than a medium through which
goods are exchanged for goods. He put it this way: "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."2
John Stuart Mill noticed that there is another
difference which comes into play when money is used. There is, he said,
"this difference that in the case of barter, the selling and buying are
simultaneously confounded in one operation; you sell what you have, and
buy what you want, by one indivisible act, and you cannot do the one
without doing the other. Now the effect of the employment of money, and
even the utility of it, is, that it enables this one act of interchange
to be divided into two separate acts or operations; one of which may be
performed now, and the other a year hence, or whenever it shall be most
convenient." The seller "does not therefore necessarily add to the
immediate demand for one commodity when he adds to the supply of
another."3
The Timing of Trade
What occurs may be described this way. The demand which
arose from a product at some time in the past is transferred into money
in which it may be said to reside until another purchase is made. But
this is a never ending process, so long as the money remains in
circulation, so that at any given time some of the demand resides in the
medium through which exchanges are made. None of this changes the
validity of the fundamental axiom, as Mill affirms: "Nothing is more
true than that it is produce which constitutes the market for produce,
and that every in crease of production ... creates, or rather
constitutes, its own demand ."4
Say's Law impressed and was accepted by many of the
greatest economists of the past two centuries. David Ricardo affirmed
and applied it. John Stuart Mill, as just noted, accepted it as
axiomatic. Say's works provided an important part of the foundation for
Frederic Bastiat's writing. Amongst our contemporaries, William H. Hutt
has declared "that the Say Law stands once again inviolate as the basic
economic reality in the light of which all economic thinking is
illuminated."5 Moreover, it is a self evident truth whose
validity may be tested and proved by all who have some understanding of
the world in which we live.
"Production creates its own demand." We have now
arrived at the point, perhaps, where we can affirm the importance of the
word "production" in the statement of the law. However misleading it may
be on first encounter it is nonetheless the key to the significance of
Say's discovery. Production is the road to prosperity, the law informs
us. If there is a fall off in demand, the way to increase it is to
increase production. If supply is declining the way to signal demand is
by production.6 The only limit on the degree of potential
prosperity, Say was telling us, is whatever limits there may be to
productivity of what is wanted. The way to create Permanent Depression
can now be restated. It is to act on the premise of the reversal of
Say's Law. Reversed, it can be stated this way: Consumption creates its
own supply. Although no one to my knowledge has phrased the proposition
that way, it is the necessary premise for much that is believed. The
notion of a general overproduction of goods is premised upon it. In like
manner, it is the underlying premise of all notions that the economic
problem is to stimulate consumption. So far as programs to discourage
production and encourage consumption have an economic premise, it is the
one arrived at by reversing Say's Law.
Barriers to Commerce
Even a brief survey of government programs will give
some indication of how deeply involved the United States is in
discouraging production and encouraging consumption. Indeed, such
policies are not entirely new in this country. The protective tariff was
a fixture in the United States in the latter part of the nineteenth
century. Although proponents of the protective tariff have often
advanced it as a device to encourage production, it does not have that
effect. So far as it works, it discourages domestic production by
denying some of the foreign market to American products. If domestic
producers are enabled to supplant foreign producers as a result of the
tariff the true significance is that Americans produce less, and at
higher cost, than if their resources had been directed to that
production which Americans could do most efficiently. Foreign loans,
much used in the twentieth century, have the economic effect of
encouraging foreign consumption at the expense of domestic, and
discouraging production for the domestic market.
But it is in the twentieth century that so many devices
have been adopted to encourage consumption and discourage production.
Since it would take a massive catalogue to detail them all, it will be
possible here to touch only on some of the broad categories.
All redistributionist programs, whatever the motives
for enacting them, have the effect of encouraging consumption and
discouraging production. This is so whether it is school lunch programs,
food stamp programs, urban renewal projects, CETA, government operated
educational institutions, welfare payments, or what have you.
Redistribution takes away from potential saving and investment and
allots the money where it is likely to be spent for consumption. Thus,
it discourages production by making it more difficult to accumulate
capital with which to produce. The progressive income tax is not only a
redistributionist measure but also one which patently discourages
production and, depending on how it is spent, encourages consumption.
All payments made to the idle have the effect of discouraging production
and making the recipient a consumer only.
Inflationary Distortions
The effects of inflation-increase of the money
supply-are somewhat more complex. On the face of it, much of the
increased money supply is an encouragement to production, for it may be
spent on plants, machinery, and productive equipment. But this is
misleading. Inflation encourages the consumption of capital or
productive equipment, not production as such. It sends false signals
into the market by leading to a general rise in prices, leading to
indiscriminate increases in production, many of which are unwarranted.
Inflation, then, tends to encourage consumption, encourage
indiscriminate production, and hence to discourage the concentration on
producing what is most wanted, which is that portion of production which
contributes most to prosperity.
Price controls have the general effect of encouraging
consumption and discouraging production. And such controls are rampant
in the United States today. Minimum wages, whether established by law or
by unions, whether called minimum wages or salaries or wages prescribed
in a civil service structure, are price controls. Moreover, wage price
controls discourage production. They do so, in the first place, by
reducing the number who might be employed in production - causing
unemployment. In the second place, where the unemployed are paid, either
in unemployment compensation or as welfare, there is an encouragement to
consumption unmatched by production. Maximum prices are widespread
today, on domestic oil, on much of transportation, on milk, on gas, and
for hundreds of other goods and services. So far as these prices are
below what they would be in a free market, they discourage production
and encourage consumption.
Many sorts of government controls discourage production
without themselves encouraging consumption. Government monopolies
discourage production. The monopoly which the United States Postal
Service has over the delivery of first class mail, for example, prevents
others from entering the field and providing the service. The virtual
monopoly which governments have of schooling discourages others from
entering that field. Indeed, all government licensure and franchising
discourages production, "Licensure," Milton Friedman has said, "is a
special case of a much more general and exceedingly widespread
phenomenon, namely, edicts that individuals may not engage in particular
economic activities except under conditions laid down by a constituted
authority of the state."7 Such activities are usually
justified on the grounds that they protect the public by maintaining
standards, but whether they do or not, by restricting entry they
discourage production.
Costly Regulations
Government regulation of industry, whatever its aim,
discourages production. Quality controls, environmental controls, safety
regulations, prescriptions for labeling, and so on are just so many
difficulties in the way of producing goods. Government prescribed record
keeping and reporting to government are discouraging to production. They
raise the cost of producing and keep from the market myriads of
products.
Generally speaking, governments in the United States do
not avowedly aim to discourage production today. For a while in the
1930s, and to a lesser extent in the 1940s and 1950s, there was a
conscious effort to limit production. Nowadays, however, production, per
se, is not the avowed object of government control. It is even usually
admitted, perhaps reluctantly, to be a good thing. But the government
does often avowedly encourage consumption and by so doing proclaims that
consumption, in effect, creates its own supply and leads to prosperity.
J. B. Say wrote precisely to the point. He said "that
the encouragement of mere consumption is no benefit to commerce; for the
difficulty lies in supplying the means, not in stimulating the desire of
consumption; and we have seen that production alone, furnishes those
means.... For the same reason that the creation of a new product is the
opening of a new market for other products, the consumption or
destruction of a product is the stoppage of a vent for
them."8 He goes on to point out, of course, that the
consumption of a product is not an evil, for it is the end for which the
production was done. But then, neither does the consumption itself
contribute one whit to any further commerce.
It is an evil, however, he said, when consumption
begins to exceed production. What then happens: "the demand gradually
declines, the value of the product is less than the charges of its
production; no productive exertion is properly rewarded; profits and
wages decrease; the employment of capital becomes less advantageous and
more hazardous; it is consumed piecemeal ... because the sources of
profit are dried up. The labouring classes experience a want of work;
families before in tolerable circumstances, are more cramped and
confined; and those before in difficulties are left altogether
destitute."9
That is an apt description of what is happening in the
United States today, though it was written nearly two hundred years ago.
We are inclined to ascribe our difficulties today to inflation.
Undoubtedly, inflation is an important part of our difficulty, but it is
not at the root of the trouble. Our trouble stems from acting as if
consumption creates its own supply, from turning Say's Law upside down.
We have been encouraging consumption and discouraging production. Every
effort in that direction contributes to the breadth and depth of a
Permanent Depression. When restrictions on production have proceeded far
enough Permanent Depression emerges as the kind of depression we
recognize from the past. Except, the underlying Permanent Depression may
have been transmuted into a visible permanent depression.
Say's Law points away from Permanent Depression. It
points toward, if not Permanent Prosperity, at least to as great
prosperity as is possible for man. What is government's proper role in
this prosperity? John Stuart Mill put it this way: "The legislator has
to look solely to two points: that no obstacle shall exist to prevent
those who have the means of producing, from employing those means as
they find most for their interest; and that those who have not at
present the means of producing, to the extent of their desire to
consume, shall have every facility afforded to their acquiring the
means, that, becoming producers, they may be enabled to
consume."10 In short, government should remove its obstacles
to production and take what measures are appropriate to it to facilitate
production. Then, all may consume at will, and as they will, what they
have produced themselves, or acquired from others with their production.
At the time of the original publication, Dr. Carson
had written and taught extensively, specializing in American
Intellectual history. His recent series in The Freeman, World in the
Grip of an Idea, is being published by Arlington House.
1 For a more complete statement of its implications,
see Henry Hazlitt, The Failure of the New Economics (New Rochelle, N.Y.:
Arlington House, 1973), pp. 35-37.
2 J. B. Say, "Of the Demand or Market for Products" in
Henry Hazlitt, ed., The Critics of Keynesian Economics (New Rochelle,
N.Y.: Arlington House, 1977), p. 15.
3 John Stuart Mill, "On the Influence of Consumption on
Production" in ibid., pp. 41-42.
4 Ibid., p. 44.
5 Svetozar Pejovich and David Klingaman, eds.,
Individual Freedom: Selected Works of William H. Hutt (Westport, Conn.:
Greenwood Press, 1975), p. 141.
6 No one is relieved by Say's Law from applying
intelligence to production, of course. It is necessary to determine what
is wanted and to go about producing it efficiently if production is to
become effective demand and profitable.
7 Milton Friedman, Capitalism and Freedom (Chicago:
University of Chicago Press, 1962), p. 138.
8 Say, op. cit., pp. 20-21.
9 Ibid., p. 22.
10 Mill, op. cit., p. 26.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
December 1979, Vol. 29, No. 12.
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