‘Lord Keynes’s main contribution did not lie in the
development of new ideas but “in escaping from the old ones,” as he himself
declared at the end of the Preface to his “General Theory.” The Keynesians tell
us that his immortal achievement consists in the entire refutation of what has
come to be known as Say’s Law of Markets. The rejection of this law, they
declare, is the gist of all Keynes’s teachings; all other propositions of his
doctrine follow with logical necessity from this fundamental insight and must
collapse if the futility of his attack on Say’s Law can be demonstrated.
Now it is important to realize that what is called Say’s Law
was in the first instance designed as a refutation of doctrines popularly held
in the ages preceding the development of economics as a branch of human
knowledge. It was not an integral part of the new science of economics as
taught by the Classical economists. It was rather a preliminary – the exposure
and removal of garbled and untenable ideas which dimmed people’s minds and were
a serious obstacle to a reasonable analysis of conditions.
Whenever business turned bad, the average merchant had two
explanations at hand: the evil was caused by a scarcity of money and by general
overproduction. Adam Smith, in a famous passage in “The Wealth of Nations,”
exploded the first of these myths. Say devoted himself predominantly to a
thorough refutation of the second.
As long as a definite thing is still an economic good and
not a “free good” its supply is not, of course, absolutely abundant. There are
still unsatisfied needs which a larger supply of the good concerned could
satisfy. There are still people who would be glad to get more of this good than
they are really getting. With regard to economic goods there can never be absolute overproduction. (And economics
deals only with economic goods, not with free goods such as air which are no
object of purposive human action, are therefore not produced, and with regard
to which the employment of terms like underproduction and overproduction is
simply nonsensical.)
With regard to economic goods there can be only relative overproduction. While the
consumers are asking for definite quantities of shirts and of shoes, business
has produced, say, a larger quantity of shoes and a smaller quantity of shirts.
This is not general overproduction of all commodities. To the overproduction of
shoes corresponds an underproduction of shirts. Consequently the result can not
be a general depression of all branches of business. The outcome is a change in
the exchange ratio between shirts and shoes. If, for instance, previously one
pair of shoes could buy four shirts, it now buys only three shirts. While
business is bad for shoemakers, it is good for the shirtmakers. The attempts to
explain the general depression of trade by referring to an allegedly general
overproduction is therefore fallacious.
Commodities, says Say, are ultimately paid for not by money,
but by other commodities. Money is merely the commonly used medium of exchange;
it plays only an intermediary role. What the seller wants ultimately to receive
in exchange for the commodities sold is other commodities. Every commodity
produced is therefore a price, as it were, for other commodities produced. The
situation of the producer of any commodity is improved by any increase in the
production of other commodities. What may hurt the interests of the producer of
a definite commodity is his failure to anticipate correctly the state of the
market. He has overrated the public’s demand for his commodity and underrated
its demand for other commodities. Consumers have no use for such a bungling
entrepreneur; they buy his products only at prices which make him incur losses,
and they force him, if he does not in time correct his mistakes, to go out of
business. On the other hand, those entrepreneurs who have better succeeded in
anticipating the public demand earn profits and are in a position to expand
their business activities. This, says Say, is the truth behind the confused
assertions of businessmen that the main difficulty is not in producing but in
selling. It would be more appropriate to declare that the first and main
problem of business is to produce in the best and cheapest way those
commodities which will satisfy the most urgent of the not yet satisfied needs
of the public.
Thus Smith and Say demolished the oldest and most naïve
explanation of the trade cycle as provided by the popular effusions of
inefficient traders. True, their achievement was merely negative. They exploded
the belief that the recurrence of periods of bad business was caused by a
scarcity of money and by a general overproduction. But they did not give us an
elaborated theory of the trade cycle. The first explanation of this phenomenon
was provided much later by the British Currency School.
The important contributions of Smith and Say were not
entirely new and original. The history of economic thought can trace back some
essential points of their reasoning to older authors. This in no way detracts
from the merits of Smith and Say. They were the first to deal with the issue in
a systematic way and to apply their conclusions to the problem of economic
depressions. They were therefore also the first against whom the supporters of
the spurious popular doctrine directed their violent attacks. Sismondi and
Malthus chose Say as the target of passionate volleys when they tried – in vain
– to salvage the discredited popular prejudices.
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
acknowledgement of the truth contained in Say’s Law was the distinctive mark of
an economist. Those authors and politicians who made the alleged scarcity of
money responsible for all ills and advocated inflation as the panacea were no
longer considered economists but “monetary cranks.”
The struggle between the champions of sound money and the
inflationists went on for many decades. But it was no longer considered a controversy
between various schools of economists. It was viewed as a conflict between
economists and anti-economists, between reasonable men and ignorant zealots.
When all civilized countries had adopted the gold standard or the gold-exchange
standard, the cause of inflation seemed to be lost forever.
Economics did not content itself with what Smith and Say had
taught about the problems involved. If developed an integrated system of
theorems which cogently demonstrated the absurdity of the inflationist sophisms.
It depicted in detail the inevitable consequences of an increase in the
quantity of money in circulation and of credit expansion. It elaborated the
monetary or circulation credit theory of the business cycle which clearly
showed how the recurrence of depressions of trade is caused by the repeated
attempts to “stimulate” business through credit expansion. Thus it conclusively
proved that the slump, whose appearance
the inflationists attributed to an insufficiency of the supply of money, is on
the contrary the necessary outcome of attempts to remove such an alleged
scarcity of money through credit expansion.
The economists did not contest the fact that a credit
expansion in its initial stages makes business boom. But they pointed out how
such a contrived boom must inevitably collapse after a while and produce a
general depression. This demonstration could appeal to statesmen intent on
promoting the enduring well-being of their nation. It could not influence
demagogues who care for nothing but success in the impending election campaign
and are not in the least troubled about what will happen the day after
tomorrow. But it is precisely such people who have become supreme in the
political life of this age of wars and revolutions. In defiance of all the
teachings of the economists, inflation and credit expansion have been elevated
to the dignity of the first principle of economic policy. Nearly all
governments are now committed to reckless spending, and finance their deficits
by issuing additional quantities of irredeemable paper money and by boundless
credit expansion.
The great economists were harbingers of new ideas. The
economic policies they recommended were at variance with the policies practiced
by contemporary governments and political parties. As a rule many years, even
decades, passed before public opinion accepted the new ideas as propagated by
the economists, and before the required corresponding changes in policies were
effected.
It was different with the “new economics” of Lord Keynes.
The policies he advocated were precisely those which almost all governments,
including the British, had already adopted many years before his “General
Theory” was published. Keynes was not an innovator and champion of new methods
of managing economic affairs. His contribution consisted rather in providing an
apparent justification for the policies which were popular with those in power
in spite of the fact that all economists viewed them as disastrous. His
achievement was a rationalization of the policies already practiced. He was not
a “revolutionary” as some of his adepts called him. The “Keynesian revolution”
took place long before Keynes approved of it and fabricated a pseudo-scientific
justification for it. What he really did was to write an apology for the
prevailing policies of governments.
This explains the quick success of his book. It was greeted
enthusiastically by the governments and the ruling political parties.
Especially enraptured were the new type of intellectuals, the “government
economists.” They had had a bad conscience. They were aware of the fact that
they were carrying out policies which all economists condemned as contrary to
purpose and disastrous. Now they felt relieved. The “new economics”
re-established their moral equilibrium. Today they are no longer ashamed of
being the handymen of bad policies. They glorify themselves. They are the
prophets of the new creed.
The exuberant epithets which these admirers have bestowed
upon his work cannot obscure the fact that Keynes did not refute Say’s Law. He
rejected it emotionally, but he did not advance a single tenable argument to
invalidate its rationale.
Neither did Keynes try to refute by discursive reasoning the
teachings of modern economics. He chose to ignore them, that was all. He never
found any word of serious criticism against the theorem that increasing the
quantity of money cannot effect anything else than, on the one hand, to favour
some groups at the expense of other groups, and, on the other hand, to foster
capital malinvestment and capital decumulation. He was at a complete loss when
it came to advancing any sound argument to demolish the monetary theory of the
trade cycle. All he did was to revive the self-contradictory dogmas of the
various sects of inflationism. He did not add anything to the empty
presumptions of his predecessors, from the old Birmingham School of Little
Shilling Men down to Silvio Gesell. He merely translated their sophisms – a
hundred times refuted – into the questionable language of mathematical
economics. He passed over in silence all the objections which such men as
Jevons, Walrus and Wicksell – to name but a few – opposed to the effusions of
the inflationists.
It is the same with his disciples. They think that calling
“those who fail to be moved to admiration of Keynes’s genius” such names as “dullard”
or “narrow-minded fanatic” is a substitute for sound economic reasoning. They
believe that they have proved their case by dismissing their adversaries as
“orthodox” or “neo-classical.” They reveal the utmost ignorance in thinking
that their doctrine is correct because it is new.
In fact, inflationism is the oldest of all fallacies. It was
very popular long before the days of Smith, Say and Ricardo, against whose
teachings the Keynesians cannot advance any other objection than that they are
old.
The unprecedented success of Keynesianism is due to the fact
that it provides an apparent justification for the “deficit spending” policies
of contemporary governments. It is the
pseudo-philosophy of those who can think of nothing else than to dissipate the capital
accumulated by previous generations.
Yet no effusions of authors however brilliant and
sophisticated can alter the perennial economics laws. They are and work and
take care of themselves. Notwithstanding all the passionate fulminations of the
spokesmen of governments, the inevitable consequences of inflationism and
expansionism as depicted by the “orthodox” economists are coming to pass. And
then, very late indeed, even simple people will discover that Keynes did not
teach us how to perform the “miracle … of turning a stone into bread,” but the
not at all miraculous procedure of eating the seed corn.’
-
Ludwig Von Mises, professor of economics at New
York University, writing in 1950
The quote ‘miracle … of turning a stone into bread’ is taken from the Paper of the British Experts April 1943
concerning credit expansion. The author was none other than Lord Keynes
himself.
