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Both Karl Marx and John Maynard Keynes rejected “Say’s Law of Markets”: “Production equals income, therefore supply generates its own demand, and demand, its own supply.” Why should we care?
Rejecting Marx and Keynes, we discover “Production equals income,” etc., really isn’t Say’s Law. It’s the conclusion of Say’s Law, which is more involved.
It all starts with Adam Smith’s first principle of economics from The Wealth of Nations: “Consumption is the sole end and purpose of all production.”
You can’t consume what doesn’t exist, however. Production must precede consumption.
Everything else being equal, there are only two ways to consume. You either produce for your own consumption, or for trade to someone else for what he has produced.
How do you produce? Smith and Say said by means of your labor, land, and capital. We put the factors of production into two groups. These are the human (labor), and the non-human (capital). This makes no difference for this discussion.
The problem is that Marx and Keynes said that only labor is productive. Limiting production to labor means that production and consumption are automatically out of balance because the contribution of capital to production is ignored.
“The problem is that Marx and Keynes said
that only labor is productive.”
As technology advances, however, capital has become increasingly productive and displaced labor. Say’s Law assumes if you can’t produce with labor, you will produce with capital . . . which is not the case when you lose your job.
Louis Kelso had the answer. To restore Say’s Law, every consumer must also produce, and that means every child, woman, and man must own capital as well as labor.
And who is going to pay for it? Kelso noted that capital is inherently “financeable.” It can pay for itself out of its own future earnings. You don’t need to be rich to become a capital owner, or take anything from anyone else.
Production can equal income, and supply generate its own demand, and demand, its own supply .. if everyone has access to the means of acquiring self-liquidating capital: money and credit.
Michael D. Greaney is Director of Research at the Centre for Economic and Social Justice