|
I had an interesting
question about Say's Law, so I thought I'd bring that up. I talk about Say's
Law fairly extensively in my book, in Chapter 6. Today, however, we will try
to condense the idea behind Say's Law into the usual 1000 words or so. Often
things are easier to understand in 1000 words than in 10,000.
I've never really seen
Say's Law put effectively into a few words, so I will "summarize"
it thus: Say's Law is the idea that economic rise and fall is the result of
changes in production, not "demand." This gets back to an
idea which is very basic, but which most contemporary economists have no clue about. Economics
is the study of how people make a living. An economy is
fundamentally a system of production. Probably any mainstream economist will
recognize that increasing wealth, by which we mean an increasing ability to
consume (higher wages), is the result of increasing productivity. Someone has
to make the stuff, right? However, our economic statistics today are largely
measures of shopping. GDP, for example, is really a measure of shopping. It
measures how much shopping the consumers did, how much shopping the
corporations did, and how much shopping the government did. Thus, there is a
strong tendency, among economists, that when there is a dip or decline in
GDP, then the problem must be that someone wasn't doing enough shopping.
This "lack of
demand" is a real phenomenon, but Say's Law indicates that the most
common cause of a "lack of demand" is some sort of impairment in
the productive system. When the productive system is impaired, then the
effects are experienced as a "lack of shopping." (Also, when the
productive system is working well, it is experienced as "plenty of
shopping.") When I say "productive system," most people think
of a factory of some sort, and an "impairment in the productive
system" is like a broken machine or something like that. This is almost
never the case in a recession, except perhaps in wartime. Typically there is
a factory that is capable of making 1000 widgets a day, but instead of
selling 1000 widgets they are only able to sell 400 or so (at a profit at
least).
We have to expand our
idea of "impairment of the productive system" well beyond the
mechanical metaphors. (Economics is full of mechanical metaphors today,
although economies themselves are increasingly service-oriented.) We can
recognize today that our vastly increased productivity is the result of
organization, specialization, and trade. Only a hundred years ago, many
Americans were farmers. Their economy was mostly within the household itself.
They grew their own food to eat, and often built their own houses. They
maintained their own transportation (horses). Once a week or so, they might
go to the town and sell a little bit of their produce, and buy some hand
tools or something of the sort, which they could not make themselves. Today
this kind of self-sufficiency is very uncommon. Typically, we do very little
for ourselves, but devote virtually all our labor and effort to some
specialized job in trade for money. With this money we buy virtually everything
we need and want for living. Thus, while the old-time farmer might have been
80% self-contained, we are probably about 20% self-contained today. Instead,
we participate in huge networks of cooperation, doing work for others so that
others may do work for us.
So, I would say that
today's "productive system" is one in which, instead of
self-sufficiency, there is vast cooperation. Instead of building your own
house, you hire a homebuilder, who has contractors and subcontractors, who
has bank debt, bondholders and equity investors, who hires advertisers and
salespeople, who sources materials from all over the globe, and so forth.
This system of
cooperation is most easily impaired by high taxes and instability of money.
We can take some extreme examples to illustrate what I mean. The homebuilder
might be perfectly capable of building your house, in a physical sense.
However, if the corporate tax is 100%, then no house will be built, because
there is no profit in it. Corporations might then operate illegally to avoid
the taxman. (Actually, corporations might then be capitalized via debt, as
debt is tax-free today.) If the income tax was 100%, but the corporate tax
was 0%, then the homebuilder would be anxious to build houses, but nobody
would work for the homebuilder (legally), because they wouldn't get paid.
Also, the homebuilder would have no customers, because nobody would have any
income to pay for the house. In an environment of high inflation, but
reasonably low taxes, then you could pay for the house, but nobody would lend
you the money to buy one, because they wouldn't know if the money they got
paid back in would be worth anything. Mortgage finance is a fairly new thing
in Latin America and Eastern Europe, which have had many episodes of currency
collapse and inflation. It has become more common only in the last five years
or so. People there have traditionally built their houses out of current
savings, adding a door here and a window there from month to month. (There is
something to be said for this.) In a deflation, the "lack of
demand" is caused by monetary distortion, and persists until prices have
adjusted accordingly.
That's Say's Law in a
nutshell: an economy is a system of productive cooperation; impairment of
this system of productive cooperation results in economic decline; the most
common cause of serious impairment of this productive system of cooperation
is high taxes and monetary instability. From that we lead directly to the
Magic Formula:
Low Taxes
Stable Money
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has
appeared on financial television in the United
States, Japan,
and the Middle East. About the Book: Gold:
The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is
available at bookstores nationwide, from all major online booksellers, and
direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
|
|