Say's Law and
Supply Side Economics

It should be known that at the beginning of a dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.

ʿAbd-ar-Raḥmān ʾAbū Zayd ibn Khaldūn (1332-1406), The Muqaddimah, An Introduction to History, Franz Rosenthal translation, abridged and edited by N.J. Dawood, Bollingen Series, Princeton University Press, 1967, p.230, quoted by Ronald Reagan [note]

How could it be possible that there should now be bought and sold in France five or six times as many commodities as in the miserable reign of Charles VI?

Jean Baptiste Say, A Treatise on Political Economy, 1803

In France, John Baptist Say has the merit of producing a very superior work on the subject of Political Economy. His arrangement is luminous, ideas clear, style perspicuous, and the whole subject brought within half the volume of [Adam] Smith's work. Add to this considerable advances in correctness and extension of principles.

Thomas Jefferson, letter to Joseph Milligan, April 6, 1816

If any person had told the Parliament which met in perplexity and terror after the crash of 1720 that in 1830 the wealth of England would surpass all their wildest dreams,... that London would be twice as large... and that nevertheless the rate of mortality would have diminished to one-half,... that men would be in the habit of sailing without wind and would be beginning to ride without horses, our ancestors would have given as much credit... as they gave to Gulliver's Travels. Yet the prediction would have been true.

Thomas Babbington Macaulay, "Southey's Colloquies on Society," Edinburgh Review, January 1830

Yet the fundamental point remains that the sustained increases in productivity of the Machine Age brought widespread benefits over time:  average real wages in Britain rose between 15 and 25 percent in the years 1815-1850, and by an impressive 80 percent in the next half-century.

Paul Kennedy, The Rise and Fall of the Great Powers, Vintage Books, 1987, 1989, p.146-147

Full employment occurs when wages are determined by a free market finding the market clearing price for labor. Wage levels otherwise are irrelevant to the welfare of workers -- i.e. nominal wages can be any number. Welfare depends entirely on production. A pound of gold to every peasant in Ancient Egypt would not have enabled them to buy a television set, or even dental floss. Such things were not produced. But production requires capital -- material, human, and moral -- the very thing whose legitimacy or existence is denied by Marx and by the modern, rent-seeking intellectual of fashionable "progressive" opinion. Thus, the application of Marxism has never produced anything but poverty and, in frustration at its failure, tyranny and murder.

Ἐγκλινοβάραγγος (Enklinobarangus)

I am convinced that the larger incomes of the country would actually yield more revenue to the government if the basis of taxation were scientifically revised downward.

Calvin Coolidge, State of the Union message,
December 3, 1924 (5.0% unemployment)

Nearly everything in this country is too high priced. The only thing that should be high priced in this country is the man that works. Wages must not come down, they must not even stay on their present level; they must go up. And even that is not sufficient of itself -- we must see to it that the increased wages are not taken away from the people by increased prices that do not represent increased values.

Henry Ford, New York Times, November 22, 1929 (5.0% unemployment)

1,028 Economists Ask Hoover to
Veto Pending Tariff Bill

New York Times headline, about the Smoot-Hawley Tariff, May 5, 1930 (6.8% unemployment)

In this enlightened age, large manufacturers...will maintain being the far-sighted and...the constructive thing to do.

Howard ("57 Varieties") Heinz, "Would Keep Scale of Present Wages," New York Times, August 7, 1930 (6.4% unemployment)

Our leading business concerns have sustained wages.... These measures have maintained higher degrees of consumption than would have otherwise been the case.... They have thus prevented a large measure of unemployment.

Herbert Hoover, Banker's Magazine, November 1930 (11.6% unemployment),

Well, they’re going to elect that Superman Hoover, and he’s going to have some trouble. He’s going to have to spend money, but it won’t be enough. Then the Democrats will come in. But they don’t know anything about money.

Calvin Coolidge, to Secret Service agent Edmund Starling

We didn't admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.

Rexford Guy Tugwell, Roosevelt Advisor

We will spend and spend, and tax and tax, and elect and elect.

Harry Hopkins (Roosevelt Advisor), Arthur Krock, "Win Back 10 States; Republicans Take Ohio, Wisconsin, Kansas and Massachusetts," The New York Times, November 9, 1938, p. 4 (17.7% unemployment)

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises.... I say after eight years of this Administration we have just as much unemployment as when we started.... And an enormous debt to boot!

Henry Morgenthau, Jr., Secretary of the Treasury, testimony to the House Ways and Means Committee, May 9, 1939 (19.9% unemployment)

Of course, some think that neither monetary nor fiscal policy should be used. Instead, they argue, we should "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." In other words, sell everything until they reach a rock-bottom price at which point, supposedly, the economy will readjust and spending and investing will resume. That, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into the Great Depression. Mellon thought government should do nothing. This advice manages to be both stupid and wicked. Stupid, because following it would almost certainly lead to a depression across the advanced world. Wicked, because of the misery that would follow.

Martin Wolf, "How Austerity Failed," The New York Review of Books, July 11, 2013, p.20, boldface added [note]

[General Motors President William Knudsen] knew what historians have since learned:  that FDR's vaunted New Deal, with its massive new government programs and antibusiness regulations, had done nothing to end the Great Depression. After six years of FDR, unemployment in 1939 still stood above 17%.

Arthur Herman, "The FDR Lesson Obama Should Follow," The Wall Street Journal, May 10, 2012, A15

Recovery is yet to be achieved after the expenditure of some $25,000,000,000 [$3,000,000,000,000 in 2010 dollars] of borrowed money. The conclusion is that what we have done so far in our attempts to secure it not having succeeded, the only recourse is to change the policies which have dictated those attempts. Those policies... have in general relied upon expenditure of government funds as distinguished from private capital directed by private initiative.

The Wall Street Journal, July 17, 1939 (not 2014?), "Six Years of a New Deal," July 8, 2014, p.A14

Say emerged victoriously from his polemics with Malthus and Sismondi. He proved his case, while his adversaries could not prove theirs. Henceforth, during the whole rest of the nineteenth century, the acknowledgment of the truth contained in Say's Law was the distinctive mark of an economist.

Ludwig von Mises, "Lord Keynes and Say's Law," The Freeman, October 30, 1950

[Thomas] Malthus's assumption that human labour could be regarded as a more or less homogeneous factor of production (i.e., wage labour was all of the same kind, employed in agriculture, with the same tools and the same opportunities) was not far from the truth in the economic order that then existed (a theoretical two-factor economy). For Malthus, who was also one of the first discoverers of the law of decreasing returns, this must have indicated that every increase in the number of labourers would lead to a reduction of what is now called marginal productivity, and therefore of worker income...

This ceases to be true, however, under the changed conditions we have been discussing, wherein labour is not homogeneous but is diversified and specialised.

F.A. Hayek, The Fatal Conceit, The Errors of Socialism, 1988, The University of Chicago Press, 1989, 1991, p.122

The very idea that profits "trickle down" to workers depicts the economic sequence of events in the opposite order from that in the real world. Workers must first be hired, and commitments made to pay them, before there is any output produced to sell for a profit, and independently of whether that output subsequently sells for a profit or at a loss. With many investments, whether they lead to a profit or a loss can often be determined only years later, and workers have to be paid in the meantime, rather than waiting for profits to "trickle down" to them. The real effect of tax rate reductions is to make the future prospects of profit look more favorable, leading to more current investments that generate more current economic activity and more jobs.

Those who attribute a trickle-down theory to others are attributing their own misconception to others, as well as distorting both the arguments used and the hard facts about what actually happened after the recommended policies were put into effect.

Thomas Sowell, "Trickle Down" Theory and "Tax Cuts for the Rich", Hoover Institution Press, 2012, pp.10-11, boldface and color added

Some people continue to defend trickle-down theories, which assume [?] that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts [!], expresses a crude and naive trust [?] in the goodness [?] of those wielding economic power and in the sacralized [?] working of the prevailing economic system.

Pope Francis I, Evangelii Gaudium, "The Joy of the Gospel," November 26, 2013, exclamations and questions added,

The European Dream, with its emphasis on collective responsibility and global consciousness... represents humanity's best aspiriations for a better tomorrow.

Jeremy Rifkin, "The European Dream," 2004

Europe is an economic success, and that success shows that social democracy works.

Paul Krugman (Princeton), January 10, 2010

Let's write about something we know nothing about & be smug, overbearing & patronizing: after all, they're just wogs... Guess a Nobel [i.e. Paul Krugman's] in trade means you can pontificate on fiscal matters & declare my country a "wasteland." Must be a Princeton vs Columbia thing.

Toomas Hendrik Ilves, President of Estonia, a graduate of Columbia University, in response to a blog post by the Keynesian Paul Krugman about the "incomplete recovery" of Estonia from the European recession, June 6, 2012

Now, what we're doing, I want to be clear, we're not trying to push financial reform because we begrudge success that's fairly earned. I mean, I do think at a certain point you've made enough money.

Barack Obama, April 29, 2010, speaking in Quincy, Illinois,

Mr. Obama was right to compare his administration to those of FDR and LBJ: Like them, he has driven the U.S. miles down the road toward the social democratic model he so admires. Then again, neither of his predecessors had such visible evidence of where social democracy ultimately leads. What's this president's excuse?

Bret Stephens, "2012: A U.S. Referendum on Europe," The Wall Street Journal, Tuesday, January 3, 2012

Economists agree that a large capital stock is a key ingredient for prosperity, as it expands our productive capacity and raises worker productivity, which in turns increases wages and consumer purchasing power. Our capital stock is comparatively much smaller today than it was before the Great Depression. The ratio of business-sector capital to output is about 30% smaller today than it was in 1929.

Thomas F. Cooley (NYU) and Lee E. Ohanian (UCLA), "The Bush Tax Cuts Never Went Far Enough," The Wall Street Journal, Wednesday, December 8, 2010

And make no mistake, economic growth doesn't happen absent private investment. This isn't complex economic theory; it's something we all know from our personal experience. Where there is investment -- a new factory or distribution facility being built, a new store about to open, new software being installed -- that is where new jobs are created. It is no coincidence that during this period of subpar growth, private capital investment as a percentage of our economy is at post-World-War II lows.

Randall Stephenson, Chairman and CEO of AT&T Inc., "A Business Short List for Growth," The Wall Street Journal, Wednesday, January 15, 2014, p.A19

Capital goes where it's welcome and stays where it's well treated.

Walter Wriston (1919-2005), Citicorp Chairman, 1967-1984

All economic problems are about removing impediments to supply, not demand.

Arthur Laffer, "Why Americans Hate Economics," Stephen Moore, The Wall Street Journal, Friday, August 19, 2011

In 1944 Friedrich Hayek received a letter from a guest of the Claridge Hotel in Atlantic City, New Jersey. It congratulated the Austrian-born economist on his “grand” book, “The Road to Serfdom”, which argued that economic planning posed an insidious threat to freedom. “Morally and philosophically, I find myself”, the letter said, “in a deeply moved agreement.”

Hayek’s correspondent was John Maynard Keynes, on his way to the Bretton Woods conference in New Hampshire, where he would help plan the post-war economic order. The letter’s warmth will surprise those who know Hayek as the intellectual godfather of free-market Thatcherism and Keynes as the patron saint of a heavily guided capitalism.

But Keynes, unlike many of his followers, was not a man of the left. “The Class war will find me on the side of the educated bourgeoisie,” he said in his 1925 essay, “Am I a Liberal?”. He later described trade unionists as “tyrants, whose selfish and sectional pretensions need to be bravely opposed.” He accused the leaders of Britain’s Labour Party of acting like “sectaries of an outworn creed”, “mumbling moss-grown demi-semi-Fabian Marxism”.

"Was he a liberal?" "Philosophy brief, Liberal thinkers," The Economist, August 18th, 2018

When you get right down to it, Keynesianism is just a convenient excuse for what the left wants to do anyway, spend more government money.

Don Boudreaux (George Mason University), Alfred S. Regnery, "Balancing Acts," The American Spectator, October 2011, p.6

What few know is that there is no meaningful theoretical or empirical support for the Keynesian position.

Robert J. Barro (Harvard), "Keynesian Economics vs. Regular Economics," The Wall Street Journal, Wednesday, August 24, 2011 (regarding the demand side "multiplier")

The principle of Keynesian economics is to stimulate demand. This done by distorting the labor market through artificially inflating wages or actually fixing wages. Price manipulation and price fixing always result in either surpluses or shortages of what is manipulated. This part of Keynesian strategy thus increases unemployment, which is the surplus of labor. The other part of the strategy is public spending, which always ends up being done for political rather than economic reasons, in part because governments cannot successfully engage in macroeconomic calculation. This was predicted by von Mises and Hayek and demonstrated, not just by the economies of the Soviet block, but by almost every government spending program that has ever existed. Government spending also siphons off capital from the private economy, which inhibits hiring, production, and investment. The whole Keynesian program is thus grotesquely counterproductive, except to the privileged and often connected few to whom the inflated incomes and government money actually flow.

Ἐγκλινοβάραγγος (Enklinobarangus)

They've already pumped endless amounts of money into the economy... The results are dismal.

Wolfgang Schäuble, Finance Minister of Germany, about "stimulus" spending in the United States, 2010 ("Europe's Phony Growth Debate," The Wall Street Journal, Wednesday, April 25, 2012, A14)

If you want to create jobs, the quickest way to do it, is to provide more funding for food stamps and have unemployment insurance for people who have lost their jobs.

Rep. Nancy Pelosi, D-CA, Speaker of the House, 7 October 2010 (9.6% unemployment), color added [note],

When we've got new teachers doing great work with our kids, then you know what, they go to a restaurant and spend that money. And so suddenly businesses are doing well, the economy is doing well, and we get into a virtuous cycle. And we go up...

We believe that when a CEO pays his auto workers enough to buy the cars that they build, the whole economy does better.

Barack Obama, first quote, 2 August 2012, Leesburg, Virginia; second quote, Democratic National Convention, acceptance speech, 6 September 2012 (8.1% unemployment) -- Obama and Herbert Hoover;

Rubbish [that capital creates jobs]. The real job creators are the vast middle class and the poor, whose spending induces businesses to create jobs. That is why raising the minimum wage, extending overtime protection, enlarging the Earned Income Tax Credit, and reducing middle-class taxes are all necessary.

Robert Reich, Secretary of Labor, 1993-1997, Mar 10, 2015 -- so how does a new business hire people before selling anything?

Don’t let anybody tell you that, you know, it’s corporations and businesses that create jobs.

Hillary Clinton, at a Democratic rally in Massachusetts, October 24, 2014,

There is no alternative to strong economic growth. None. They know this in Beijing, Seoul, Kuala Lumpur, Jakarta, Warsaw, Bratislava, Taipei, even Hanoi. The missing piece is a global growth agenda led by a U.S. president and Treasury secretary who aren't fundamentally at odds with capitalism.

Daniel Henninger, "The Growth Revolutions Erupt," The Wall Street Journal, Thursday, February 27, 2014, A13

There is only one minimum wage, and it is always the same. The natural or default minimum wage is not any positive number. It is zero. If an employer cannot afford to pay the legal "minimum wage" for the work that an employee does for him, the worker's wage reverts to the natural minimum -- zero. Only "liberals" and "progressives" can think of a way to pay workers nothing and expect them to be happy and grateful. Such workers are called "interns." Google "Clinton, Lewinsky."

Ἐγκλινοβάραγγος (Enklinobarangus)

One of the simplest and most fundamental economic principles is that people tend to buy more when the price is lower and less when the price is higher. Yet advocates of minimum wage laws seem to think that the government can raise the price of labor without reducing the amount of labor that will be hired.

Thomas Sowell, "Minimum Wage Madness," September 17, 2013

One network producer told me, "When I wrote stories about workers protesting to gain a hike in the minimum wage, I was not allowed to write that the majority of the people protesting were not minimum wage workers, but were paid by outside groups to protest.... [W]e conducted 10 separate interviews of actual workers who make minimum wage. In these interviews, all 10 revealed to us that they had several times been offered raises, but turned them down becaue of the added responsibility that came with the pay hike. I was told directly by my supervisor, 'you can't put that into the story because it will skew the viewer's impression of the demonstration'." More accurately, it would have skewed the supervisor's preconceived notions of the story that he wished to be told, or the agenda that he sought to advance, regardless of the facts encountered in the field.

Sharyl Attkisson, Stonewalled, My Fight for Truth Against the Forces of Obstruction, Intimidation, and Harassment in Obama's Washington [HarperCollins, 2014, p.83]

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

Thomas Sowell

The first lesson of economics is scarcity. The response of capitalism is to increase production. The response of political culture is rationing.

Rationing favors political allies, with a generous cut, of course, for the political class, who will not be smeared like the capitalists who invest their capital in increased production. Also, those who suffer from rationing will not be sanctified as martyrs, unlike those who suffer from the scarcity that would have been remedied had capitalism and voluntary exchange been allowed to function.

Ἐγκλινοβάραγγος (Enklinobarangus)

The real story of the VA scandal is the failure of what liberals have long hailed as the model of government health care.

Don't take our word for it. As recently as November 2011, Paul Krugman [] praised the VA as a triumph of "socialized medicine," as he put it: "What's behind this success? Crucially, the V.H.A. is an integrated system, which provides health care as well as paying for it. So it's free from the perverse incentives created when doctors and hospitals profit from expensive tests and procedures, whether or not those procedures actually make medical sense."

Ah, yes, the VA lacks the evil profit motive. What the egalitarians ignore, however, is that a government system contains its own "perverse incentives," such as rationing that leads to treatment delays and preventable deaths, which the bureaucracy then tries to cover up. This isn't an accident or one-time error. It is inherent in a system that allocates resources by political force rather than individual consumer choices. The VA is ObamaCare's ultimate destination.

"The Government Health-Care Model," The Wall Street Journal, May 23, 2014, A14, boldface added

The GOP theories about cutting taxes to raise more revenue were always claptrap[!]. They have resulted in desperately unfortunate deficits. This is not the fault of the Democrats. Bill Clinton, whatever his flaws, left us with budget surpluses.

Ben Stein, "A Nightmare Presidency," The American Spectator, April, 2014, p.49 -- the puzzling Ben Stein "loved" Richard Nixon, who imposed wage and price controls, but consistently disparages "supply siders" (Ronald Reagan?) and praises the high taxes of the Eisenhower Administration, which used the taxes, of course, to pay off the debt from World War II, putting the money in the hands of whoever owned War Bonds. Modern taxes are not used so honestly or productively. And Bill Clinton, of course, would leave budget surpluses only because he had a Republican Congress.

The time for demand-side gimmicks has long passed. The remarkably aggressive fiscal and monetary effort to stimulate demand did not stimulate demand. Even if it had worked, we can't pretend to be "fighting recession" forever. Today's economic predicament is not a cyclical crisis but a sustained subsidized lethargy. Different tasks require different tools. When the number of job seekers falls twice as fast as the increased number of jobs, that is a supply-side problem.

Alan Reynolds, "Demand-Side Policy Gave Us the Big Economic Fizzle," The Wall Street Journal, April 28, 2014, A13, color added

It's fascinating to see our Keynesian friends celebrate these private job gains that weeks ago they were saying couldn't happen without more government spending to stimulate demand. Maybe the better way to revive private business confidence is for government to shrink so there is less expectation of future tax increases. Or maybe cut taxes so businesses have more money... sorry, for a moment we forgot what decade we're in.

"Spring Jobs Rally," The Wall Street Journal, May 3-4, 2014, A12

So Paul Krugman [], who once called on Alan Greenspan "to create a housing bubble to replace the Nasdaq bubble"; who, in a few months before the eurozone crisis erupted, praised Europe as "an economic success" that "shows that social democracy works"; who, as the U.S. fracking revolution was getting under way, opined that America was "just a bystander" in a global energy story defined by "peak oil"; and, who, in 2012, hailed Argentina's economy as a "remarkable sucess story" -- this guy now tells us, in Rolling Stone magazine, that Barack Obama has been a terrific president.

Which can only mean that the next two years are going to be exceptionally ugly. How to get through them?

Bret Stephens, "Obama Survival Manual, Intl. Edition," The Wall Street Journal, Tuesday, October 14, 2014, A13, boldface added

The U.S. and Europe have paid a high price for six years of stimulus that didn't stimulate, programmed consumption that fell short, regulatory expansion that froze private producers, and high tax-rate regimes that benefited the public-spending class and beggared everyone else, especially young people and the working poor scrambling for jobs.

No one should underestimate the political dangers of persisting with a Keynesian economic model that looks depleted.

Daniel Henniger, "A Year of Living on the Brink," The Wall Street Journal, October 16, 2014, A17

The economists’ guild, like others, insists on adherence to a particular methodology and set of beliefs -- in this case, the standard understanding of macroeconomics, with its emphasis on Keynesian categories and government-fueled aggregate demand. The guild operates with an unofficial but real license from the banks and the federal government.

When it comes to Washington policy, macroeconomists shut out innovative colleagues, some even of the sort Mr. [Robert E.] Litan celebrates. The ruling macro-theorists, for instance, demonstrate an annihilating contempt for the Austrian School, which focuses more on individuals than aggregates. The same contempt is directed at Public Choice Theory, which predicts that governments will take advantage of market crises to expand in nonmarket sectors. Scholars from these schools do not win top positions at the Fed or at major universities and firms.

Such guildthink is what proved fatal just before 2008 and after. There were no Public Choice School theorists at the White House or powerful institutions to warn that there might be a housing bubble if government expanded its presence in the housing sector. Few elite economists warned that the administration might use a financial crisis to undermine bankruptcy precedent or socialize health care. Ironically, analysis by economists demonstrates the inefficiency of guilds, yet these scholars perpetuate their own. Until that changes, go ahead and blame the economists.

Amity Shlaes (biographer of Calvin Coolidge), "The Wonks Can’t Save Us," The Wall Street Journal, October 28, 2014, A17

With European inflation declining to 0.3%, and U.S. inflation slowing, a specter now haunts the Western world. Deflation, the Economist[!] recently proclaimed, is a "pernicious threat" and "the world's biggest economic problem." Christine Lagarde [disinvited to speak at Smith College in 2014, evidently for being a capitalist, which shows us that Marxism trumps feminism in Progressive evaluation], managing director of the Internationl Monetary Fund, called deflation an "ogre" that could "prove disastrous for the recovery"...

Milton Friedman long ago recognized slight deflation as the "optimal" monetary policy, since people and businesses can hold lots of cash without worrying about it losing value. So why do people think deflation, by itself, is a big problem?

John H. Cochrane, "Who's Afraid of a Little Deflation?" The Wall Street Journal, November 14, 2014, A15

The eurozone's economy will fall further behind that of the U.S. without a concerted effort to boost demand through increased government spending and lower taxes, rid banks of bad loans and make labor markets more flexible, the International Monetary Fund said...

At that rate, the IMF said inflation will be below the European Central Bank's target of just under 2% through 2020, while unemployment will stay high.

"IMF Urges Eurozone To Boost Spending," The Wall Street Journal, July 28, 2015, A8;on spending and the inflation "target," ; on taxes and deregulation,

Our first big stimulus [2009] fell flat, leaving Keynesians to argue that the rescession would have been worse otherwise. George Washington's doctors probably argued that if they hadn't bled him, he would have died faster.

With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly. The story is similar in the U.K.

These are only the latest failures. Keynesians forecast depression with the end of World War II spending. The U.S. got a boom. The Phillips curve failed to understand inflation in the 1970s and its quick end in the 1980s, and disappeared in our recession as unemployment soared with steady inflation.

Still, facts and experience are seldom decisive in economics. Maybe Washington's doctors were right. There are always confounding influences. Logic matters too. And illogic hurts. Keynesian ideas are also ebbing from policy as sensible people understand how much topsy-turvy magical thinking they require.

Hurricanes are good [the "broken window" fallacy], rising oil prices are good, and ATMs are bad, we were advised: Destroying capital, lower productivity and costly oil will raise inflation and occasion government spending, which will stimulate output. Though Japan's tsunami and oil shock gave it neither inflation nor stimulus, worriers are warning that the current oil price decline, a boon in the past, will kick off the dreaded deflationary spiral this time.

I suspect policy makers heard this, and said to themselves "That's how you think the world works? Really?" And stopped listening to such policy advice...

In Keynesian models, government spending stimulates even if totally wasted. Pay people to dig ditches and fill them up again. By Keynesian logic, fraud is good; thieves have notoriously high marginal propensities to consume. That's a hard sell, so stimulus is routinely dressed in "intrastructure" clothes. Clever. How can anyone who hit a pothole complain about intrastructure spending?

But people feel they've been had when they discover that the economics is about wasted spending [i.e. political payoffs], and intrastructure was a veneer [non-existent "shovel ready" jobs] to get the bill passed. And they smell a rat when they hear economic arguments shaded for partisan politics...

Now you like roads and bridges. Where were you during decades of opposition to every new road on grounds that they only encouraged suburban "sprawl"? If you repeat in your textbooks how defense spending saved the economy in World War II, why do you support defense cutbacks today? Why is "infrastructure" spending abstract or andecdotal, not a plan for actual, valuable, concrete projects that someone might object to?...

Magical thinking -- that, contrary to centuries of experience, massive taxation and government control of incomes will lead to growth, prosperity and social peace -- is moving back to the salons.

John H. Cochrane, "An Autopsy for the Keynesians" The Wall Street Journal, December 22, 2014, A17

A growing number of investors and policy makers, seeing central banks as powerless to revive an anemic global economy, are championing a resurgence of fiscal spending.

A move away from central-bank-led policy, and toward the use of the government’s taxing-and-spending power to revive growth, would end a years-long economic era and could cause upheaval in financial markets.

John Sindreu, "Fiscal Stimulus Wins More Fans, Investors support government spending as central-bank moves fail to ignite growth" The Wall Street Journal, October 24, 2016, C1 -- such people seem to have forgotten the pathetic "stimulus" package, not just of 2009 in the U.S., but of the last 20 years in Japan; but perhaps they just like the idea of the government giving them money.

When the state of Maryland raised its tax rate on people with incomes of a million dollars a year or more, the number of such people living in Maryland fell from nearly 8,000 to fewer than 6,000. Although it had been projected that the tax revenue collected from such people in Maryland would rise by $106 million, instead these revenues FELL by $257 million.

Thomas Sowell, "Politician's undefined words," October 20, 2015; the Laffer Curve in action.

We recall once asking visitors from CBO [the Congressional Budget Office] how they arrived at their estimates that higher government spending always increases GDP [Gross Domestic Product] and job creation. The answer was the models. Which models? The Keynesian economic models that assume that $1 of spending produces some "multiplier" of higher GDP. And, no, CBO doesn't share those assumptions with mere journalists.

"Cracking Washington's Black Box," The Wall Street Journal, April 4, 2016, A18

Duke Ai [of Lu] asked Yu Jo, "It is a year of dearth; there's not enough to use; what should I do?" Yu Jo answered, "Have you assessed the tithe?" The Duke said, "Even twice the tithe, I still don't have enough. How could I make do with only a tithe?" Yu Jo answered, "When the Hundred Names [the Chinese people] have enough, what prince is there not to share enough? When the Hundred Names have not enough, what prince is there to share enough?"

Confucius, Analects XII:9, translation after James Legge [1893], Arthur Waley [1938], and D.C. Lau [1979]

When I was a [University of] Chicago undergraduate in the 1970s, I recall a trigger warning in the form of a tongue-in-cheek microaggression. The first day of an economics class the professor warned: "You will not learn Keynesian economics here. If you want to learn Keynesianism, you're in the wrong classroom in the wrong department at the wrong university."

L. Gordon Crovitz, "A Safe Space for Unsafe Spaces," The Wall Street Journal, September 19, 2016, A11

If cutting tax rates brings in more revenue, the rates weren't cut enough.

Milton Friedman (1912-2006)

There was a series on PBS about the Great Depression some years ago. Remarkably, there were no actual economists interviewed about the causes of the Depression. Instead, pseudo-authorities,
Freedom from Want, 1943, Norman Rockwell (1894-1978), National Archives at College Park
like Gore Vidal, and ordinary people from the time were asked what the problem was. They repeated phrases about "overproduction and underconsumption." Like Herbert Hoover and Franklin Roosevelt themselves, they thought that people simply did not have enough money to buy the output of industry [note].

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. Vidal said that Roosevelt "saved capitalism," but the New Deal did not revive the economy or substantially lower unemployment. Most people are aware of this -- otherwise the Depression after 1933 would not still have been the Depression -- but acknowledging its implications is avoided [note].

Even today, economics is often still thought of in "underconsumptionist" terms -- not often by economists but frequently in politics and in public debate -- and the Los Angeles Times still prints articles to the effect that the basic problem of economics is "how to achieve sufficient demand to absorb available production" [note].

In fact, public policies including everything from protective tariffs and "fair trade" to unionism and the minimum wage are based on this principle. These kinds of ideas in the post-World War II world are usually identified with John Maynard Keynes. A biographer of Keynes, 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" [note].

But Hoover, Roosevelt, and Keynes had it all backwards. The proper economic principle is called "Say's Law," for Jean Baptiste Say (1767-1832), that "supply creates demand." This means that "overproduction" in a free economy is actually impossible, and "underconsumptionist" economics are wrong in theory and destructive in practice. The implications of Say's Law extend to the critical issues cited of economic and political significance; but the principle especially underlies everything that subsequently has been called "supply-side economics." Say's Law also happens to have been the topic of the doctoral dissertation of the great free market economist Thomas Sowell, now available as Say's Law, An Historical Analysis [Princeton University Press, 1972] [note].

Why Say's Law is correct is evident from one simple consideration:  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 [note]. In more technical economic terms, if the supply function increases (from "supply, a" to "supply, b" in the chart below), which means that it becomes possible to produce a greater quantity of goods for a given price, then, if the demand function does not also increase, a greater quantity of goods will end up being sold anyway as prices fall to a market clearing level (from "price, a" to "price, b" in the chart). Say's Law may also mean that the demand function will increase also, but it is not necessary to get into that part just to see how the basic price mechanism works (indeed, if demand increases, prices might not fall) -- and it is a significant case to imagine how prices fall and quantity of demand increases even if nominal income remains the same.

A greater quantity of demand will result from an increased supply function even if no other factors are involved -- as long as prices are allowed to fall (in modern Germany, businesses have been fined for cutting prices). When industrial production increases and more goods become available, some old goods will go unsold as money (from income) 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 (the Edsels, of course, don't sell, except for bankruptcy liquidation) [note].

A visitor to the United States from the Soviet Union in the 80's was shown an American supermarket -- in stark contrast to the empty shelves in Soviet stores -- and he remarked that it was well stocked but that people could not afford to buy the goods. Almost anyone can see the fallacy in his viewpoint:  a store that couldn't sell its goods would quickly go bankrupt. Many do all the time. But although this is obvious on a microeconomic scale, people lose track of it on a macroeconomic scale:  they imagine that industry could just produce a bunch of stuff that people would actually want but that would just sit there. No industry would be left in that case.

Several questions occur. Question #1:  Why hasn't there been any deflation since World War II, even though the U.S. economy has grown vastly since then? 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. Under the gold standard, what happened to the money supply depended on the supply of gold. As gold from California slowly ran out, there was deflation; but, after 1897, gold strikes in the Yukon and South Africa created a mild inflation until World War I. Now that nations are no longer on the gold standard, governments can increase the money supply and even create permanent inflation just by printing money. Indeed, most people today, including reporters, businessmen, politicians, and even many economists, unaware of monetary history, think that a growing economy somehow actually causes inflation.

When I was in high school, an American history textbook had a diagram of the "wage and price spiral." Workers would press for higher wages. Then businesses would raise prices. Then workers would press for even higher wages. This was supposed to explain how inflation happened. However, there is a very simple reason why this isn't correct:  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.

Question #2:  If a business must cut prices to sell its inventory, will it not also cut wages to preserve its profit margin, meaning that the growing value of deflating wages will simply be offset by wage cuts? Wages will indeed fall with prices in a deflation, but falling nominal wages in the post Civil War era actually meant rising real wages:  Wages did not fall as fast as the prices of goods. If the value of wages simply fell equally with the value of production, then cutting prices to move inventory would be ineffective -- no new products, like cars or radios, could ever be introduced into an economy, since the purchasing power would not be there to buy them. Why real wages would rise as nominal wages fell may be understood in terms of another 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.

All the great labor strife of the 1870's, 80's, and 90's -- the Great Railroad Strike & Riot of 1877, the Haymarket Riot (1886), the Homestead Strike (1892), and the horrific Pullman Strike (1894) -- followed from the understandable perception that wages were falling, as nominal wages actually were being cut, even while real wages in fact were rising. At the time, who was going to believe that wages, even while being cut, were in fact rising? This would require a level of economic sophistication that even today, in public discourse, is usually lacking. Once the post-gold strike inflation ended the cuts and so the perception, labor strife diminished greatly. Unionism would not achieve great victories until given special monopoly legal privileges ("collective bargaining rights," etc.) in 1932 & 1935, as part of the Hoover and New Deal policies to drive up wages.

Artificially raising wages, on the other hand, or maintaining nominal wage levels during a deflation, as with Hoover and Roosevelt, only manages to produce unemployment (cf. "Historical Statistics and Analysis"). Wages that are not allowed to naturally seek a market clearing level 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 unparalleled Depression.

Question #3:  When the labor market is left to determine wages, what guarantee do we have that the wages will buy anything? Another way to understand the answer 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. What wages will buy thus 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.

When Henry Ford raised his daily wage from $2.34 to $5 in 1914 (also cutting the working day from 9 to 8 hours -- U.S. Steel still had a 12 hour working day as late as 1922), and ultimately to $6 a day in 1922, it was because he thought that nominal wages would have to rise to make it possible for his workers to buy Model T Fords. But unless everyone similarly more than doubled wages, which they didn't, this cannot explain how Ford created a mass market for Model T's outside of his own workers. He did that by cutting the price of the car:  Originally offered at $850 in 1908, the price of the Model T was cut to $600 in 1912, to $550 by 1914, and ultimately down to $300 by 1922 (about $4500 in 1995 dollars -- still cheaper than most cars), when he was selling more than a million a year. The Ford Model T pickup, introduced in 1925, went for $281. Ford knew why cutting prices worked, and one of the reasons he raised wages too was to attract and retain loyal workers; but Ford was confused about the economic role of wages, thinking that nominal wages needed to rise, since later he advised Herbert Hoover to prevent wages from falling during the deflation of the early Depression [as in the quote above], with disastrous consequences. In the mild inflation of 1914, it is reasonable that Ford's wages would have risen in such a productive industry, but this should not be have been confused with the real engine of wealth for most people:  Falling real prices. Ford's understanding, which was the opposite of Say's Law, may be called "demand side" economics, just as Say's Law itself may be called "supply side" economics.

"Supply side" economics is now associated with Arthur Laffer and his advice in the late 70's that the highest tax rates should be cut, which would free up private capital and produce economic growth, which then would result in higher tax revenues. The rise in tax revenues against falling tax rates was illustrated in a graph called the "Laffer Curve." Although cutting tax rates then produced the "seven fat years" from 1982-89, and tax receipts actually did increase, this advice is now commonly disparaged as "tax cuts for the rich" and falsely blamed for growing federal budget deficits in the '80's. The thinking seems to be that the profits of business should either be given directly to workers through pay raises or be taken by the government to be given to workers indirectly. Producing greater profits is thought of as useless and immoral [note].

However, if Say's Law is correct, life improves through greater production, not through higher nominal wages. Greater production requires greater capitalization -- money invested in machinery and training -- and the capital for that must come out of profits. Greater production, in turn, means greater productivity -- that fewer workers are needed to produce the previous quantity of goods. But, Question #4:  If employers must cut prices in the deflation of a growing economy but cannot cut wages to the same degree, what is going to restore their 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. The employer therefore must have had a sufficient profit margin in the first place to absorb both the blow of declining prices against rising real wages and to be able to invest in sufficiently greater productivity to offset the new level of wages. In the long run, this means that lower paying, labor intensive work gets replaced by higher paying, capital intensive work.

If we think in terms of the labor freed up by greater productivity, as fewer workers can produce the same output, it is then clear that this can be put to the production of more of the old products, if desired, or new products, as we have seen:  the cars, radios, refrigerators, washing machines, TV's, calculators, pacemakers, VCR's, computers, snowmobiles, and all the other features of modern wealth. But just as profits and capital are still foolishly attacked in the press and in politics, the process by which labor is made available for new production is also attacked:  "corporate downsizing," even when all it does is get rid of useless, bloated management, is attacked for its cruel effects on workers. The effects may indeed be cruel on an individual level, but without that process, 90% of human beings would still be subsistent peasants, which is far crueler than any industrial layoffs. Certainly, the ancient Egyptians would have been horrified to learn that less than 2% of the population would later be needed to produce all of a large country's food [cf. "Historical Statistics and Analysis"]. What is everyone else to do? It would not have helped to tell them that most people would be producing things that they could not have even imagined -- just as no science fiction writers of the 1950's imagined pocket calculators or personal computers.

Question #5:  If investment in greater productivity frees up labor, will that not produce a higher level of unemployment that would drive down wages? Indeed, unless the capital exists and is invested to create the new production that would need the free labor. Even if there is a lag in hiring that would drive down wages, so that increases in productivity would initially mean increases in profits for businesses that "downsized" their labor force, as new businesses bid up labor again and produce new goods, the prices of all goods would then have to fall, if necessary, until the market cleared. Employers with windfall profit margins from downsizing would lose their higher profits to the interaction between deflationary price cutting and the wages bid up by the labor market. The effect of productivity freeing up labor is then precisely the same, seen from a different direction, as the effect of expanded production driving down prices:  falling nominal prices and rising real wages will meet at the point where production will equal consumption.

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 [note]. Thus the Soviet Union reproduced the economic poverty as well as the political privilege of a mediaeval state, even as Herbert Hoover and Franklin Roosevelt, with glowing rhetoric about the common man, lodged the wealthiest nation in history in a full decade of unprecedented unemployment. The mythology of the New Deal and the Keynesian rejection of Say's Law still distort American politics and economics.

Question #6:  If we are faced with the dilemma between "supply creates demand" and "demand creates supply," isn't this just an irresolvable "chicken or egg" question? No, because we have the historical evidence from the Depression (and otherwise) what happens when the government (Hoover & Roosevelt) acts to drive up wages. Higher cost for labor means that less of it sells. That is Economics 101. If less labor sells, that is the definition of increased unemployment. Where capital is freed up, taxes are cut, etc., an economy can just skyrocket, as the U.S. economy did in the 1920's, 1960's, 1980's, and (most dramatically for historical reasons) in Ireland during the 1990's. But, we have a right to ask, if the historical evidence is for Say's Law, is there some intelligible reason why boosting demand doesn't work? Why is it that increased wages and putting more money in the pockets of workers would not result in the stimulus of their increased spending? A perfectly fair question. I see the answer expressed nicely in a recent quotation. Bill Dunkelberg, an economist for the National Federation of Independent Business (a small-business lobby), said about the 2009 rise in the minimum wage, "Every dollar the minimum wage mandates comes out of somebody else's pocket. There's no gain in spending power as alleged by the administration" [quoted by columnist Donald Lambro, July 28, 2009]. "[C]omes out of somebody else's pocket" is the key point. If driving up wages drives down employment, then the extra money that some employee gets has been taken from another employee who has lost, or who doesn't get, a job. It is moving wages around. The Keynesian might imagine that pay raises could come out of the comfortable profits of the greedy capitalists, but it is just as likely that small businesses (responsible for most employment in the country) operating on the margin will simply go bankrupt, eliminating multiple jobs all at once. Small businesses rarely have comfortable profit margins, much less Scrooge McDuck's bags of gold lying around. The policies of Leftists railing against corporations and capitalists manage to trample small businesses, usually without even noticing it.

How Say's Law works can be examined with some simple graphs. At left is a hypothetical "equilibrium" condition where production equals consumption, i.e. wages equal prices. The quantity of money mediates the exchange between wages and prices. There is also an equivalence between labor and production, since the quantity of production derives from the quantity of labor. This chart and the subsequent ones presuppose market-clearing wages, i.e. full employment (which should be no more than 2% unemployment). If wages are too high and do not clear the market, then there is substantial unemployment and both production and consumption are concentrated in the employed workforce. At right we can see what happens if the quantity of production increases, ceteris paribus (all other things being equal). Here the money supply still matches the quantity of labor, so wages remain the same. However, if the quantity of production is going to sell, for the same quantity of money, then prices must fall. This was the deflation characteristic of late 19th Century America. Also, note that for the increased production to come from the same quantity of labor, productivity must increase, i.e. labor produces more goods for the same effort.

This case represents the bottom line, the touchstone and paradigm, in all considerations of economic growth and progress. Life improves by increased production, and constant labor can increase production by increased productivity. If the money supply remains the same, then nominal wages will remain the same, but for the increased production to sell, prices must fall. If businesses kept prices the same, despite increased productivity, then some goods would not sell, and the increased productivity would be wasted (or, at least, remaindered). But prices can be cut, with costs and profits remaining the same, and the increased production can then sell. The real value of money (and the real value of wages) thus rises, since the money covers more transactions. Everything else is just a variation of this, mainly because of independent variation in the money supply.

The increase in production shown is slightly less than the actual increase in the Gross National Product of the United States from 1921 to 1928 (Harding-Coolidge), which was 49%. This still compares most favorably with the increase in the GNP during subsequent periods of strong growth, from 1961 to 1968 (Kennedy-Johnson), 38%, and from 1982 to 1989 (Reagan), 29%. Why the rate of economic growth should have slowed over time is explained by the restrictions that have been put on business and capital, for purposes contrary to Say's Law.

One characteristic of the Twenties, however, was stable prices. The chart at right shows what happens if the quantity of money increases along with production, which is what happened in the Twenties, thanks to Benjamin Strong. Now prices remain stable, but the extra quantity of money must be absorbed by the same quantity of labor:  So wages rise. This is actually what happened during the Twenties, though the labor force also increased in size, so wages would not have risen quite as much as the idealized case shown. If wages did not rise, then not all of production would be sold, and somebody would go bankrupt with unsold inventory -- though the consumption of labor itself would be unchanged. At the same time, however, the money that could have gone to the wages that could have moved the extra inventory would have to be just sitting someplace, perhaps in a bankvault.

What if people poured into the country and production didn't change? This could hardly happen unless the addition to the population remained unemployed. However, if somehow the addition to the population was absorbed into the workforce, and if production did not change, then two things would have to happen:  (1) wages would fall, and (2) productivity would have to fall also. Thus, the same quantity of production would be produced by more labor and would be distributed among the larger population. Wealth per worker would decrease, and technology would have to decline, as production becomes more labor intensive rather than capital intensive. This situation could not occur unless the technology were somehow declining, despite growth in population, OR if we had some sort of collapse in the existing economy and money supply, relative to stable population.

That is actually what happened in the Great Depression, when the collapse of credit and the failure of banks sharply deflated the money supply and when production declined both because of business failure and because many businesses deliberately scaled back production (through layoffs and slowdowns). Since much of the workforce became unemployed (28% at its worst), the distribution of remaining production would be disproportionately concentrated with the remaining employed workers. If we had the same sort of situation, but the money supply is maintained through money creation, we would still have the same decline in wealth, but prices would rise rather than wages fall. This was the early situation in post-Communist Russia, where the economy continued, overall, to collapse, but the money supply, at first, expanded continually. When the expansion in the Russian money supply was brought, somewhat, under control, wages still declined in relation to production, since real wealth, production, still declined, whether massive inflation occurred or not [note].

If production keeps up with the growth in the labor force, and the money supply keeps up also, then prices and wages would not change at all -- we would simply have a kind of expansion of the equilibrium state. This is somewhat unrealistic, since productivity does increase over time with technological innovation. So, in general, production is going to increase faster that the quantity of labor, and real wages are most likely to increase, unless there is some collapse in the money supply or the economy.

In the days of central banking -- which means today -- when money can be created by fiat, the money supply is no longer liable to experience any kind of collapse. Instead, we have the opposite, as at right, where the growth in the money supply outpaces the growth of both the labor force and production. This means that both prices and wages will expand:  a general inflation. This has been the case in the United States ever since World War II. This is the easiest policy politically, since wages will appear to rise whatever is happening to the economy. People may be irritated that prices rise also, and they may even realize that the real value of their savings is being lost, but these are both more remote considerations than a stagnant or declining paycheck and are unlikely to become hot political issues.

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.

A recent epigraph at the top of this page is a statement by Barack Obama:

Now, what we're doing, I want to be clear, we're not trying to push financial reform because we begrudge success that's fairly earned. I mean, I do think at a certain point you've made enough money. [April 29, 2010, speaking in Quincy, Illinois, boldface added]

The idea that someone would have "made enough money" at some point may reveal the extent to which President Obama may neither like nor understand capitalism. People (like lawyers, Presidents) may have large incomes. This may be what is meant by "making money." But many people with large incomes simply spend them, which means in the end they actually end up "making" no money. If they lose the income, they have nothing. A more substantial meaning for "making money" is therefore to save money out of one's income, put it away, invest it, and then have the income of those investments even after loss of one's previous, regular income, as at retirement. Anyone who thinks that $100,000 year would be a nice income, and might be able to invest money at a 5% return for a year, needs to save and invest $2,000,000 to get the desired income.

In those terms, is there such a thing as having "made enough money"? No, because the invested money does not sit in a warehouse and miraculously shed that 5% return. The investment means that capital is added to the economy and, as we should understand now from Say's Law, the economy needs as much capital as it can get.

President Obama thus does not seem to understand this, and that may reveal an incomprehension or dislike for the role of private investment in a free economy. Indeed, we have seen Democrats since Bill Clinton speaking of government spending as "investment." But while some government spending for infrastructure can be economically productive, most of it (including "Bridge to Nowhere" infrastructure) is directed as political payoffs that almost never result in profitable enterprises, i.e. businesses that do not need subsidies, monopolies, or other protections to survive. Taxing and spending in general is a negative sum game generated by and for rent seekers.

Tax and spend politics thus is politically responsive to rent seekers (these days especially public employee unions) and is entirely unconcerned at the manner in which this draws capital out of the economy and so undercuts economic development, increases in productivity, and the provision of consumer goods. Indeed, there also may lurk behind this an ideology that is hostile to consumer goods, and consumers, as representing "unnecessary desires" that waste resources, exploit the Third World, and harm the Earth. It is therefore possible that President Obama does understand the role of capital in the growth of a consumer economy. He just (privately) disapproves of it.


The term "supply-side economics" is used in two different but related ways. Some use the term to refer to the fact that production (supply) underlies consumption and living standards. In the long run, our income levels reflect our ability to produce goods and services that people value...

"Supply-side economics" is also used to describe how changes in marginal tax rates influence economic activity. Supply-side economists believe that high marginal tax rates strongly discourage income, output, and the efficiency of resource use. In recent years, this latter use of the term has become the more common of the two and is thus the focus of this article. ["Supply-Side Economics," James D. Gwartney, The Concise Encyclopedia of Economics, edited by David R. Henderson, Liberty Fund, Indianapolis, 1993, 2002, 2008, p.482]

The focus of "supply-side economics" on tax policy is a grave and even dangerous restriction in the use of the concept, since many more public policy issues ride on a proper understanding of the matter in its generality. That "production (supply) underlies consumption" is, in turn, only one logical implication of Say's Law. Production not only underlies consumption, but, if "supply creates demand," then consumption is something that, once we have the production, will take care of itself in a free market. Also, production reflects the investment of capital, both human and material, which means that "supply-side economics" and Say's Law, in their generality, are principles of capital and so first principles of capitalism itself. This is not a issue that should be neglected.

Thus, I would say that the treatment in The Concise Encyclopedia of Economics reflects an oversight or neglect of something very fundamental, which is a little surprising given the Conservative or Classical Liberal perspective of its publisher, the Liberty Fund. But we see a similar problem in that the book lacks a separate article about Say's Law as such and then, in the biographical article on Say himself, puts the matter in these terms:

Say's Law has various interpretations. The long-run version is that there cannot be overproduction of goods in general for a very long time because those who produce the goods, by their act of producing, produce the purchasing power to buy other goods... There can be no long-run glut of goods.

But Say also said that even in the short run there could be no overproduction of goods relative to demand. It was this short-run version that THOMAS ROBERT MALTHUS attacked in the nineteenth century and JOHN MAYNARD KEYNES attacked in the twentieth. They were right to attack it. ["Jean-Baptiste Say (1767-1832)," op.cit., p.584]

The article then does not say why Malthus and Keynes were right to attack the short-run version of Say's Law. However, it is unnecessary to guess what this means. Since he did not believe that supply alone could be relied upon to always generate demand, Keynes, as we know, recommended that demand be independently "stimulated" by government action, especially government (deficit) spending. As I have noted, many other policies have since been promoted as useful in stimulating demand, including the minimum wage and monopolistic powers for labor unions.

Early in December 2010, a chorus of Democrat politicians (including the unbelievably witless but unbelievably reelected Barbara Boxer) and their media supporters are arguing that unemployment benefits must be continued and increased because of the demand side effects they will have on the economy, effects that will be so pronounced that raising taxes "on the rich" will be of no economic significance. I have already referenced here in a footnote such an argument that was made in an opinion piece in the Wall Street Journal. Since the 800+ billion dollar "stimulus" bill of 2009 did not prevent unemployment from approaching 10% at the end of 2010, the failure of the first line of Keynesian attack apparently merely opens the way for the more desperate backup ideas -- of course, as unemployment ticks back up in June 2011 (to 9.1% from 9.0%), we are hearing "didn't spend enough" and "tax the rich" again. We also learn, however, that a great deal of the "stimulus" money was simply spent by the States to avoid layoffs and wage reductions among government employees, as a political payoff to government employee unions. Thus, the principle "stimulus" was funding the corruption and conspiracy of faithless (Democrat & RINO) politicians and the unions that hired them.

Now, Keynes famously said, "In the long run we are all dead." We can take from this the lesson that Say's Law as a "long-run" truth is of no significance. Indeed, to the politician looking at the next election, Keynes' attitude reflects no more than political reality and practice. Thus, his policy recommendations will only be for the short run, in terms of which even The Concise Encyclopedia of Economics apparently agrees. We have every right to examine, therefore, the short-run success of Keynesian economic policy.

However, government spending and demand side policies did not work in the Great Depression, as any moderately informed person would know on honest reflection. Any unbiased person would also have realized that the "stagflation" of the 1970's, after Richard Nixon's "We are all Keynesians now," was the Götterdämmerung of demand side economics. High spending, high taxes, and inflation were accompanied by high unemployment and slow growth. It's not the way it was supposed to be. In the '80's and '90's, we knew that the Keynesians were still out there, but they had little effect on policy until 2009. Then the whole Keynesian system rose from the grave, with great promises to immediately ameliorate and then quickly end the recession that resulted from the collapse of the home mortgage market.

Not only were the Keynesians back, but they also often acted as though everyone had always known they were right in the first place. Thus, Alan Reynolds, of the CATO Institute, discusses some assertions by a Washington Post columnist:

He [Dana Milbank] blames "think tanks such as the Cato Institute" for not agreeing that Keynesian theory is so "unassailable" and "universally embraced" that daring to question the elixir of deficit spending "has a flat earth feel to it." ["Old Theory of Keynesian Stimulus Comes Up Against Hard New Facts," Investor's Business Daily, Thursday, September 16, 2010, boldface added]

Unfortunately, a zombie may walk, but it is still dead (whether on a "flat earth" or not); and all the Republic has profited from the "stimulus" and other policies is simply a massive increase in the National Debt and a terrifying extension of extra-Constitutional and illegitimate powers in the Federal Government. Before the November 2010 election, economic advisors were abandoning the White House like rats from a sinking ship, all their hopes and promises forgotten. Only the inspiration of "unemployment benefits" Keynesianism seems to remain among the political true believers -- except for the suggestions now to use inflation as a stimulus, so we can have the full joyous experience of the 70's again [note].

Of course, in the long run [sic], the Keynesians will return, as they have already begun to do, to their standard rationalization:  The government just didn't spend enough money. Another 500 billion, or trillion, or three trillion, dollars, and all would have worked out as they (originally) predicted. All we need to do is update the classic Everett Dirksen line: "A trillion here, a trillion there, and pretty soon you're talking about real money."

Just how bad the direct advice of Keynes himself could be we see in a recent Wall Street Journal article by Thomas F. Cooley (Business, NYU) and Lee E. Ohanian (Economics, UCLA):

The most striking evidence for the impact of higher capital taxes comes from Britain, which increased tax rates on capital income (net of depreciation) to more than 90% in the 1940s, and continued to tax capital income at relatively high rates through the 1960s. Not surprisingly, per capita GNP growth in Britain was abysmal, averaging less than 1% per year between 1940 and 1960, and capital accumulation during this period was among the lowest of all developed countries.

Britain's tax policy was implemented on the advice of British economist John Maynard Keynes. Keynes was a British Treasury adviser who developed a plan to finance Britain's World War II efforts by substantially increasing capital income taxation. Keynes not only advocated higher capital taxation to pay for the war, but he also advocated permanently higher capital taxes in order to redistribute wealth. He wrote about this in his 1940 book "How to Pay for the War": "I have endeavored to snatch from the exigency of war positive social improvements. The complete scheme now proposed... embodies an advance toward economic equality greater than any which we have made."

Keynes gave little credence to the view that higher capital tax rates would sharply reduce investment and damage economic growth. ["The Bush Tax Cuts Never Went Far Enough," Wednesday, December 8, 2010, boldface added]

Make no mistake:  The truth is that when the Democrats attack "the rich," they are attacking capital, which truly means attacking Capitalism; and many of them, as we see here with John Maynard Keynes himself, know that is precisely what they are doing. Either, as Marxists, they don't believe in the existence of capital at all, or, as statists and socialists, they believe that proper capital "investment" only occurs through government spending or a dirigiste mandate on private investment (e.g. "green" energy). It is a tribute to the cluelessness of the Republicans that, while they often do characterize Democrat politics as "class warfare," they do not simply say that attacks on "the rich" are indeed (Marxist) attacks on capital.

It also must not be forgotten that the Left does not approve of a consumer economy, what is tarred and dismissed as "Consumerism," i.e. a market that offers products that people want (also according to the precept of Adam Smith that "the purpose of production is consumption"). This is because they think that the market caters, in the words of both Plato and of John Kenneth Galbraith, to "unnecessary desires." Advertising gets us to buy things that we don't need and that, if we were in our right minds and of virtuous disposition, we would not want -- things that waste resources, damage the environment, exploit the Third World, and divert us from morally worthy activities (such as electing Democrats, protesting Fox News, or only using toilet paper one square at a time). We should be living in holy and ascetic poverty, singing folk songs and producing handicrafts (see George Lucas' complaint about mass production and a "consumerist mentality") -- although this pitch is often from people who are themselves rich (sometimes with taxpayer subsidies), live in luxury, and travel on private jets. Al and Tipper Gore, righteously traveling (with the press) on the subway from Oslo airport, nevertheless sent their luggage in the limo. This is all an example of anaesethic and anhedonic political moralism.

What are now the many failures of its economic policies and recommendations falsify and refute the premises of Keynesian economics. Chief among those premises is itself the denial of Say's Law, with its implicit or explicit attack on capital. History thus tends to vindicate Say's Law, even in the short run, no less. Attempts to promote demand by cash, law, or regulation, while attacking, restricting, or confiscating capital, produce nothing but debt, waste, corruption, unemployment, little growth, and, not the least, tyranny [note].

The abundance of evidence for this is rarely exposed in the "main stream" media; but it is part of public discourse. For instance, Robert J. Barro (Economics at Harvard) had a column in the May 10, 2012, Wall Street Journal, "Stimulus Spending Keeps Failing." In addition to discussion of the recent success of Sweden and Germany, after market reforms, Barro has a nice observation about Japan:

Once a comparatively low public-debt nation, Japan apparently bought the Keynesian message many years ago. The consequence for today is a ratio of government debt to GDP around 210% -- the largest in the world.

Since the Japanese economy has been sluggish since the 1990's, and Japanese governments have been launching "stimulus" spending projects ever since, one might think that the world would have learned the lesson by now. Japan grew to its daunting strength in the 1980's through the Keynesian no-no of hard work and savings. That Japan still has not learned -- not to mention American leftists not learning -- to stop the "stimulus" spending and return to savings is excellent evidence of the impenetrability of the leftist mind to reason and experience. Indeed, there was subsequently a letter to the Journal critical of Barro from an economics professor, by which he probably did not realize that he was only embarrassing himself. He said that "we economists," apparently not noticing that Barro is a member of the profession (this certainly reflected the way this professor customarily talks to students), do not take seriously "one off" examples like Sweden and Germany. If he was not aware of the many other examples, or of cases like Japan actually mentioned in the article, perhaps he really should be looking for an academic specialty more suited to his gifts.

If we keep in mind the function of prices in the operation of Say's Law, it is not difficult to understand why the whole "in the long run" business is a red herring. If you own a business, and your inventory is not selling, what you face "in the long run" is bankruptcy. In the short run, therefore, you must cut prices and get things moving. Thus, Say's Law does not operate through some circuitious route in the background, gradually connecting production and consumption, with a perhaps considerable lag in time. No, as soon as you cut your prices, the effect can be immediate. And this is what has happened historically. When we see Henry Ford cut, cut, and cut, it is not surprising that he priced the horse out of the transportation market. And he knew that is what he needed to do. Corporations looking for federal subsidies may not know, or even care, that that is what they need to do.

Free Market economists, which I assume would include the editor of a book by the Liberty Fund, thus pursue a disastrous and suicidal course if they neglect Say's Law, let alone if they admit objections to it from someone like John Maynard Keynes. Long run or short, Keynesianism has led to no good, while policies to free capital and allow the market to work on prices and wages, have consistently produced, not just growth, but prosperity -- both on unprecedented scales and in unprecedented scope. One of the great ironies of 20th century economic history, of course, is that tax cuts and prosperity were set off, not just by Calvin Coolidge and Ronald Reagan, but also by Lyndon Johnson. The Democrats simply do not want to take credit for something they did themselves, when now they have drifted far, far towards Marxism and don't want the logic and the facts of the Kennedy-Johnson tax cuts to be true.

The truth of Say's Law thus is supremely the truth of capital, from which all production, supply, and wealth flows for all. Its enemies say they want a greater distribution of wealth and income, but by their actions we know that what they want is power -- a moralistic and anhedonic power to impose poverty on us, but which, of course, will have its privileges and compensations for them. Indeed, their hearts are those of thieves and their character reeks of all the greed and envy that they love to attribute to "capitalists" and business. Fortunately, outside of California (where the asylum has been turned over to the lunatics), most Americans had caught the scent of this ill wind before November 2010 and then did something about it.

The venerable British newsmagazine The Economist, while often displaying some good sense, nevertheless has still not awakened from the Keynesian dream. The July 30th-August 5th 2011 issue editorially asserts that the United States now "should be spending to boost recovery" [p.9]. Does it not matter that a trillion dollars has already been spent without any demonstrable help to recovery? -- money that has been drained from private capital spending and investment? Apparently not. The recommendation is simply more of the same. Similarly, we also get the shot that "the tea-partiers live in a fantasy world in which the deficit can be reduced without any tax increases." Let's see, I don't think it takes more than elementary mathematics to understrand that cuts in spending will equal reduction in the deficit. To spell that out:  if you spend less, you will not need to borrow as much. Indeed, if you cut spending in the amount equal to the deficit, there would be no deficit at all.

The Keynesianism of The Economist coincides with the current message [August 2011] from Democrat politicians (e.g. Nancy Pelosi) and their academic/media supporters (e.g. Paul Krugman), that Federal spending must now be increased to create jobs -- right after the Democrats agreed in the Debt Limit compromise with Republicans to cut spending. So the zombie keeps moving, and the Left continues to act as though private job creation is neither needed nor desired, while all economic goods flow from the government. This was why they constantly said that not raising the Debt Limit would "crash" the economy and destroy the country (while comparing the Tea Party to suicide bombers). The Debt Limit debate itself was characterized by profound lies, such as the constantly repeated refrain (in supposedly straight news stories, even at Fox News) that the United States would default on its debt if the debt ceiling were not raised. No, the debt would continue to be serviced with revenues. Not raising the debt ceiling would simply mean that the Treasury stops borrowing. Federal spending would need to be radically reduced, but it would only be reduced by the amount of the deficit, not by the the size of the whole Federal budget.

The Democrats have no intention of ever cutting spending. Under Obama, they raised the share of the Federal government in the U.S. economy from 20% to 25%, and they are determined to hold it at that level, and then increase it. Their idea of fiscal responsibility is raising taxes to (notionally) cover (or reduce) the deficit. Even The Economist knows enough to see through this:  "The president also stuck too long to the fiction that the deficit can be plugged by taxing the rich more: he even wasted part of a national broadcast this week bashing the wealthy, though the Democrats had already withdrawn proposals for such rises" [ibid.]. But Obama's rhetoric has never involved serious economic proposals. It is a political strategy, trying to sell class warfare and elicit resentment against the rich. And it all makes sense if the economic and political ideal of the Democrats is Cuba. Cuba's poverty and tyranny, after all, has actually been called an egalitarian "ecotopia" by a radical law professor (Robert W. Benson, Professor of International Environmental Law at Loyola Law School Los Angeles, LA Times, 29 March 1992), even as the Congressional Black Caucus engages in political pilgrimages to do homage to Fidel Castro. Be that as it may, there is nothing the Democrats do without promoting the power and size of government, despite the damage done to private business and employment.

After the Dow Jones industrials fell more than 500 points on 4 August 2011, The Wall Street Journal editorialized:

In the wake of the debt deal, liberal economists are now complaining that the downward pressure on spending violates the Keynesian commandment to flood a faltering economy with government outlays.

We've done that. From the first months of the Obama Presidency, billions of stimulus have been injected into the economy...

The Keynesians have fired all their ammo, and here we are, going south. Maybe now President Obama should consider everything he's done to revive the American economy -- and do the opposite. ["The Global Rout," A12, boldface added]

After the actual experiences of the 1930's and '70's, Keynesian economics should have been refuted, and it should not have been necessary to do that all over again in 2009. That it was done all over again, to similar miserable effect, should have at least perusaded all the die-hards. That it didn't should properly arouse our suspicions that more is involved than just economics.

After all, when most economists agreed that the Soviet economy worked just fine, Capitalism was still promoted by many of its advocates (apart from Hayek and von Mises) on the basis of the higher principle that freedom was better than a totalitarian police state. Now that we know how bad the Soviet economy really was, and the Left continues to promote socialist devices, a command economy, and ever more concentrated government power, we might wonder if the Soviet state was admired in the first place precisely for its lack of freedom, regardless of its supposed economic successes.

A correspondent recently accused me not having read Thomas Sowell's Say's Law, An Historical Analysis, since the book actually proves that Say's Law is wrong. Well, I read the book fifteen years ago, and I am willing to believe that perhaps I had not understood it very well at the time. However, these days I read Thomas Sowell's newspaper columns every week, and I have never seen him make any policy recommendations that were inconsistent with supply side economics.

I was curious, therefore, what the policy recommendations of this correspondent would be. If he believed that Sowell had disproven Say's Law, I would expect him to support demand side economics and Keynesian policy recommendations (i.e. from the Keynes whom most people might believe had disproven Say's Law). However, although the correspondent was perfectly happy to continue accusing me of not having read Sowell, he was curiously reluctant to admit what the consequences and policy implications would be of Sowell's refutation of Say.

In this I began to suspect the characteristic dissimulation of the leftist. If the correspondent admitted that demand side economics follow from the falsity of Say's Law, while Sowell always supports supply side economic policy, then the correspondent would need to acknowledge that Sowell's thought is incoherent -- not the right implication when the original point was to accuse me of ignorantly getting Sowell's ideas wrong.

So I told the correspondent, that if I was misrepresenting Sowell on this webpage, he should write to Sowell to warn him that some idiot on the internet was giving everyone the wrong idea about his thought. At this, the correspondent decided that I was calling him an "idiot" -- although I don't know where he is misrepresenting Sowell on the internet -- and that he couldn't keep writing to someone using insults in this way.

Well, accusing me of not having read a book that I was writing about strikes me as a bit insulting. I was reminded of the rule that people who begin with insults very often are easily insulted themselves and become indignant over things that actually are not insults at all. Conveniently, however, having been righteously offended by an imaginary insult, the correspondent is thus excused from divulging his own economic and policy preferences, let alone explaining how Sowell's supply side political economy is consistent with his supposed refutation of Say's Law.

I therefore invite the reader to make up the deficiency in the correspondent's case. If Sowell disproved Say's Law in Say's Law, An Historical Analysis, I would like to know how that is consistent with the economic views that he has expressed ever since -- including the essay attacking the smear of "trickle down economics" from which I quote above. Because the book was based on Sowell's doctoral dissertation, perhaps he was still a Marxist at that point and simply thought better of the matter afterwards. If so, there would not be much point in reproaching me for misrepresenting Sowell; and as "An Historical Analysis," the book is still properly going to mostly be dealing with people who denied Say's Law. But then we also need to know the point where Sowell repudiated the conclusions of his book and detailed this in print. This would require anyone, consequently, to explain the reasons why Say's Law is true, or at least why Sowell would think so now. If Sowell denies Say's Law now, I would be very astonished, but I would be intrigued to hear the case made.

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Say's Law and Supply Side Economics, Note 1

The great Arab historian ʾIbn Khaldūn clearly anticipated the Laffer Curve. While most of his political enemies regarded Ronald Reagan as an ignorant fool, Reagan actually majored in economics in college and long remembered Ibn Khaldūn's wisdom. Supply Side economics was nothing new to him.

It is thus of some interest to quote the full explanation that Ibn Khaldūn gives for his assertion:

It should be known that at the beginning of a dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.

The reason for this is that when the dynasty follows the ways of Islam, it imposes only such taxes as are stipulated by the religious law, such as charity taxes, the land tax, and the poll tax. These have fixed limits that cannot be exceeded.

When the dynasty follows the ways of group feeling and (political) superiority, it necessarily has at first a desert attitude, as has been mentioned before. The desert attitude requires kindness, reverence, humility, respect for the property of other people, and disinclination to appropriate it, except in rare instances. Therefore, the individual imposts and assessments, which together constitute the tax revenue, are low. When tax assessments and imposts upon the subjects are low, the latter have the energy and desire to do things. Cultural enterprises grow and increase, because the low taxes bring satisfaction. When cultural enterprises grow, the number of individual imposts and assessments mounts. In consequence, the tax revenue, which is the sum total of (the individual assessments), increases.

When the dynasty continues in power and their rulers follow each other in succession, they become sophisticated. The Bedouin attitude and simplicity lose their significance, and the Bedouin qualities of moderation and restraint disappear. Royal authority with its tyranny and sedentary culture that stimulates sophistication, make their appearance. The people of the dynasty then acquire qualities of character related to cleverness. Their customs and needs become more varied because of the prosperity and luxury in which they are immersed. As a result, the individual imposts and assessments upon the subjects, agricultural labourers, farmers, and all the other taxpayers, increase. Every individual impost and assessment is greatly increased, in order to obtain a higher tax revenue. Customs duties are placed upon articles of commerce and (levied) at the city gates. Then, gradual increases in the amounts of the assessments succeed each other regularly, in correspondence with the gradual increase in the luxury customs and many needs of the dynasty and the spending required in connection with them. Eventually, the taxes will weigh heavily upon the subjects and overburden them. Heavy taxes become an obligation and tradition, because the increases took place gradually, and no one knows specifically who increases them or levied them. They lie upon the subjects like an obligation and tradition.

The assessments increase beyond the limits of equity. The result is that the interest of the subjects in cultural enterprises disappears, since when they compare expenditures and taxes with their income and gain and see the little profit they make, they lose all hope. Therefore, many of them refrain from all cultural activity. The result is that the total tax revenue goes down, as individual assessments go down. Often, when the decrease is noticed, the amounts of individual imposts are increased. This is considered a means of compensating for the decrease. Finally, individual imposts and assessments reach their limit. It would be no avail to increase them further. The costs of all cultural enterprise are now too high, the taxes are too heavy, and the profits anticipated fail to materialize. Finally, civilization is destroyed, because the incentive for cultural activity is gone. It is the dynasty that suffers from the situation, because it profits from cultural activity.

If one understands this, he will realize that the strongest incentive for cultural activity is to lower as much as possible the amounts of individual imposts levied upon persons capable of undertaking cultural enterprises. In this manner, such persons will be psychologically disposed to undertake them, because they can be confident of making a profit from them. ['Abd-ar-Raḥmān Abū Zayd ibn Khaldūn, The Muqaddimah, An Introduction to History, Franz Rosenthal translation, abridged and edited by N.J. Dawood, Bollingen Series, Princeton University Press, 1967, pp.230-231]

While Ibn Khaldūn was writing about the cycle of dynastic governments with which he was familiar in Mediaeval North Africa and Spain, the same dynamic applies to democracies, where politicians seek to obtain votes by bestowing benefits from the public purse. Indeed, the motive to abandon productive "cultural" activities will be stronger in a democracy, since it quickly becomes apparent that profit can be obtained more easily from political activity than from economic production, when economic activity itself is burdened with increasing taxes, mandates, and regulations. This dynamic is explored by modern Public Choice economics. Thus, the productive are despised (as the greedy and grasping) and burdened, while the unproductive are celebrated (as noble victims or disinterested public or cultural servants) and supported.

It is especially noteworthy that Ibn Khaldūn identified the period of low taxes as one in which the "ways of group feeling" predominate. These days, collectivist ideologies of "group feeling," like communitarianism, support the idea that the productive have a duty to support the unproductive, promoting a regime of high taxes and high vilification against the productive themselves. But, as noted elsewhere, a welfare regime of the rent-seeking and unproductive promotes a kind of malignant individualism that is impossible under laissez-faire capitalism. The political benefits bestowed on the unproductive are rights which require no agreement or good will from others, and which can be demanded without civility or consideration. Ibn Khaldūn's wisdom thus is conformable with this greater insight, that true community attends low taxes and respect for the property of others, not the high taxes and confiscations of a regime of parasites, whether dynastic or democratic.

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Say's Law and Supply Side Economics, Note 2

Since Hoover did not follow Mellon's advice, did not "do nothing," and the Great Depression grew, with all its misery, it is not clear what Mr. Wolf is talking about. Perhaps he has insensibly and forgetfully shifted from history to his own prediction about the future of Europe, were it to take Mellon's advice now. At the time, how could taking Mellon's advice have been "stupid and wicked" when Hoover didn't take it, "a depression across the advanced world" happened anyway, and the activist policies of Hoover and Roosevelt did nothing but prolong the Depression?

In a bit of clear sophistry and evasion, Wolf leaves the impression that somehow Hoover did take Mellon's advice, without actually saying so. Yet we have examples of Presidents who acted that way:  When Harry Truman decided to "do nothing" about the recession of 1949, as Warren Harding had done nothing in 1921 (with unemployment of 11.7%), the economy recovered, in each case, within a year. "Austerity" in the recent European context has meant raising taxes as well as cutting spending. This is not Supply Side economics. Raising taxes (like borrowing or debasement) merely pulls more capital out of the private economy and discourages investment.

Although economists plead with the EU to reform their labor law, taxes, and suffocating regulation, "austerity" has done little but raise taxes and cut some spending. Even the success of liberalization in formerly resolutely socialist Sweden seems to be lost in places like France. According to The Economist, in 2014 Greece remains with an economic freedom index of 55.7, little better than Russia's 51.9 and well below Germany at 74.4, Sweden at 74.1, and even Japan, which has stiffled itself for more than two decades now, at 72.4. Since high taxes and little economic freedom mean no growth, in 2015 frustrated Greek voters have now turned to people who are essentially communists, but who promise more government spending again. This will required more borrowing from the EU, which isn't going to be in the mood, or leaving the Euro and printing drachmas, which will receate for Greece the joys of the Weimar Republic, or the current prosperity of Zimbabwe or Venezuela.

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Say's Law and Supply Side Economics, Note 3

This remarkable and senseless statement may be the best reductio ad absurdum of demand side economics, especially with the notion that it would be the "quickest" economic remedy for unemployment. Removing capital from the private economy and handing (some of it) it out to welfare recipients or the unemployed is only going to "create jobs" by the most tortured and indirect route, i.e. that the spending by these people helps business (which makes the profits that the government thinks it should have instead), which then, with the profit it makes (and manages to keep, amid a blizzard of vilification), expands and hires more people. In the regime of Representative Pelosi, hostile to profit, business, capital, and finance, this would not be rational behavior for a business, even were the effect to work as postulated, which of course it does not.

The following quotes by Barack Obama and Robert Reich are similarly demand-side and anti-capital propositions. If income from their sales was so important for businesses to create jobs, then presumably more jobs would be created if the government taxed those profits of business less. But the logic of this, the logic of their own argument, never occurs to Democrats, who never think that businesses need those profits for anything. So they take away what they themselves assert is the life-blood of job creation. You would think that consumer spending goes directly into hiring, without the mediation of any businessman or his grubby, sticky fingers. Contrary to Reich, sales "induce" business to hire more only if this helps to expand production, and only if this makes for greater profits. But to the likes of Reich, those profits are illegitimate unless they are directed to more hiring, which is not necessarily going to happen.

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Say's Law and Supply Side Economics, Note 4

It may seem strange to lump Herbert Hoover and Franklin Roosevelt together. The conventional wisdom is that Hoover was a supporter of laissez-faire capitalism whose inactivity let corrupt business practices drive the country into the Depression, while Roosevelt reformed the economy and therefore pulled the country out of the Depression. Neither impression is true. Hoover was a Teddy Roosevelt "Progressive" who believed in activist government. Federal spending increased faster during Hoover's four years than during the first seven years of the New Deal. Hoover promoted high wages for workers and high prices for farmers. Twice, in 1920 as chief of the wartime Food Relief Administration and then after he became President in 1929, Hoover wrecked the American agricultural export market by using the power of the federal government to drive up agricultural prices. That was supposed to be good for farmers, but it simply destroyed their foreign markets. Hoover then destroyed almost all export markets by signing the Smoot-Hawley Tariff in 1930, even though he was warned in a petition from 1000 economists not to do it. Within a year American trade had fallen more than 50% and unemployment had jumped from 6% to 17%. Later Roosevelt said that farmers didn't need an export market anyway! (For the details of this, see The Farm Fiasco, by James Bovard, ICS Press, San Francisco, 1991.)

Although it is Roosevelt who is famous for pro-labor legislation, especially the National Labor Relations Act of 1935 and the Fair Labor Practices Act of 1938, pro-union legislation began with the Norris-LaGuardia Act of 1932, under Hoover, which exempted labor unions from antitrust law, freed them from any responsibility for violence that their members might engage in, and granted additional privileges. It is no wonder that Calvin Coolidge said of Hoover:  "That man has offered me unsolicited advice for six years, all of it bad." Occasionally Hoover is credited with having "anticipated" many of Roosevelt's New Deal policies. The irony is that the New Deal policies did not work (if their purpose was to end the Depression, rather than just expand the power of government or open the way for socialism); and if Hoover "anticipated" Roosevelt's policies, this means that the Depression was perpetuated when Roosevelt continued and expanded the very devices by which it was created in the first place. Indeed, there were limits to what Hoover was willing to do:  he did not believe the federal government should make direct payments to private individuals or seize unconstitutional powers to completely control finance, business, and commerce. Roosevelt had no such scruples, though even what he did now looks modest compared to the powers that the Federal Government has since usurped.

The mythology and bad economics that attend our understanding of Roosevelt was reinforced in one of the Century episodes run by ABC News, as part of a series looking back on events of the 20th Century. On Thursday 8 April 1999, ABC ran an episode on Roosevelt. They explained his election victory in 1936 as the result of his alliance with labor unions, which is probably in part true, but then it explained his alliance with the labor unions as the result of a new understanding that "workers are consumers also," so that wage raises would enable them to buy more, stimulate the economy, end the Depression, etc. Since the economy actually became worse after Roosevelt's reelection, ABC said that Roosevelt wasn't even as interested any more in ending the Depression but in creating a "different kind of society" where there was less of a gap between rich and poor. Unfortunately, instead it made for a kind of a society where unionized employees were a lot better off than the continuing unemployed. But all of this treatment by ABC was a tissue of falsehoods. A program of driving up wages was not something that suddenly occurred to FDR in 1936, it had been the constant policy, not just of FDR, but of Herbert Hoover before him, as can be seen merely in the quotes given above. ABC seemed to only interview "experts" who reinforced the mythology, like a labor historian, rather than any economist who could explode their treatment and expose the continuity of policy from Hoover to Roosevelt. The whole episode was, indeed, merely the continuation of New Deal, Democratic Party propaganda. The kind of thing that is all too typical of Network News (as discussed in Bernard Goldberg's recent book Bias -- though still stoutly denied by the figures who, styling themselves "objective," continually repeat the leftist line).

Bill O'Reilly's New Deal

The mythology of the New Deal is alive and well in 2014 even in places where we might not expect to find it. Thus, in introductory sections to Killing Patton, the Strange Death of World War II's Most Audacious General [Henry Holt and Company, 2014], conservative commentator Bill O'Reilly (& Martin Dugard) give us this long characterization of Franklin Roosevelt's programs:

Many believed that FDR's strategy of government-funded jobs and the public works projects of the New Deal were socialistic, even though they have rescued the nation from the Great Depression. Roosevelt's Republican opponent in the presidential delection of 1944, New York governor Thomas Dewey, has relentlessly attacked FDR for promoting a form of "communism."

But Franklin Roosevelt is not a Communist any more than Thomas Dewey plays center field for the Yankees. FDR is a natural leader whose foremost objective is to push the nation in a positive direction, first as governor of New York in 1928 and then during the legendary "First 100 Days" as president in 1933, when he realized that drastic experiments in government were required to halt a four-year economic slide that was being call the Great Depression.

The American Dream has evaporated. One fourth of all American workers were out of a job. Banks were failing. Poverty was epidemic. The American people felt that they were on their own. The government to whom they paid taxes and the men they voted into office were either unwilling or unable to fix the problems. Millions of Americans were desperate, families were falling apart, and prosperity looked as if it might never return.

Working closely with Congress, Roosevelt crafted a series of fifteen bills that fixed the banking system and made possible a number of monumental public works projects designed to put Americans on the job. Thus began the long climb back to prosperity...

FDR's social experiments have worked. The American Dream has been revived, and the nation is reaching new heights of prosperity because of the production necessary during World War II. But those new laws also drastically expanded the size and reach of the federal government. This has made some voters angry...

Tonight [4 November 1944] at Fenway [Park, Boston]... Roosevelt tells the crowd, "We want to live under our Constitution." [pp.68-69, color added]

In red we see the false, outrageous, and preposterous statements in this passage. Perhaps the most outrageous is that, "The American Dream has been revived [as of 1944], and the nation is reaching new heights of prosperity because of the production necessary during World War II." As we see elsewhere on this page, Bill O'Reilly confuses war production with "prosperity" even though such production is not of consumer goods. Basic products of genuine prosperity, like automobiles, their tires, and housing, were not being produced for civilians during the War. Gasoline and other necessities were rationed. Meanwhile, full employment was achieved during the war by (1) drafting millions of men into the military, and (2) providing jobs for the rest of the work force, including women, to produce the war materiel that was of no immediate benefit to them whatsoever. Henry Ford wanted his workers to be able to buy a Ford automobile; but it never occurred to FDR that his workers would be buying tanks or battleships. The (inflated) wages that workers then earned were best used to buy War Bonds. O'Reilly's statement is thus outrageous, not only because it is simply false and demonstrates his failure to understand the nature of a war economy, but because it also demonstrates his failure to understand that the New Deal had already failed on its own terms, which were presumably to restore "prosperity" to the previous peacetime economy.

Thus, the statement of the first paragraph above, that Roosevelt's policies "have rescued the nation from the Great Depression," is also false; and its falsehood obscures the reality that many people were angry and hostile to Roosevelt, not just because the policies were socialistic or involved bigger goverment, but because they actually had not worked. This is also noteworthy with respect to O'Reilly's statement that the 100 Days "began the long climb back to prosperity..."; for this leaves the impression that there was steady progress as a result. Untrue. After a very long and slow recovery, the Depression returned in full force in 1937-1938. Amity Shlaes begins The Forgotten Man: A New History of the Great Depression [2008] with emphasis on this "Second Depression."

To anyone with any wit, this relapse meant that the whole New Deal had collapsed; and conservative Democrats and Republicans took control of Congress in 1938 as a result, ending the "drastic experiments in government" of New Deal legislation. But the damage had been done to America. Perhaps I must reconsider the most outrageous statement in O'Reilly's account, which may instead have been Roosevelt saying in his speech, "We want to live under our Constitution." No, the Deal Deal Court had already effectively destroyed the Constitution, the consequences of which would grow slowly, like many cancers, until the United States is truly stumbling, at a crucial moment, in both wealth and power in 2014 -- all from the same causes:  The growth of socialism and government. The President, indeed, who built the Jefferson Memorial and put Jefferson on the Nickel, Franklin Roosevelt, absolutely destroyed the Jeffersonian paradigm of government, in favor of that of Jefferson's greatest political enemy, Alexander Hamilton. Still today, even after Ronald Reagan, we live under the Hamiltonian paradigm of absolute government, which eats away at the spirit and the substance of America.

Other statements by O'Reilly are equally revealing and characteristic. If Roosevelt was not a communist, what does it mean to say that he wanted to "push the nation in a positive direction" even already as governor of New York in 1928? We are not told, unless we are to understand that Roosevelt already wanted to put into effect the big government policies that he would later have the pretext to apply during the Depression. If that is so, then a "positive direction" for both Roosevelt and O'Reilly apparently means tax-and-spend Big Government "Progressivism." This is not what anyone would expect from Bill O'Reilly as a "conservative," let alone a flagship conservative of the hated Fox News Network.

We also get the statement that the American people saw their previous government as "either unwilling or unable to fix the problems." This may have been true, but then it obscures the circumstance that Herbert Hoover believed just as much as Franklin Roosevelt in the "the public works projects" that O'Reilly cites as an effective (!) part of the New Deal. Ignoring the fact that Hoover initiated such projects (especially with Hoover Dam, which the Democrats then meanly renamed "Boulder Dam" to conceal Hoover's role), allows the false impression to remain that he did nothing, and that Roosevelt's own projects ended the Depression, which they did not. When unemployment was again over 20% in 1938, how was all the public spending successful?

So what we are left with in O'Reilly's account is the mythology that the New Deal was effective, ended the Great Depression, and that by 1944 prospertiy had returned. None of these was true. These failures raise grave doubts about Bill O'Reilly's grasp either of economics or of history. Indeed, when O'Reilly opines that rising (but not falling) oil prices are a conspiracy, or that a substantial raise in the minimum wage will help the poor, we should realize that he is not a real friend, spokesman, or advocate for capitalism or the free market.

The Money Makers,
by Eric Rauchway, Basic Books, 2015

One place we might not expect to find fictions about the New Deal perpetuated would be in The Wall Street Journal. However, it happens. We find an embarrassing example in a review, "Inflationist From the Start," of The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace [Basic Books, 2015], with the book by Eric Rauchway and the review by Charles R. Morris. They both seem to be uncritical New Deal boosters.

Now, unlike most libertarians, I agree that the Gold Standard was a problem. Deflation increases the value of debt, which is economically destructive. Thus, the ability of the Federal Reserve to issue Federal Reserve Notes to prevent deflation and provide banks with liquidity during a credit collapse was a good idea. This is anathema to libertarians and Austrian School economists. Their idea to prevent a credit bubble and credit collapse is to prohibit fractional reserve banking. This is ridiculous, and it contradicts the general libertarian principle that all actions are allowed that are not violent or fraudulent. Their argument that fractional reserve banking is somehow fraudulent is simply false and, what's more, absurd and dishonest.

Now, the purpose of issuing money beyond its hard metal base is to maintain prices. Yet Mr. Morris, and apparently Mr. Rauchway, like the idea of positive inflation. I believe that this goes beyond what John Maynard Keynes wanted himself, but it became the standard interpretation of Keynesian economics by the 1970's, when everyone thought (as they did again in 2008) that inflation would fuel growth. Morris says:

The U.S. brought its [WWI] inflation under quasi-control by 1921 but at a level of domestic prices still considerably higher than implied by the official gold-dollar parity of $20.67. Orthodox financial opinion prescribed yet more deflation, although it was wrecking havoc in the agricultural heartland. Deflation drove down crop prices even as farm mortgages and other debt remained at their old values. Farmers defaulted wholesale, triggering cascading waves of bank failures. When FDR was finally inaugurated on March 4, 1933, most banks were shuttered throughout the country. ["Inflationist From the Start," by Charles R. Morris, The Wall Street Journal, November 21-22, 2015, C10]

Now, with the reference to 1921, Morris continues this passage as though he means the economic experience of the 1920's; but we suddenly realize he means the start of the Depression instead, at the beginning of the 1930's. This ambiguity conceals some innuendo and some (for him) unwelcome truths. He may really mean to imply that the economy of the 1920's was already part of the evil policies (e.g. the Gold Standard) of the beginning of the Depression. This is a typical conceit of Leftist economics, which cannot concede the prosperity of the "Roaring Twenties" (when the economy grew by half-again its size). But the 1920's were not deflationary. In 1921, prices were just at 103.7% of prices in 1929, with only minor fuctuations in between, like a bump up to 102.1% in 1926 [Milton Friedman and Anna. J. Schwartz, Monetary Trends in the United States and the United Kingdom, U. of Chicago Press, 1982, pp.122-137]. This consistency was probably thanks to the supervision of Benjamin Strong at the New York Federal Reserve Bank. The policy of Strong proves that deflation was not "orthodox financial opinion," which means that Morris misunderstands or misrepresents the financial history. And writing about the events of the early '30's as though they were a continuation of the '20's is a deception -- perhaps a self-deception -- but a deception none the less.

Unfortunately, Strong died in 1928; and the subsequent credit and banking collapse, addressed by lesser hands, was allowed to produce a deflation that took prices down to 73.3% of 1929 levels by 1933. This had all the evil effects that Morris relates. However, if the thesis of Rauchway and Morris is that the Roosevelt Administration was "Inflationist From the Start," the problem is that inflation was never generated through the whole life of the New Deal. Prices did not rise above 1929 levels until 1943, when the Federal Reserve was clearly expanding the money supply to generate revenue to pay for the War. By the time wage and price controls were gone in 1946 (except for New York City rent controls), prices stood at 126.4% of 1929 levels, and they were at 136.6% in 1947 and 145.6% in 1948. Curiously, if actual inflation is supposed to promote prosperity, the arrival of a recession in 1949 is a problem for such a thesis. A slow and steady inflation through the 1950's, reaching 186.4% of 1929 prices by the election year of 1960, did not prevent, despite the terrific growth of the '50's, two further recessions, in 1953 and 1958.

The policy of price stablity, understood by Benjamin Strong, and part of the positive duty of the Federal Reserve (now explicitly evaded), is an alternative to inflation or deflation that curiously is not considered by Charles Morris in his article. Instead, we have the falsehoods that (1) "orthodox financial opinion" was for deflation and (2) the Roosevelt Administration and the Federal Reserve were successfully able to generate positive inflation during the Depression. If, as Morris says, "Mr. Rauchway makes a good case that Roosevelt had a firm grasp of the monetary realities and was an inflationist from the start," then the President was remarkably ineffective in carrying out his policy. That he had a "firm grasp of monetary relaties" is questionable; but his political understanding was right on, as Morris admits the politics being "heavily tilted toward the always-inflationist farm belt" -- farmers, of course, like the government itself, always being in favor of the inflation of defts. Since the whole Hoover-Roosevelt economic program, as we have seen, was to drive up wages, with a Demand Side understanding of economics, a good tide of inflation would have helped -- as it did help breaking down high wages during the War and post-War periods of inflation. Not what Roosevelt or Rauchway or Morris really had in mind.

The acid test of the new policy, of course, was whether it would help growth, and it passed with flying colors [!]. Real growth in Roosevelt's first term averaged about 9%, a peacetime record. There was a short, sharp recession in 1937-38 when the money supply was prematurely tightened, but robust growth [!] resumed after policies were adjusted. [color added]

Certainly anyone who lived through the Depression, or anyone studying it in a unbiased fashion, would find these statements by Morris no less than preposterous. If we measure "growth" from the tough of collapse created by Hoover, it might look like a lot. But we have a better idea of the absolute situation when we consider employment, which is what actual citizens were worried about at the time. "Growth" without employment would have been a cruel taunt; and of course the high wage policy of Hoover and Roosevelt did mean that those with jobs did rather well. But when Roosevelt was reelected in 1936, unemployment was still at 16.9%. That is clearly still a Depression level of unemployment, after a rollercoaster ride down, and up, and down from its alarming high of 24.9% in 1933. After falling below 15% early in 1937, unemployment was again up to 19.0% in 1938, not because of a "tightened" money supply, but because of more of the anti-business and anti-growth (i.e. socialistic) policies of the Administration. The "Second Depresson" was not "short" but instead went on for almost two years, before War industry spending and hiring (the "policies" that were "adjusted"), the only kind of "robust growth" before 1946, pulled people out of unemployment. It did not produce the kind of consumer products that people would expect from "robust growth" and real prosperity, and for a lot of men no longer unemployed, the occupation they were in -- the military -- included the real danger of sudden and violent death (the fate of more than 400,000 of them).

Charles R. Morris thus looks like an apologist for the Roosevelt Administration, the New Deal, and Keynesian and Demand Side economics. To make his apologia work, multiple facts and features of economic and monetary history must be ignored or distorted. This sort of thing, disgracefully dishonest in its own terms, represents a danger in our own time (2015), when the Keynesians have prolonged recovery from the Recession of 2008-2009 and have loudly endorsed and effected the kind of anti-business and anti-finance laws such as those that prolonged the original Great Depression -- with the added features of blasts of hatred for business from the likes of Elizabeth Warren (D-MA) and avowed Socialist Bernie Sanders (CP-VT). As Thomas Sowell says, foolish statements about economics are now being made by economists as well as by otherwise ignorant commentators. Of course, the same thing characterized the Depression itself.


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Say's Law and Supply Side Economics, Note 5

It is common and indeed conventional knowledge that only World War II ended the Depression. It is also generally understood why the War did that, with millions of men drafted into the armed forces and the government borrowing and spending mountains of money on war production. What is less often acknowledged is that the New Deal as such thus failed to end the Depression. Nor is it generally understood why the Depression did not return in 1946, after the military was demobilized and war production ended. By all rights, nothing should have been any different from 1939. But the Depression did not return. Despite demobilization and the end of war production, unemployment in 1946 was 3.9% and in 1947 3.9%.

On 5 June 2004, the day Ronald Reagan died, there was a report on CNN about the Normandy landings (whose 60th anniversary would be the following day) and about the impact of World War II on subsequent history. The reporter said that the War ended the Depression with the draft and by "putting money in workers' pockets" -- and that things have continued much the same ever since. The reporter, however, failed to reason through that with the end of the War the draft ended and that during the War it was both the case that wages were frozen and that war production was not of consumer goods to be bought by those workers. Civilian housing, automobiles, and tires were not even produced during the war. People had to just either save their money or buy War Bonds with it. After the War, the money was then worth less because of inflation. So his explanation didn't add up.

Beguiled with the idea that war magically means economic growth, New York Times columnist Paul Krugman recently suggested (8/15/2011) that an alien (i.e. space alien, extraterrestrial) invasion, even a fake one, would help end the poor economic growth seen in 2008-2011. Krugman, who of course believes in Keynesian "stimulus" spending, obviously does not reflect that war production does not contribute to the availability of consumer products, or that an alien invasion likely would mean the actual destruction of capital and consumer goods (what see see in Independence Day [1996], etc.). Krugman's suggestion was widely perceived as the reductio ad absurdum of his economics, as it is -- the "broken window" fallacy shot into orbit. It also pays to keep in mind that liberal economists like Krugman probably don't worry about consumer production because they are disdainful of "consumerism." Thus, they tend to forget that there is such a thing as a consumer economy. We're more virtuous without all that stuff anyway.

So why didn't the Depression return in 1946? Because wages were frozen even while the money supply was inflated with the war spending. This drove down real wages, the opposite of the consistent policy of Hoover and Roosevelt for a decade to drive up wages. In 1946, wages were low enough to clear the employment market. If employers could then hire workers at a market wage, and produce consumer goods, business could get back to normal. It did.

The first post-War recession was in 1949. In the fourth quarter of 1949 unemployment peaked at 7.0%. President Truman was urged to do something, but he actually said, "The kind of government action that would be called for in a serious economic emergency would not be appropriate now" [Richard K. Vedder and Lowell E. Gallaway, Out of Work, Unemployment and Government in Twentieth-Century America, Holmes & Meier, 1993, p.185]. By the second quarter of 1950, unemployment was already back down to 5.6%.

This is an instructive history for the Marxist view that capitalism only saves itself through militarism. Such a thesis is refuted by the economy of 1946 and by the economy of 1950 (let alone by the economy of 1921). Economically, Cold War government did not begin until 25 June 1950, when North Korea invaded South Korea. This effected the return of the draft and renewed military spending. If the economy had really been in trouble, some might have thought that welcome, but the economy was already recovering from the recession of 1949, nothing of the sort explains the prosperity of 1946-1949, and military spending, of course, does not produce the consumer goods characteristic of the economy of the 1950's.

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Say's Law and Supply Side Economics, Note 6

Los Angeles Times, Commentary, "Wanted: Alternative Thinkers for a Change," Robert Theobald, Monday, April 8, 1996.

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Say's Law and Supply Side Economics, Note 7

In The Road From Serfdom:  The Economic and Political Consequences of the End of Communism, Viking Penguin, 1996.

Tragically, the electoral success of the Democrats in 2008, which resulted in their control of both Houses of Congress and the Presidency, brought back Keynesian economics with a vengeance. In response to the recession that resulted from the collapse of the home mortgage market, demand side remedies were all the rage. A "stimulus" package of over 700 billion dollars was passed with emergency speed early in 2009, coupled with warnings that without such spending unemployment might exceed 8%. Unfortunately, unemployment was soon near 10%, and as of October 2010, it is still hovering around 9.5%. Most Americans have realized that massive government spending, resulting in terrifying deficits and debt, was not effective at "stimulating" the economy. Indeed, a great deal of the "stimulus" was simply directed to State governments so that they could avoid balancing their own budgets or laying off public employees (who vote for Democrats).

One of the most extraordinary examples of an economist who has learned nothing and forgotten nothing (like the Bourbons) from the Depression or the 1970's (Nixon's "we are all Keynesians now") is Alan S. Blinder, Professor of Economics and Public Affairs at Princeton University, who wrote an Opinion column for the 19 July 2010 Wall Street Journal. Blinder's idea was to allow all the Bush era tax cuts to expire, which they will on 1 January 2011 (if Congress does nothing about it), and then devote all the money to unemployment benefits. The unemployed will spend the money and, presto! the economy will recover. Blinder even snipes that worries about the deficit are "pretty anti-Keynesian thinking." Well, yes. But then Blinder's Keynesian thinking in this day and age is ridiculous.

Almost two years after the bailout and "stimulus" packages under both Bush and Obama, it should be obvious even to Mr. Blinder that he is barking up the wrong tree. However, for people who never learn, the only lesson from this fiasco is that the government must not have spent enough. Another trillion might just do the trick. Greece has been more sobered by its experience than the Democrats.

We see similar follies in a November 8, 2010 blog by John T. Landry, identified as a contributing editor of Harvard Business Review, where it is posted, "Time for a New Five-Dollar Day."

Landry, in pure demand side thinking, wants employers to raise everyone's pay, which will bring us out of the dismally slow recovery we are in from the 2008-2009 recession. His precedent for this was Henry Ford:

Back in 1914 Henry Ford had the crazy idea of giving his factory workers a huge raise. He doubled the standard wage from $2.50 to a whopping $5. The business press excoriated him for his "five dollar day," but it turned out to be a brilliant move.

Landry thinks this was "brilliant" mainly because Ford would enable his own workers to buy his own cars, which, "after all that efficiency [i.e. assembly line manufacturing] a Model T still cost $500." However, Landry doesn't mention how this would help anybody else buy the Model T cars. If only Ford employees could buy Ford cars, Ford would be out of business. Indeed, Ford was already so successful that he was able to contemplate his pay raise in the first place.

What Landry then overlooks is that Ford kept cutting the price of the cars. The Model T was soon down to $300. Even the $500 car was a world of difference from the $2000 car other makers had been offering. Also, Landry overlooks what happened when Ford gave his demand side advice to Herbert Hoover. That didn't work out too well. But if Landry is in the position of Ford, then Barack Obama is in the position of Hoover. Probably not what Landry would prefer.

But Landry does believe that today, "we're dealing with a new crisis in consumer demand," and so he is going to get the whole business backwards, again, just as Ford, Hoover, and Roosevelt all did.

Landry is afraid of a kind of recovery where we get an economy as in China or Japan, with production going into exports, while local consumers cannot afford what is exported. But Landry needs to pay more attention to American history, not to China and Japan. The American consumer market was created by industrialists, like Ford himself, but also as with John D. Rockefeller, Bill Gates, and others, who knew that they had to drive prices down to market clearing levels. Indeed, American CEO's may have forgotten this themselves. But then the great thing about a free market with free entry is that we don't need to care about them:  there will be new entrepreneurs who will take advantage of the situation, unless, of course, we heed the rent-seekers and hinder free entry.

Landry ends up by saying, "Henry Ford helped create America's astonishing 20th-century prosperity with his five dollar day." That may have helped a bit; but mainly what he did was produce a cheap car that could sell even to people who were not getting five dollars a day. Landry wants to "spark consumer spending," but it will not help if he merely sparks unemployment, as driving up wages did for Hoover and Roosevelt. Capital drives down prices. But Leftist politics will never make its peace with capital. The raison d'etre of Leftist politics is to attack and destroy capital. Someone like John T. Landry helps in that effort with misdirection -- the mirage that draining capital and directing it to consumption is the engine of economic growth. No, it isn't.

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Say's Law and Supply Side Economics, Note 8

One might have expected Jacques Barzun's formidable From Dawn to Decadence, 500 Years of Western Cultural Life, 1500 to the Present [HarperCollinsPublishers, 2000] to devote some mention to Say, especially when his preference for figures in his native France is noted. But what we get instead is tribute to a "forgotten pioneer" of economics, Simonde de Sismondi (1773-1842). And what was Sismondi's singular contribution and insight?

Why did the seemingly beneficial production of goods by machinery bring on "poverty in the midst of plenty"? The answer was:  free competition keeps wages low, free enterprise makes for overproduction, which leads to recurrent "crises" -- shutdowns or failures entailing unemployment and starvation.

His detailed criticism of the new society includes the observation that it splits labor from capital and makes them enemies, with the power all on one side. The idea of their "bargaining" over wages is absurd. Tyrant and victim describes the relation, yet without cruel intent of the one or knowledge by the other of who his oppressor is. Again, with overproduction the capitalist must seek foreign markets and precipitate national wars, while at home a class struggle goes on without end...[pp.456-457]

Barzun apparently considers these proto-Marxist confusions and canards to be a great discovery, anticipating Marx in the year of his birth (1818). Indeed, Sismondi coined the term "proletariat." No wonder Say is overlooked -- he failed to notice that overproduction was endemic in capitalism! Sismondi even anticipates Lenin's Imperialism with the idea that overproduction must be diverted to foreign markets (all those wealthy colonials in Africa, India, etc.), with war following behind (since so much British trade and investment went to the United States, there must have been some terrible wars over it).

It is sad to still find something like this in a distinguished historian in the year 2000. The simple ideas that wages depend on the labor market, where workers "bargain" by changing jobs or, heaven forbid, going into business for themselves (something strongly discouraged, apparently, in modern France), and "overproduction" sells when prices fall to a market clearing level, still hasn't gotten through to people like Barzun, despite the failure of command economies and the stagnation of the Euro-socialist ones (apparently what Barzun prefers). Not a lot of starvation in laissez-faire Hong Kong there, Jacques. Or, for that matter, in Victorian England (just in preindustrial and mono-agricultural Ireland). Note the statement on increasing wages in 19th century Britain by Paul Kennedy in the epigraph above.

1818 may, indeed, have been a bad year for Sismondi to publish, since there was a post-War recession in Britain and the economy had not yet taken off in the way that would distinguish it for the rest of the century. Many people writing during the Great Depression, of course, thought it proved that America was finished and that the Soviet model was the hope of the 20th century. Barzun, in effect, has not noticed the results of post-1818 Britain, post-1945 America, or the real fruits of the Soviet Russian economy. While Kennedy himself, writing in 1987, believed that the Soviet economy was the second largest in the world (and had been for decades), this turned out to be fraudulent. In 2003, the Russian economy, for all the size and population of the country, was only the 18th largest in the world, behind that of little Taiwan and Argentina [cf. The Economist Pocket World in Figures, 2003 Edition, p.24]. Kennedy's own thesis of the relative decline of Great Powers, well illustrated by Russia in the 19th century (falling from the largest economy in the world to fourth), and believed by him to likely be applicable to the United States in the 1980's, only applied to 20th century Russia, again, instead.

But if Jacques Barzun is still parroting "underconsumptionist" economics, it is not surprising that the indoctrinated, politically correct, economic and historical illiterates of American colleges and universities should still be operating as an orphaned Fifth Column for the Soviet Union. A popular book like Barzun's represents a distinct disservice to the future.

An interesting contrast to Barzun's treatment of Sismondi is in Thomas Sowell's recent On Classical Economics [Yale, 2006]. Sowell has an entire chapter on Sismondi, actually titled "Sismondi: A Neglected Pioneer" [pp.104-128]. Sowell's appreciation of Sismondi, of course, is not the gushing enthusiasms of Barzun. Sowell credits him, as a critic of Say's Law, with scoring real points against defenders like Say and Ricardo, introducing concepts (the theory of equilibrium income, the development of growth model equations, etc., see pp.125-126) that were valuable advances but then, because Sismondi was forgotten, had to be rediscovered all over again later. This did not mean that Sismondi was right about Say's Law or right in his proto-Marxist principles. Indeed, among Sismondi's suggestions were "guaranteed wages and employment" [p.121]. If any notion in political economy has been taken seriously and been applied with vigor, it is this, especially in places like France. The result, however, as in the Great Depression, has been high unemployment and low growth. Not what Sismondi, or anyone implementing these policies, would have expected. Yet, as Sowell points out and Barzun doesn't, Sismondi expected that most of the problems with an economy would be due to government intervention:

"The development of nations proceeds naturally in all directions; it is scarcely never prudent to obstruct it, but it is no less dangerous to hasten it..."

Contrary to interpretations in the literature [Barzun's?], it was not inherent defects of the capitalist economy but the deliberate policies of contemporary governments which Sismondi regarded as the primary cause of glutted markets....

...but he was by no means a dirigiste:  "By allowing the greatest freedom to capital, it will go where profits call, and these profits are the indication of national needs" [pp.115-116]

And we get a good Sismondi quote in the June 21-22, 2014, Wall Street Journal:

It ought to be recollected that each merchant knows his own business better than government can do; that the whole nation's productive power is limited; that in a given time, it has but a given number of hands, and a given quantity of capital; that by forcing it to enter upon a kind of work which it did not previously execute, we almost always at the same time force it to abandon a kind of work which it did execute: whilst the most probable result of such a change is the abandonment of a more lucrative manufacture for another which is less so, and which personal interest had designedly overlooked. [A13, from Political Economy, 1815]

Thus, Sismondi was much less a sort of proto-Marxist critic of Say's Law as a kind of Keynesian, and one whose arguments rested at least as much on the weaknesses of Ricardian economics as on any mistakes of his own. He does not sound sanguine about the value of government interventions.

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Say's Law and Supply Side Economics, Note 9

The simplest and most abstract explanation of Say's Law is the principle that the value of production always equals the value of income. The income it produces is ultimately the income that exists to purchase it. What goes around, comes around. Thus, if the production is increased, income is necessarily increased. Thus Say's Law may be expressed as "Supply constitutes demand" as well as "Supply creates demand."

While this principle is appealing in its simplicity, it does not obviously explain how one gets from production to the income that buys it. Nor does it obviously answer the objection that there clearly was something fearfully wrong with the "comes around" part during the Great Depression. Indeed. What the principle cannot explain of itself is the case where the labor market pushes a large body of unemployed out of the income loop. If that happens through an artificial manipulation, to drive up wages, because of a theoretical belief in prosperity through high wages rather than low prices, then the production/income loop cannot operate. And if increased production and productivity require capital spending, but capital spending all but stops (as it did in the Depression) because of uncertainty, political attacks, and hostile government policy, then the engine of increased wealth is stopped dead.

Thus, the best explanation of Say's Law is how the price mechanism works with increased production. You make something; it doesn't sell; so you cut the price. If your product is actually appealing, you will get down to the price where it will sell; and if your operation is efficient and productive enough, you will be able to cover your costs.

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Say's Law and Supply Side Economics, Note 10

There is also an extended discussion of Say's Law in Sowell's On Classical Economics [Yale, 2006]. However, many passages make it clear that the "general glut" critics of Say's Law were aware that falling prices would clear the market. Their point was that the market clearing prices might not cover the production costs, leaving the producer with a loss and possibly with bankruptcy. This is succinctly expressed in "an anonymous monograph of 1821, probably written by Samuel Bailey" quoted by Sowell:

Nobody denied, that a new product will always, or almost always, find a market:  The question is, at what price? whether a profitable market? whether its production and sale will bring in what were before the usual average profits of stock or less? [p.141]

This, however, strikes me as a very different issue from other conclusions drawn by the "general glut" critics, for Sowell also says:

Underconsumptionists such as Sismondi and Malthus saw the problem as inadequate aggregate demand to sustain the existing level of aggregate output and employment. [p.166]

"Inadequate demand" (still the issue with Keynes) and profitability are different problems. If we attempt to inflate demand by driving up wages, as Sismondi recommended and Hoover and Roosevelt practiced, we do not increase profitability -- au contraire -- we simply drive down employment. Meanwhile, businesses, with rising wages, can only maintain any profit margin they have by laying off employees (forbidden by Sismondi and modern France) or increasing productivity (with capital investment).

But that is the trick behind the whole thing. Production can never be increased without increases in productivity, in the first place, so that some labor can be freed up from the necessity of producing what is already being produced. When market clearing prices fall below the level of recovering costs, the difference in the long run can only be made up for with increased productivity. If politics then drives up wages also, businesses must (1) increase productivity even more, and (2) avoid new hires. French unemployment, after all, is not the result of people being fired (which is illegal) but of new workers not being hired in the first place.

As it happens, the "general glut" theorists held that falling prices would fail to cover costs because they postulated constant technology, i.e. productivity would not increase. In this they were logically correct, given that postulate, but historically wrong -- with special irony since one good difference between people like Sismondi and the Ricardians was the development of a dynamic rather than a static analysis of economics. In a dynamic economy, technology changes and productivity grows. And in retrospect, the point seems moot. That is because "underconsumptionists" at the level of policy rarely worry about the profitability of businesses. Those under Marxist influence, all too many, don't care whether businesses are profitable or not. All that the modern underconsumptionists worry about is driving up demand. They think that will take care of everything else, perhaps even the profitability of business. And that is the bad news. Driving up demand pulls up unemployment but does nothing for productivity or production. That requires capital, and capital may require tax cuts. Not surprisingly, the underconsumptionists tend to hate tax cuts, don't like capital, and believe that capital and profits should be taxed away in order to stimulate demand by way of government largesse (which, coincidentally, may also get the responsible politicians reelected). This then produces the "perfect storm" of unemployment and stagnation, as in the Depression or modern France.

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Say's Law and Supply Side Economics, Note 11

See discussion in Thomas Sowell, "The Reagan Administration," The Vision of the Anointed, BasicBooks, 1995, pp. 82-85. From the 80's to the present, Congress developed the habit of spending $1.50 for every $1.00 of revenue, regardless of what the revenue was, rising or not. Hence the painful folly that we find visible in Warren Buffett but also, distressingly, in Ben Stein of conceding to the Democrats any kind of tax increase, in order to "reduce the deficit." It will not reduce the deficit, but only motivate further increases in spending.

Martin Gardner (just passed away in May 2010), whose mistaken criticisms of Karl Popper I have noted elsewhere, disgraced himself years ago with an attack on the Laffer Curve in Scientific American ["The Laffer Curve," reprinted in Knotted Doughnuts and Other Mathematical Entertainments, 1986]. His "Neo-Laffer Curve" was a twisted line based on the argument that data points could conceivably be connected by a line of any length and complexity. This was supposedly to demonstrate that Laffer (or Reagan) was wrong and that tax revenues cannot be increased by lowering tax rates.

When I saw this article, I was at the time a consistent Democratic voter and a long time subscriber to Scientific American. Yet I realized immediately that there was something profoundly biased and dishonest about it. I remembered trying to draw isobars in my introduction to meteorology class at the University of New Mexico in 1968. It was not easy, given the scattering of data points across a map, and I had trouble doing it very well -- which was a bit of a shock after seeing so many weather maps with what looked like self-evident lines on them. The rules for drawing the isobars then, at the very least, needed to reflect Ockham's Razor, that the simplest construction was probably the right one.

Such a principle, of which Gardner was otherwise well aware, must be ignored or parodied to get the tangle of the "Neo-Laffer Curve." So why would Gardner commit so ridiculous a solecism? As with many among Modern Democrats, it is likely to have been the case that he just had a visceral and hysterical antipathy towards tax cuts (limited government, freedom, etc.). In the service of that animus, he was willing to employ any sophistry, even something contrary to his whole philosophy of science. This turns out to be all too characteristic of leftist intellect.

I do not remember having seen so gross an example of political bias previously in Scientific American. Eventually, I wrote letters to them citing other examples. The last straw was their treatment of Bjørn Lomborg [The Skeptical Environmentalist: Measuring the Real State of the World, Cambridge University Press, 2001], which was so patently dishonest, vicious, and disgraceful that I felt it had permanently discredited Scientific American as a reliable source of knowledge. A great loss -- but also symptomatic of the politicization of everything, including science, by the aging but perpetually clueless political radicals of my generation. The attack on Lomborg, of course, was entirely due to his heresy -- and there is no other word for it -- of raising questions about environmentist pieties, such as the use of resources or the policy implications of Global Warming, whose science he did not actually question. It was one of the first examples of the fury and smears that would henceforth be directed at such skeptical scientists.

The Political Corruption of Scientific American magazine

Bjørn Lomborg

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Say's Law and Supply Side Economics, Note 12

I have considered elsewhere that the fundamental content of capital is imagination. A capital "resource" is worth nothing, and may even be a nuisance (that black goo oozing out of the ground), unless one can imagine what is to be done with it. Human capital consists of what may be the superficially invisible knowledge, skills, and habits of people; yet it explains all the historic economic differences between Chinese and Malays, Indians and Ugandans, Jews and Russians, Ibo and Hausa, Koreans and Harlemites. These differences are hidden from casual inspection yet dramatic and astonishing in their effects -- to the point where Malays, Ugandans, Russians, Hausa, and Harlemites could not believe that such effects could be accomplished without dishonesty and "exploitation," providing a convenient motive for vandalism, violence, expropriation, or expulsion -- all perpetrated against hated minorities that, in standard left wing discourse, could not possibly be economically successful, let alone dominant, against a politically powerful majority.

Even the hardest of hard capital goods, the machinery of transportation or a modern factory, are worthless unless one can imagine what they are for and know what to do with them. But if what is to be done with them becomes unwanted or obsolete, all the capital goods immediately become junk, and the capital which is sunk (i.e. invested), becomes sunk (i.e. deep sixed).

Indeed, capital is the variable that distinguishes between labor intensive production -- peasants stooped in the rice paddy -- and capital intensive production -- which can be the supervisor watching the computer screens that monitor the machines that fold the fortune cookies around the fortunes or simply the small businessman who knows how his business must be run, how much time he must put into it, and what he might profitably sell, to avoid bankruptcy, break even, or even grow.

Nevertheless, some defenders of capitalism don't like the word "capitalism." I find Deirdre McCloskey saying:

Yet the word "capitalism" -- a coin which like "ideology" was struck around 1800 and whose value in our scientific rhetoric is due mainly to Marx's appropriation of it -- points in the wrong direction, to money and saving and accumulation. It brings to mind Scrooge McDuck in the Donald Duck comic books, with his piles of money. Or in a slightly more sophisticated version it brings to mind Charles Montgomery Burns in The Simpsons, with his piles of factories. What's wrong with such images? This:  the world did not change by piling up money or capital. It changed by getting smarter about steam engines and wiser about accepting the outcome of innovation....

Let's retire the fraught and misleading C-word. [Bourgeois Dignity, Why Economics Can't Explain the Modern World, University of Chicago Press, 2010, p.75-76]

But what is misleading here is not so much the imagery that McCloskey cites, which, after all, is not labeled "this is Capital" in the cartoons, but McClosky's own apparent acceptance that these "piles" of money or factories in fact accurately represent the meaning of "capital." That the economic value of the "piles" is a figment and instrument of the imagination is the point that is overlooked or forgotten by McCloskey. Instead, her preference, calling the system something like "innovation," obscures the nature of capital as a store of value, where the value, of course, exists in the estimation of those who know what to do with it. Getting "smarter" and "wiser" is the essence of capital and of capitalism.

Indeed, what is the most misleading about Scrooge McDuck or Charles Montgomery Burns is that we get no sense of what would enable them, as persons, to run businesses or make money. We don't see Mr. Burns designing factories or taking any interest in how they work. He is just a Lord who orders people around because he has money. Did he start at a 50¢ a day job, like John D. Rockefeller, and work his way up? We don't know. Does he even care how his business efficiently creates its product? We don't know.

Does McCloskey's discussion clarify any of this? No. But should we be using a term appropriated by Karl Marx with hostile intent? Yes, precisely because of what Marx meant by it and what it reveals about him. Marxism is the denial of Capitalism because it contains the theoretical denial of the existence of capital. All value in Marx is a function of ("socially necessary") labor. Since this eliminates the capital variable in production and in human capacity, it means that the "capitalist" is unnecessary and that the workers, with the identical skills of Chinese or Malays, Jews or Poles, can be expected to produce all the same kinds of goods. But since the elimination of capital means the elimination of imagination and knowledge, let alone all the useful virtues of prudence, we should not be surprised that "the workers" on their own don't know what to do, or that Lenin's experiments in pure Communism collapsed to his horror. He soberly concluded that factories needed managers after all -- without realizing that managers with no imagination, i.e. bureaucrats, cannot reproduce the value that capitalists do. They didn't.

McCloskey's discussion is also marred by the failure to distinguish between the interests of producers and consumers, leaving the implication hanging in the air that producers have a right to their living, a moral claim on it, that is only sustained by the consumers who do, or subsequently may not, buy their products. But the proposition that "because you have bought my product and provided me an income, you therefore don't have the right to harm my interests by buying someone else's product instead" is morally vacuous. What harms some producers is that other producers come to better serve the consumer (in the consumer's own judgment), while no producer, who may have benefited from offering the public something it desired, has the right to make others into captives of his product. I have discussed this issue separately as "Smith's Law."

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Say's Law and Supply Side Economics, Note 13

In December 1930, when unemployment had jumped up to 14.4% (from 6.1% as recently as October), 352 banks failed. The Federal Reserve, which had been created to back up the banks in a credit collapse, providing cash to prevent the banks from default if there was a run, decided not to do the job it was created to do. The first banks to fold were small ones in the Midwest. The larger Eastern banks that dominated Federal Reserve decision making may not have considered them important enough to care about or strong enough to merit survival anyway. Banking laws often prevented branch banking (this survived in Texas, for instance, until the 1980's), and this helped create many small, vulnerable banks. The general collapse, however, created a momentum that spread. The Bank of United States was based in New York and was allowed to fail, even though it took down many New York small businesses with it. It had half a million depositors and was the largest bank in American history to break. That many depositors were Jewish may have worked against the Bank, when establishment Anglo bankers were less embarrassed by anti-Semitism than they might have been later. If finance was under control of the Jews, as anti-Semites like Henry Ford believed, the failure of this bank would be hard to explain. Of the 25,000 banks in the United States in 1929, only 12,000 were open in early 1933. This was devastating for the economy, let alone for the individual fortunes of families and businesses. As the banks collapsed, this cut the money supply by almost a third, since banking deposits multiply the money supply -- "demand" deposits, upon which checks can be written, are used as money by the depositor, while the banks use the original money for loans. If the loans default, and the deposit is lost in the bank's collapse, the money supply abruptly contracts. This created an almost unprecedented deflation, in which the value of taxes and all debts suddenly was much greater, imposed upon individuals and businesses whose income was itself collapsing. Since government revenues were falling, Congress and President Hoover thought that raising taxes was a good idea -- still the first instinct of politicians during a recession. Meanwhile, Federal Reserve monetary policy was based on the impression that inflation, of all things, was a problem -- an impression created by the high values of the Stock Market before the Crash, and by a flow of gold into the United States from Europe. This misdiagnosis was never corrected in any way that made much difference, and the price levels of 1929 did not return until after 1942.

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Say's Law and Supply Side Economics, Note 14

Of course, the Keynesians don't think that they are the zombies. Princeton University Press has just published a book, Zombie Economics, How Dead Ideas Still Walk among Us, by John Quiggin, a professor of economics at the University of Queensland, Australia [2010]. In case we are in any doubt about which kind of ideas are "dead," the description of the book clears that up:

"Tempted to tangle with your libertarian uncle or your Wall Street Journal bromide-spouting coworkers? If so, this book will arm you to rebut the clever phrasemaking and slippery reasoning that has allowed dead constructs like 'trickle down economics' to soldier onward." -- Yves Smith, author of ECONned; How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism [Princeton Philosophy, 2011, p.31]

Yes, we must be careful about that "libertarian uncle" or those "bromides" from the Wall Street Journal. Perhaps the book should be called, or subtitled, "Rules for Keynesians," since we have no difficulty gathering to whom it is addressed.

I am intrigued, however, how professor Smith seems to regard "trickle down economics" as a term used by the defenders of low taxes or Say's Law. He is probably so lost in the self-referential world of the Left that he mistakes a hostile caricature as the term used by those who have been thus caricatured -- although, unfortunately, some Conservatives, like Rush Limbaugh, have themselves failed to recognize "trickle down economics" as a smear and a caricature and have actually continued to use the expression as though it is appropriate and harmless. This introduces grave confusions into the debate and, of course, provides grist for the distortions promoted by people like Quiggin and Smith. Apart from this, Smith would be more honest to say "dead constructs like 'low taxes'," or "...'fiscal responsibility'." The term "trickle down" itself apparently originated with Samuel Rosenman, a speech-writer for Franklin D. Roosevelt, who launched the canard:

...the philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all. [quoted by Thomas Sowell, "Trickle Down" Theory and "Tax Cuts for the Rich", Hoover Institution Press, 2012, p.2]

It is remarkable how consistently the Left has perpetuated Rosenman's mischaracterization of Andrew Mellon's theory of tax cuts, or its actual results, not to mention his clueless ignorance of the function of capital in investment and hiring. Unfortunately, it has been the "dead constructs" of Rosenman, Keynes, Hoover, and Roosevelt that continued dictating policy after the mortgage collapse of 2008, to the great loss of the American people, who waited in vain for something to "trickle down" from the "stimulus" bill or the other boondoggles of the 111th Congress. But it is characteristic of the Left to practice the sins of which they accuse their enemies. Little "tricked down" from the "stimulus" bill because it was diverted to the benefit of the political class and bureaucrats, especially the public pensions that are now coming due. Even Barack Obama later admitted that the "shovel-ready jobs" (everyone eager to pick up those shovels?) that the bill supposedly was for mostly didn't exist. He got reelected anyway.

George Will quotes a couple of New York Times Keynesians on inflation ["Big government: All in the (federal) family," 15 September 2011]. Our old friend Paul Krugman has said that the Federal Reserve should have "the deliberate goal of generating higher inflation to help alleviate debt problems" -- in other words, monetize the debt. Floyd Norris says, "sometimes we need inflation, and now is such a time." This does not explain whether Norris thinks that inflation is necessary for economic growth (the Phillip's Curve) or, like Krugman, to monetize the debt. Either way, it is idiocy. The sort of thing the socialists are now trying in Venezuela, as (in 2016) the economy collapses.

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Say's Law and Supply Side Economics, Note 15

A topic I have not touched on in this page is the issue of savings. In a demand side or Keynesian economics, spending is what it is all about, and consumer spending is king. If consumers are not spending, then their money is not going to producers in the prefered Keynesian way. If consumers put money into savings instead, and don't spend, then producers are not getting the revenue they need to pay for and expand production. Savings are more or less wasted, and the consumer who saves is damaging the economy. When the consumer doesn't have the money to spend, because of unemployment or insufficient wages, then the government must make up the difference, just as Hoover and Roosevelt, or Nixon and Obama, reasoned.

In terms of Say's Law, however, the picture is very different. Capital is what expands production and productivity, and capital formation is what creates businesses, jobs, and growth. Savings are part of capital formation. Saving is therefore not wasted in the least, but it contributes to greater consumption in the future, both because of its own growth, as return on investment, and because of the growth of productivity and the falling prices that it promotes in the economy. The Keynesian would rather borrow than save, which costs rather than benefits the consumer, and misdirects capital from investment to consumption.

Historically, the most prosperous people have been some of the most frugal people. Japan grew into the second largest economy in the world because of the savings, and indeed lack of consumption, on the part of the Japanese people. The proper complaint about Japan is that too much of Japanese production went into exports, which left the Japanese people poorer in consumables than we might have expected. On the other hand, Japan may have needed to export a larger share of their production than, say the United States, because Japan needed to import most of the resources for its production. A similar issue would have arisen, in more dramatic fashion, for Hong Kong and Singapore, which as city-states have no resources whatsoever, apart from their people. Capital will be king, by default, in such places; and, indeed, Singapore has required people to save by law -- a much sounder and more sensible approach than, for instance, Social Security in the United States, where money is sent to the government, spent, and a promise is made to return some part of tax revenues to the contributor in the future. The return on investment for this, so generous for many decades, will soon become negative.

Even with Japan, Hong Kong, and Singapore, however, we notice much greater prosperity for the citizens than in countries without savings, production, or exports -- i.e. where there has been spending (especially from "foreign aid") but no capital formation. The average Japanese now is certainly far wealthier than the average American in the 1950's; yet the 50's are remembered by all as prosperous -- a period when consumer spending and savings may have struck the best balance than they ever have since. Even in its persistent economic doldrums, with "zombie" corporations clogging the capital market, Japan is a much more attractive place to live than, say, Cairo. Or, perhaps, Detroit.

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