Jean Baptiste Say

Economic Doctrines

Agenda 1. Introduction 2.1. J.B.Say in the french Classical Liberalism school of thought 2.2. Mainstream of the Classical Liberalism school of economics 2.3. Specifics of J.B.Say 2.4. Differences regarding the opposition of Classical Liberalism 2. Description of J.B.Say 3. New approach brought by J.B.Say 4. Opinion 5. Summary

1. Introduction 1.1. J.B.Say in the french Classical Liberalism school of thought
Jean Baptiste Say was a French economist and businessman. He had classical liberal views and argued in favor of competition, free trade and lifting restraints on business. He is best known due to Say's Law , which is named after him and at times credited to him, but while he discussed and popularized it, he did not originate it. 1.2. Mainstream of the Classical Liberalism school of economics
Classical liberalism is a political philosophy and ideology belonging to liberalism in which primary emphasis is placed on securing the freedom of the individual by limiting the power of the government. The philosophy emerged as a response to the Industrial Revolution and urbanization in the 19th century in Europe and the United States. It advocates civil liberties with a limited government under the rule of law, private property and belief in the laissez-faire economic policy. Classical liberalism is built on ideas that had already arisen by the end of the 18th century, such as selected ideas of Adam Smith, John Locke, Jean Baptiste Say, Thomas Malthus and David Ricardo. It drew on a psychological understanding of individual liberty, the contradictory theories of natural law and utilitarism, and a belief in progress.
Core beliefs of classical liberals included new ideas - which departed from both the older conservative idea of society as a family and from later sociological concept of society as a complex set of social network - that individuals were "egoistic, coldly calculating, essentially inert and atomistic" and that society was no more than the sum of its individual members.
These beliefs were complemented by a belief that "labor", for instance individuals without capital, can only be motivated by fear of hunger and by a reward, while "men of higher rank" can be motivated by ambition, as well. This led politicians at the time to pass the Poor Law Amendment Act, which limited the provision of social assistance, because classical liberals believed in "an unfettered market" as the mechanism that will mot efficiently lead to a nation's wealth. Adopting Thomas Malthus' population theory, they saw poor urban conditions as inevitable, as they believed population growth would outstrip food production and they considered that to be desirable, as starvation would help limit population growth. They opposed any income or wealth redistribution, which they believed would be dissipated by the lowest orders.
Drawing on selected ideas of Adam Smith, classical liberals believed that all individuals are able to equally freely pursue their own economic self-interest, without government direction, serving the common good. They were critical of the welfare state as interfering in a free market. They criticized labor’s group rights being pursued at the expense of individual rights, while they accepted big corporations' rights as being pursued at the expense of inequality of bargaining power.
It was not until emergence of social liberalism that child labor was forbidden, minimum standards of worker safety were introduced, a minimum wage and old age pensions were established, and financial institutions regulations with the goal of fighting cyclic depressions, monopolies and cartels were introduced. They were met by classical liberalism as an unjust interference of the state.
They believed that rights are of a negative nature which requires other individuals (and governments) to refrain from interfering with free market, whereas social liberalism believes labor has a right to be provided with certain benefits or services via taxes paid by corporations.
Core beliefs of classical liberals also included their belief against direct democracy where law is made by majority vote by citizens because "there is nothing in the bare idea of majority rule to show that majorities will always respect the rights of property or maintain rule of law.

1.3. Specifics of J.B. Say Jean-Baptiste Say was a French economist who introduced Adam Smith's economic theories into France and whose commentaries on Smith were read in both France and Britain. Say challenged Smith's labor theory of value, believing that prices were determined by utility and also emphasized the critical role of the entrepreneur in the economy. However neither of those observations became accepted by British economists at the time. His most important contribution to economic thinking was Say's law, which was interpreted by classical economists that there could be no overproduction in a market, and that there would always be a balance between supply and demand. This general belief influenced government policies until the 1930s. Following this law, since the economic cycle was seen as self-correcting, government did not intervene during periods of economic hardship because it was seen as futile. 1.4. Differences regarding the opposition of Classical Liberalism a
The Fascist leader Benito Mussolini opposed classical liberalism: "Against individualism, the Fascist conception is for the State. It is opposed to classical Liberalism, which arose from the necessity of reacting against absolutism, and which brought its historical purpose to an end when the State was transformed into the conscience and will of the people. Liberalism denied the State in the interests of the particular individual; Fascism reaffirms the State as the true reality of the individual."
French economist J. B. Say is most commonly identified with Say’s Law, which states that supply creates its own demand. Over the years Say’s Law has been embroiled in two kinds of controversy - the first over its authorship, the second over what it means and, given each meaning, whether it is true.

2. Description of J.B.Say
Say was the best-known expositor of Adam Smith's views in Europe and America. His Traité d’économie politique was translated into English and used as a textbook in England and the United States. But Say did not agree with Adam Smith on everything. In particular, he took issue with Smith’s labor theory of value. Say was one of the first economists to have the insight that the value of a good derives from its utility to the user and not from the labor spent in producing it.
Say was born in Lyons. During his life he edited a journal, operated a cotton factory, and served as a member of the Tribunate under the Consulate of Napoleon. He was the first to teach a public course on political economy in France and continued his stay in academia first at the Conservatoire des Arts et Métiers, and then at the College de France in Paris. Say was a friend of Thomas Robert Malthus and David Ricardo.
Say's approach to economics is, in philosophical terms, that of a realist and an essentialist. He combines a healthy skepticism regarding the usefulness of statistical investigations with an emphasis on observing the facts of reality. A statistical description "does not indicate the origin and consequences of the facts it has collected". For Say, only a causal analysis based on the essential natures of the entities involved can achieve that end, and such an analysis is the core task of political economy. He sees economics as a genuine science capable of establishing "absolute truths", but insists that it "has only become a science since it has been confined to the results of inductive investigation". In fact, Say declares that political economy "forms a part of experimental science" and is, thus, rather similar to chemistry and natural philosophy.
Taxonomically, he divides all facts into (a) those that refer to objects and (b) those that refer to events or interactions. The former is the domain of descriptive science (e.g., botany); while the latter is the domain of experimental science (e.g., chemistry or physics).
Above all, Say seeks to be practical; for "[n]othing can be more idle than the opposition of theory to practice!". To that end, he attempts always to employ language that is precise and yet as simple as possible, so that any literate, reasonably intelligent person can comprehend his meaning. For Say, as for most modern Austrians, economics is not a shadowy realm to be penetrated only by the expert, but a subject of enormous practical importance accessible to all. It is thus no surprise to find that Say, in keeping with such a goal of lucidity and intelligibility, criticizes Adam Smith's Wealth of Nations for being "destitute of method," obscure, vague, and disjointed as well as for containing too many long and distracting digressions on topics such as war, education, history, and politics. 3. New approach brought by J.B.Say

3.1. Money and Banking
Say's discussion of money opens with what is now a standard argument about the "double coincidence of wants" problem and how a medium of exchange solves it. His explanation of how one highly demanded commodity spontaneously evolves into an accepted exchange medium is reminiscent of Carl Menger's more famous treatment of the same issue, although it predates Menger by almost seventy years. Historically, money appears due to self-interest, not government decree, and its form should be left to the interaction of consumers’ preferences. "[C]ustom, therefore, and not the mandate of authority, designates the specific product that shall pass exclusively as money."
He then reviews the list of properties a medium of exchange should (ideally) possess: durability, portability, divisibility, high purchasing power per unit, and uniformity. From this presentation, Say draws the familiar conclusion that the precious metals (gold and silver) are excellent choices as monetary substances. In other words, if individuals are left free to choose, it is highly likely that they will choose commodity money (specie). While it is true that Say is a strong proponent of gold and silver as money, it is provocative to notice that he does allow for the possibility that they could be replaced by something else if "new and rich veins of ore should be discovered." In short, Say is not unalterably wedded to the proposition that "money" means gold or silver. However, if money consists of precious metal coinage, then he does agree that monetary units, such as the dollar, should be renamed in terms of the mass of gold or silver contained in the coin. For example, if a coin denominated as one French franc is supposed to contain 5 grams of silver, then it should be named "5 grams of silver," not "one franc.
According to Say, the only justifiable intervention by the State into monetary matters is the minting of coins. In fact, Say thought this should be monopolized by the State "because there would probably be more difficulty in detecting the frauds of private issuers." In particular, in any system in which gold and silver coexisted as monetary metals, governments should studiously avoid setting an official exchange rate between the two, contrary to what was done in historical episodes of bimetallism. Say clearly understood why the practice under bimetallism always led to disaster. That is, the officially overpriced money drove the officially underpriced money out of circulation, a principle known as Gresham's Law. Say emphatically states that money is ruled by supply and demand, just like all commodities. Money's purchasing power "rises and falls in proportion to the relative demand and supply." Therefore, exchange rates between gold coinage and silver coinage should be allowed to change with market conditions. Say seems to favor a "parallel" metallic system, much like that suggested by Murray Rothbard.
With regard to banking, Say distinguishes between "banks of deposit" and "banks of circulation," but treats them both as legitimate institutions. The former function as warehouses for money. They hold one-hundred-percent reserves at all times, and provide convenience as well as security in that they effect transactions on behalf of their depositors by transferring funds from one customer's account to another's, for which services they charge a fee. The latter function as true financial intermediaries. They hold fractional reserves, issue banknotes, and generate an interest income by discounting promissory notes and bills of exchange. The banknotes issued by such institutions must be backed by specie or short-term securities, but if so, then "[t]he holders of the notes of a bank issuing convertible money run little or no risk, so long as the bank is well administered, and independent of the government." In fact, Say even argues that these fractional-reserve-holding banks of circulation bestow a benefit upon society because they provide "the advantage of economizing capital, by reducing the amount of the sum kept in reserve." And if it happens that such fractional-reserve banknotes also supplant part of the specie that had been in circulation, then "the functions of the specie, that has been withdrawn, are just as well performed by the paper substituted in its stead."
There are two additional insights on monetary topics that one must not overlook. First, Say emphasizes that as the division of labor extends ever farther, horizontally and vertically, through the society, that is, as individuals specialize ever more, the number and the importance of exchanges will increase. And this requires an identifiable medium of exchange. Briefly put, money is an integral part of the rise of modern civilization. Second, Say agrees with Mises and Rothbard, who insist that any nominal supply of money is "optimal," as long as prices are free to adjust, because any increase or decrease in nominal terms will simply change the purchasing power per unit in inverse proportion. Thus the real money supply will remain the same.

3.2. Say's Law of Markets
On the first controversy, it is clear that Say did invent something like Say’s Law. But the first person actually to use the words “supply creates its own demand” appears to have been James Mill, the father of John Stuart Mill.
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. Say wrote: “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? With this statement Say had the long run in mind. Certainly the long-run version is correct. Given enough time, supply does create its own demand. 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.
Without question, the one thing for which Say is best known is "Say's Law," also referred to as his theory of markets (la theorie des debouches) or law of markets (loi des debouches). This principle was, and still is, one of the key building blocks of the classical school of economics. It remains, in some guise or other, essential to any defense of free markets. Moreover, all collectivists attempt to refute it in the course of their assault on liberty and the free society. And yet, some writers have questioned the profundity of Say's Law. Alexander Gray refers to "this theory, which perhaps does not come to much." Even Murray Rothbard calls it a "relatively minor facet of his [Say's] thought."
Most textbooks truncate Say's Law into the transparently false proposition "supply creates its own demand." At minimum, this should be given as "aggregate supply creates its own aggregate demand," because the claim is not that the production of commodity X necessarily results in an equivalent demand for X, but that the production of X leads to demand for commodities A, B, C, and so forth. The production, or supply, of commodities (and complementary services) in general leads to the consumption of, or demand for, commodities (and complementary services) in general. It is certainly possible for there to exist either a shortage or a surplus of any particular commodity, but general overproduction or general underproduction can be no more than momentary phenomena. "It is because the production of some commodities has declined, that all other commodities are superabundant," and such maladjusted production results from "some violent means . . . a political or natural convulsion." Left to its own devices, the market will correct such imbalances.
Say identifies two means by which the corrective process operates. Principally, he argues that, though individuals do save part of the income derived from production, as long as those savings are reinvested in "productive employment," in the aggregate there need be no decreases in production, income, or consumption. This process of reinvestment is fueled by differences in the profits earned by entrepreneurs. Those goods that are relatively more scarce, and thus rising in price, attract additional investment, while those that are relatively less scarce, and thus falling in price, discourage investment. And even if one hoards money or buries it, "the ultimate object is always to employ it in a purchase of some kind," so there still cannot be deficient demand as long as real economic values are being produced. In order for consumers to exist, there must first be producers.
Throughout his discussion of production and consumption, Say consistently maintains that money is merely a neutral conduit through which aggregate supply is translated into aggregate demand, or "money is but the agent of the transfer of values." There seems to be no recognition of the transmission mechanism by which changes in the supply of money alter the relative prices of goods and, thereby, redirect the entire interrelated structure of production. From a modern Austrian perspective, Say's failure to grasp the non-neutrality of money must be deemed a deficiency of some note.
On the other hand, Say eloquently expresses a clear understanding that it is wholly beneficial for a society to experience generally falling prices whenever such declining prices are the result of productivity gains. Not only does this circumstance indicate, contrary to popular belief, "that a country is rich and plentiful," but also that "products formerly within reach of the rich alone have been made accessible to almost every class of society." Moreover, Say correctly perceives that (a) the prices of goods reflect their utility to the buyer, (b) the prices of the factors of production are derived or "imputed" from the prices of the goods produced, and therefore (c) costs of production represent an interface between the utility of the good and the productivity of the factors of production.

3.3. Enterpreneurs, Capital and Interest
Rothbard has suggested that the world of economics should bestow blessings upon Say for reintroducing the entrepreneur into economic thought, and so it should. With pen and ink, Adam Smith made the entrepreneur invisible. J.B. Say brings him back to life and to the center of the stage. What do these entrepreneurs do? They use their "industry" (a term Say prefers to "labor") to organize and direct the factors of production so as to achieve the "satisfaction of human wants."
But they are not merely managers. They are forecasters, project appraisers, and risk-takers as well. Out of their own financial capital, or that borrowed from someone else, they advance funds to the owners of labor, natural resources ("land"), and machinery ("tools"). These payments, or "rents," are recouped only if the entrepreneurs succeed in selling the product to consumers. Entrepreneurial success is not only sought after by the individual, but also essential to the society as a whole. "[A] country well stocked with intelligent merchants, manufacturers, and agriculturists has more powerful means of attaining prosperity, than one devoted chiefly to the pursuit of the arts and sciences."
Say's use of the word "capital" can be confusing, because it is used to mean, as the context requires, either (a) capital goods that are integral to the production of further, final goods, or (b) the financial capital that constitutes the enterprise's funding. The former are the result of some earlier production process and, when combined with the industry of the entrepreneur, generate profit (or loss). The latter is the result of saving some portion of the income from past productive activity and generates interest.
The analysis of interest rates is very perceptive and, in most respects, remarkably Austrian. First, Say realizes that the interest rate is not the price of money, but the price of credit, or "capital lent." Therefore, it is false that "the abundance or scarcity of money regulates the rate of interest." Of course, Say is thinking of the real rate of interest, not the nominal, or market, rate. He also clearly sees that interest rates will include some risk premium as a sort of insurance to protect against loss due to default. Such a risk premium will become very large when, for example, laws are imposed so that creditors have no legal recourse against a debtor who defaults. Furthermore, Say identifies the fact that there are "political risk" differentials between nations that lead to an international array of nominal interest rates. Overall, in terms of public policy, Say adopts the same stance with regard to credit markets that he exhibits elsewhere: namely, the state should not meddle. The "rate of interest ought no more to be restricted, or determined by law, than . . . the price of wine, linen, or any other commodity."
It has been argued that the one glaring flaw in Say's understanding of interest rates is his failure to anchor them on the bedrock of "time preferences," that is, to explain interest rates as founded on the rate at which individuals prefer to trade present goods for future goods. While Say does indeed fail explicitly to connect interest rates with time preferences, he seems to possess at least an embryonic notion of time preference itself. He observes, for instance, that there often exists an "inducement to every one to consume the whole of his income . . . [during] times of political turbulence and confusion." And when discussing the impact of increased frugality (a falling rate of time preference?) on the accumulation of capital, he even concludes that "the low rate of interest proves the existence of more abundant capital."

3.4. Value and Utility
For Say, the foundation of value is utility or the capacity of a good or service to satisfy some human desire. Those desires and the preferences, expectations, and customs that lie behind them must be taken as givens, as data, by the analyst. The task is to reason from those data. Say is most emphatic in denying the claims of Adam Smith, David Ricardo, and others that the basis for value is labor, or "productive agency." Economists who subscribe to a labor theory of value have the matter precisely backwards. "[I]t is the ability to create the utility . . . that gives value to productive agency."
The two categories of value are "exchange-value" and "use-value." Exchange-value lies within the domain of economics, because it is a measure of what one must give up in order to acquire a good in the market. In economic terms, "[t]he only fair criterion of the value of an object is, the quantity of other commodities at large, that can be readily obtained for it in exchange." Those things which possess exchange-value would today be called "economic goods," but Say calls them "social wealth." In contrast, some things, such as air, water, and sunlight, possess only use-value, because they are present in such abundance that they cannot command a price. These are now known as "free goods," but Say labels them "natural wealth."
Unfortunately, by adhering to the above taxonomy of values, Say plunges into a most regrettable error. He concludes that since the measure of a good's economic value is literally and precisely its market price, then all market transactions must involve the exchange of equal values. This, of course, must imply that neither buyer nor seller gains. Or, in other words, all market transactions are a "zero-sum game." "When Spanish wine is bought at Paris, equal value is really given for equal value: the silver paid, and the wine received, are worth one the other." Austrians are adamant in maintaining that exchanges, as long as they are voluntary, must be mutually beneficial in terms of the expected utilities of each the buyer and the seller. If that is not the case, then why would buyer and seller agree to trade?

3.5. Taxes and the State
Nowhere is Say's radicalism more evident than in his critique of government intervention into the economy. Most succinctly stated, he declares that self-interest and the search for profits will push entrepreneurs toward satisfying consumer demand. "[T]he nature of the products is always regulated by the wants of society," therefore "legislative interference is superfluous altogether."
Say's comment on one particular series of legislative acts is very instructive. The first of the British Navigation Acts was passed in 1581; these Acts were strengthened in 1651 and 1660; and the last was not repealed until 1849. Their purpose was to reserve Britain's international trade exclusively for the ship-owners of the British merchant marine. Say argues that such monopolization of the "carrying trade" diminishes national wealth because it often reduces the profits of those merchants shipping their goods to market.
He recognizes that defenders of such statutes may grant this, but still insist that the restrictions are justified on the grounds of national security. Say retorts that this is so only if "it is an advantage to one nation to domineer over others. . . . The love of domination never attains more than a factitious elevation, that is sure to make enemies of all its neighbors. It is this that engenders national debt, internal abuse, tyranny and revolution; while the sense of mutual interest begets international kindness, extends the sphere of useful intercourse, and leads to a prosperity, permanent, because it is natural."
The foregoing reveals how well Say comprehends the proposition that free trade and peace go hand in hand.
As for taxation, Say divides it into two types. Direct taxes are those levied on income or wealth. Indirect taxes are those such as sales taxes, excise taxes, and tariffs. Regardless of its specific form or method of collection, "all taxation may be said to injure reproduction, inasmuch as it prevents the accumulation of productive capital." Therefore, contrary to what some economists have claimed, "[i]t is a glaring absurdity to pretend, that taxation . . . enriches the nation by consuming part of its wealth."
Today, one will find many writers who insist that high rates of taxation, and the concomitant high levels of government spending, somehow cause a society to be more prosperous. Naturally, Say knows this to be false, despite the fact that, from a statistical standpoint, prosperity and taxation may be positively correlated. He explains that such assertions commit the error of reversing cause and effect. That is, "[a] man is not rich, because he pays largely; but he is able to pay largely, because he is rich." Prosperous nations, if they remain prosperous, do so despite heavy tax burdens, not because of them. Anyone who reads Say's Treatise should not overlook the fact that the discussion of taxes and government appears in the section headed "consumption." That is no accident, for Say does not hesitate to identify government spending as "unproductive consumption." And "[e]xcessive taxation is a kind of suicide."
4. Opinion
In my opinion, I find it to be true that Say either overlooked or misunderstood certain points of theory dear to the hearts of Austrian economists. He does not believe that market exchanges represent utility gains for both buyer and seller; he does not see the relationship between interest rates and time preference; he offers no theory of business cycles. On the other hand, he is cognizant of the limitations of statistical investigations; he is very much in favor of commodity money and free banking; he knows that entrepreneurs and the accumulation of capital are essential to economic advancement; he correctly identifies both government regulation and taxation as threats to prosperity, indeed, even as threats to civil society itself.
Also, I believe that Jean-Baptiste Say has much to offer any reader, whether Austrian or not, whether an economist or not. He saw many important truths with clarity, and wrote of them with passion and lucidity. Say once called economics "this beautiful, and above all, useful science." He left economics both more beautiful and more useful than he had found it. 5. Summary

Jean Baptiste Say was one of the most representative figures of french Classical Liberalism. He is best known for his work on Say’s Law of Markets and for publishing Traité d’économie politique, which was used as a textbook in several countries around the world. Though bairly credited for his work, Say has brought a valuable input to classical liberalism economics on the one handand to modern economics on the other.