1.3.1 Jean Baptiste Say

It is needless to say that those who are looking for information about the biography of Jean-Baptiste Say will find this information at Wikipedia: Jean-Baptiste Say.

It has already been mentioned that it doesn't make a lot of sense summarise authors like David Hume, Adam Smith, David Ricardo, John Stuart Mill under the term "classical" theory. They are so different in the concepts, methodology, philosophical background and temper that summarizing them under one term, classical theory is useless.

This is possible only in the context of Keynesian theory and Keynes actually called classical theory, even that what we call today neoclassical theory, everything that was before him.

In this context, that makes sense because all the classical and neoclassical authors share the same misleading ideas about capital, saving, interest rates and money. For more information, see the booklet downloadable from the start of this website.

Actually, all of these authors had misleading concepts about capital, saving, interest rates and money, but some of them, especially David Ricardo, are completely wrong, and others, like Jean-Baptiste Say, are less wrong and at least in a situation of full employment more or less correct.

The differences are irrelevant in the context of Keynesian theory, but sometimes it may be useful to see them because we find all versions in public debate. (Let's repeat that. All of them are wrong, but some are more wrong than others. The right version is the Keynesian version, see interest rates.)

All classical authors share the same mistakes. Although capital and money can have the same form, gold or paper money, they have very different functions and increasing the respective amount has two different effects. In the case of capital, any increase will lead to higher investments and economic growth, but an increase in money will lead to inflation. Actually, capital and money have the same physical form, gold, silver, paper, and they have the same functions. Simplifying we can say, they are the same thing. That's why in Keynesian theory the capital market is substituted by a money market. This is the basic error of classical thinking. However, there are variations of this error.

For David Ricardo, and later on for Karl Marx, capital is accumulated labour. The "capitalist" can accumulate labour because he pays the workmen less than what the produce. This capital is always reinvested. There is a difference in the context the term accumulation of capital and savings is used, but both have the same function.

A type of interest is a price that equals the supply and demand for capital doesn't exist and is not needed. The capitalists reinvest all the capital he has. The profit is defined by the wages. The lower the wages, the higher the profits. David Ricardo assumes that any amount of capital can be reinvested. Capital is always scarce. The demand for capital doesn't play any role because this demand is infinite.

Jean Baptiste Say doesn't really define how the accumulation of capital happens. For him, savings are just not consumed income of the past, wherever this income comes from. This is much closer to reality. The labour of an entrepreneur is considered a forth productive factor. This is more compatible with a market economy. In the theory of David Ricardo "capital", whatever that is, moves alone to the best allocation, in the theory of Jean-Baptiste Say an entrepreneur is needed, see entrepreneurship. The thesis of David Ricardo that the prices are completely determined by the costs of production, in other words, that the demand doesn't play any role in the determination of prices is rejected. This has obviously an impact on capital as well. Only if capital is invested in a productive way, if it helps to satisfy demand, it has a value. That's obvious, but if we take a closer look at some of the present day debates, we get the impression that it must be said sometimes.

The differences between Jean Baptiste Say and David Ricardo are obvious. Jean-Baptiste Say is perhaps the best description of the dynamic of a market economy. David Ricardo leads directly to Karl Marx and a planned economy.

Adam Smith is in the midst of these two positions. He sticks to the Ricardian idea that "capital" is materialised labour. That leads to the position that value of a commodity is determined by the labour materialised in this commodity, and that price is determined exclusively by the costs in other word by the supply side. This leads to David Ricardo and from David Ricardo to Karl Marx. However, his concept of the natural price/market price contradicts this idea. The natural price is the price that covers all the natural prices of the productive resources. The natural price of a productive resource, wages, profit and rent, is the price to be paid if the productive resources are used in a way, that the marginal revenue is the same in any use. In other words, it a reallocation of resources is not needed, because it would be useless. The market price is the actual paid price. In general equilibrium, where no reallocation of resources is needed, it equals the natural price. However, if there is a change on the demand side, the market price can be higher or lower as the natural price and a process of adaptation will start until the general equilibrium is once again reached. Demand is relevant, and that describes a fundamental pillar of a market economy. We have therefore the strange situation that two opposite lines of thinking, Marxism and one side and market economy on the other, refers to Adam Smith.

However, as we already said, these are only three different versions of an error. The fundamental error is that capital for investment purposes, defined as not consumed income of the past, is considered as a condition for investments. This is the fundamental error which leads to a cascade of other errors in thinking, see interest rate and too many errors in practical politics. If capital, defined as not consumed income of the past is not the condition for investments, then a pension system based on a capital stock is unstable. Moreover, that is what we see today.

In the context of Keynesian theory, we can, therefore, as Keynes did, summarise the theories of Adam Smith, David Ricardo and Jean Baptiste Says under the term classical theory. (Actually, the Keynes summarised under this term as well the authors nowadays considered as neoclassical, because they share, in other versions, the same error.) In this context it is useful. There is no need to discuss all versions of the same error.

Besides that, however, they are very different.

We have already mentioned several times, the comparative cost of David Ricardo, the invisible hand of Adam Smith, the creative destruction of Joseph Schumpeter and the arrogation of knowledge of Friedrich Hayek, These are examples of this phenomenon and from complex theories, only some concepts find their way to the canonisation in textbooks, although the were in the original work only an annotation.

From the whole theory of Jean-Baptiste Say, the only one surviving is the Law of Say. We find his law in any textbook about macroeconomics. We find this law in the first volume of three volume of the Traité d’économie politique. It is in the original work half a page.

It is very doubtful that a normal reader, someone who doesn't know this law, would pay great attention to this paragraph, and it is still more doubtful, that he would interpret it the way it is interpreted in textbooks.

Actually, the paragraph starts discussing an entirely different problem. You can read the whole paragraph with a translation into English in Law of Say. In this paragraph, Say discusses the widespread opinion of the traders that demand is too low ascribing this problem to a lack of money. Say argues that money is only a means of payment, something similar to a wagon that serves to transport commodities, but not the cause of the problem. The problem is that goods are paid with goods and people can only buy something if they have produced something before that can be changed for the goods they want to have. This is reduced in textbooks to the sentence that any production creates its own demand.

[Actually, there is a discussion about the interpretation of the sentence. It can be interpreted in a narrow and wider sense. In a more narrow sense, it could be said that only people who produce something can buy something. The other interpretation would be that people produce something until they can buy what they want. This is not really the same because in the second version it is excluded that supply exceeds demand. If people only produce a basket of goods that allows them to buy a certain basket of goods and stop producing when they had achieved their goal, it is excluded that supply exceeds demand. In this last version, Keynes reject the thesis. We will discuss this topic later, see Law of Say.]

There are several versions of the Traité d’économie politique. We can deduce that from the fact that he mentioned that he has corrected his theory about money after having read the book of David Richardo, but this book appeared in 1817.

We don't say that we have included on this website all the classical authors. Thomas Malthus (1766 - 1834), David Hume (1711 - 1776) and James Mill (1773 - 1836) for instance are missing. However, it is to assume that introducing them would only lead to more variations of above mentioned fundamental error. It is to assume that most of the concepts are written down by the classical authors were widespread ideas of the 18th and 19th century.

To most of the conclusions of the classical authors, one can reach with a little bit of common sense. The problem is that common sense can be highly misleading sometimes. Common sense very often is a generalisation of personal experiences and that sometimes lead to correct results and sometimes not. From an individual point of view, the classical concepts of capital, money, saving, interest rates are true. From a macroeconomic perspective, they are wrong. A single market player, for instance, is always better of in the long run, if he saves his money. However, if everybody saves money, there is nobody who will absorb the savings by investing. A single market player does not have even a chance to do what would be useful from macroeconomic point of view. If everybody consumes the few who save will earn a lot of money and that will induce the others to save as well. In a situation like that, the government or the central bank has to intervene in order to make saving less attractive, for example lowering the interest rates.

All the classical and neoclassical authors believe as well that market economies tend to full-employment. Concerning the idea that market economies lead to full-employment, in the long run, there are different versions of this misleading idea, which we will not discuss here. Actually, to put it simply, the neoclassical authors assume that the wage equal the marginal revenue. Full-employment can, therefore, be reached if wages are lowered. The classical theory assumes, to put it simply again, that wages will always remain at subsistence level. Therefore, all the living society is always employed and those who didn't find a job died and are therefore unemployed.

By looking out of the window, we see that both theories are wrong, in the context of Keynesian theory, there is no real need to enter into the details. Concerning this aspect Keynes summarises this concept under classical theory as well.

If all these fundamental errors were only typical for a certain time in history, as it is the case with the idea that the sun turns around the earth, it would be interesting only for historians. No real need to talk about it. The problem is that we can find these misleading ideas on a daily basis in newspapers, in debates on television and in "scientific" papers. If all these misleading ideas were eliminated from textbooks, one could save easily 2 years of study.

To give an example. In every textbook on macroeconomics, we find these equations at least fifty times.

Y = C + I
Y = C + S

I = S

with Y = national income, C = consumptions, I = investment and S = savings. We find that equation, that is the stunning part of the story when it come to explaining the KEYNESIAN THEORY. These equations are only valid EX POST, but they are presented as being valid EX ANTE.

The problem is that this equation is always true, describes an equilibrium. The national income is either consumed and saved (Y= C + I) or consumed and invested (Y = C + S). From that we can deduce, that S equals I. If we exclude that some savings are just burnt in the chimney, the equation is true. However, this is only true EX POST. At the end of the year, we can say always say that our income has been consumed or saved and invested. This is true in Nigeria, France, Afghanistan and in the United States. Every time and everywhere.

In other words, we find in any textbooks the old misleading ideas and what is worse, we find them when it comes to explaining the Keynesian theory. It is obvious that students don't understand in general what Keynesian theory is about.

The equation I = S suggests a classical relationship. Saving is the condition for investments. Keynesian theory affirms exactly the opposite. Investment is the condition for saving. To explain that with a simple example: Someone who wants to invests needs MONEY, wherever this money comes from. He can go to a bank and take a loan. If the bank doesn't have the money, we assume that for the sake of simplicity, the central banks will print it. (We simplify a bit, in order to make this point clear.) The loan has to be paid back, obviously, but this will happen with saving in the FUTURE, from the income generated by this investment. In other words: The investment leads to higher saving and NOT the other way round. That's how it works in modern economies. For more details see interest rates or the little book you can download from the start of this website.

In other words, classical and neoclassical theory assume that saving is a condition for investment. Keynes assumes that it is exactly the other way round. Investments generate savings, and there are many reasons that suggest that Keynes is right.

Why is it important to understand this crucial error of classical and neoclassical thinking? Firstly, it is because whoever doesn't understand this point, doesn't understand the Keynesian theory. Secondly, because the classical idea leads to many errors. People, for instance, believe that the central banks expropriate the savers if they print money. Something right now, we are still in 2015, actually do.

However, this argument is as logic as the assumption that the government has to poison the water in order to make people who have stored water in their bathtub can sell it as a good price. A good price for money means high-interest rates and high-interest rates mean less investments and less investments means higher unemployment.

The classical/neoclassical theory can be understood, if we take into account the basic assumption of the classical/neoclassical theory: full-employment. In the case of full-employment, saving make sense, but it crucial to give an exact definition of what we understand by saving: Saving means, this definition is correct, produce capital goods instead of consumer goods. In the case of full-employment, an increase in the production of capital goods is only possible at charge of the production of consumer goods, in other words, by an increase of saving. In a situation of full employment Keynesian theory and classical/neoclassical theory get to the same results.

That's why Keynes called his theory a general theory. It is general because it is valid in both cases. In the case of unemployment and in the case of full-employment.

[We put aside for the moment that even in the case of full-employment the classical/neoclassical theory is not completely true. The total output can't be increase in case of full-employment, but the resources can be reallocated with money. Who possess the money, wherever this money comes from, can attract resources and decides what is produced, how it is produced and for whom it is produced. We will return to the topic in the chapter about Joseph_Schumpeter.

There is actually a second problem with the neoclassical theory. In the equilibrium, in other word in a steady state, no saving is needed. In the equilibrium capital is only substituted, but the amount is not increased. The substitution of capital, the substitution of an old machine by a new one, is financed by deserved amortisations.

However, as we already said, there is no need to know all the variations of the error. It is enough to understand the basic version of this error.]

I = S always tries and describes an infinite amount of equilibriums. However, it doesn't explain, and that is the point we are interested in, how to get from one equilibrium to another.

We will see later on, in the chapter about Keynes, that the classical and neoclassical conceive savings as something planned before. Depending on the interest rates people save more or less. Actually, savings are residual.

Very often, it is assumed in public debates that investments financed by loans inflate the amount of money. This is nonsense. By granting a loan, the amount of money is indeed increased. However, this money will be destroyed again when the loan is paid back. Only in the case that an investment doesn't yield the respected results, the amount of money increases, but the risk that this happens can be priced in by the interest rates.

Even consumption financed by loans don't lead necessarily to an increase in the amount of money. The only difference between credit financed consumption and credit-financed investments is that in the first case the income needed has to come from someone else.

It is even wrong to say that an increase in the money supply increases the amount of money. Generation of money depends on the demand for money and not on the supply. The banking system can offer any amount of money, but if there is no demand, they can't increase the amount of money.

[There are other problems seldom addressed. Actually, the amount of money must increase if the loan must be paid back with interest rates. Obviously the normal case. If someone takes, for instance, a loan of 10,000 dollars, he must pay back for instance 12,000 dollars. In other words, the value generated by the credit financed investment must be at least 12,000 dollars.

The credit paid back with interest rates eliminates more money than what have been created when the credit was granted.

The money needed for this transaction exceeds therefore 10, 000 euros. We will not discuss all the possibilities how the amount of money can increase definitely, but it is obvious that I must increase. On possibility is that some credits were not paid back, and the money remains therefore in circulation. In other words, some companies go bankrupt, the lenders write off their receivables, and the money remains in circulation.]

One might be induced to believe that all these questions are irrelevant. That's not the case at all. The misleading idea that saving is the condition for investments lead to a lot of error and some of them with very practical consequences.

[A few examples are enough. Actually, unclear and misleading ideas about capital and money lead to many errors.]

1) In all industrialised countries, due to the demographic change, societies became older, in other words, there are more and more older people, questions the pension system based on the "contract of generations". (The working generations pays the pensions of the retired generation.) It was thought that this problem can be solved by establishing a second pillar, a system based on a capital stock. Everybody saves money, subsidised by the government, and live on this capital stock when they stopped working. This doesn't work, if all people have the same idea and if this kind of saving is subsidised, a lot of people will save. Institutional investors, banks and insurance companies will find it more and difficult to invest the money given to them by the savers and will be induced to more and more risky investments. That explains in part the financial crash of 2008.

2) It is often assumed that an increase in savings could help underdeveloped countries. However, a distinction is to be made between two very different situations. It is hard to see how this is going to work. These countries have a high unemployment rate. If the savings are invested in the country itself, it won't have an adverse impact on the employment rate. More capital goods will be produced and less consumer goods. However, if the investments are profitable, it would be much better to finance these investments with loans. That will increase employment. For the use of resources they have in their own country for investment purposes there is no saving needed.

Unfortunately, these countries need machines and know-how from foreign countries and in foreign countries, they can only buy something if they sell something. From a purely theoretic point of view, it can be useful therefore to export as much as possible. That means, in general, a the lowest price possible and to use this money for the import of machines and know how. This is a kind of saving in the meaning of consuming less.

3) The abracadabra con I = S plays a role in any kind of growth theories. All these theories, whatever is the theoretical background, Keynesianisms or neoclassical, argues with capital conceived as machines, plants, building etc. The problem is that machines, plants, building etc. are the result of resources activated with money. Money leads to capital in the sense of machines etc. and the time required to make this happen, is a question of know. There is no mechanical increase of capital. Besides that: Even if the nominal value doesn't increase, there can be a lot of growth. A computer bought 30 years ago for 1,500 dollars is fifty times slower than a computer bought today for 1500 dollars. Actually growth cannot even be measured in nominal terms.

4) It is difficult to see how micro-credits can have a positive impact on the economy, or to be more precise, the fact, that they are so popular, at least in the print media, reveals that there is a fundamental misunderstanding of the role of money. The aim of micro-credits is not to allow the borrowers to buy resources from foreign countries, machines or know how, but from national companies. If the want to attract resources from national countries, the respective governments can print the money. There is no need for micro-credit financed by private institutions and prior saving. That only reduces demand. If the government, or more realistically the respective central banks, print the money, money is generated. If the borrowers pay the money back, it the same amount of money is eliminated again.

Micro-credits can have a positive impact on "social control". The borrowers will use their credits more carefully, but from a purely economic point of view, it doesn't make any difference if the money comes from private savers who have saved the money before or from the central bank. In both cases, the credit must be paid back.

The Traité d’économie politique of Jean-Baptiste Say really resembles the Wealth of Nations of Adam Smith. There are even paragraphs which seem to be a plagiarism of the last one.

Dans une société tant soit peu civilisée, chaque personne ne produit pas tout ce qui est nécessaire à ses besoins ; il est rare même qu'une seule personne crée un produit complet ; mais quand même chaque producteur ferait à lui seul toutes les opérations productives nécessaires pour compléter un produit, ses besoins ne se bornent pas à une seule chose ; ils sont extrêmement variés : chaque producteur est donc obligé de se procurer tous les autres objets de sa consommation, en échangeant ce qu'il produit en un seul genre au-delà de ses besoins, contre les autres produits qui lui sont nécessaires.

In any society, how low the level of development may be, nobody produces all what he needs and in most cases he not even produces an entire product. But even in the case that a producer realises all the operations needed to finish a product, this product will not satisfy all his needs. These are of very different character and therefore any producer have to obtain all the other products needed by exchange for the amount of products produced by himself he doesn't need.

Jean Baptiste Say, Traité d’économie politique I, De la nature et de l'usage des monnaies

WHEN THE DIVISION OF LABOUR has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. Every man thus lives by exchanging, or becomes, in some measure, a merchant, and the society itself grows to be what is properly a commercial society.

Adam Smith, Wealth of Nations, Book I, Chapter IV

Sometimes, the style of the Traité d'économie politique is somehow "journalistic"; in other words it is pure opinion with very little facts. In this aspect as well, it resembles the Wealth of Nations. The paragraph below is an example of this kind.

Les succès obtenus par les arts et par le commerce ont fait sentir leur importance. On n'a plus fait la guerre pour se piller et détruire les sources mêmes de l'opulence ; on s'est battu pour se les disputer. Depuis deux siècles, toutes les guerres qui n'ont pas eu pour motif une puérile vanité, ont eu pour objet de s'arracher une colonie ou bien une branche de commerce. Ce ne sont plus des barbares qui ont pillé des nations industrieuses et civilisées ; ce sont des nations civilisées qui ont lutté entre elles, et celle qui a vaincu s'est bien gardée de détruire les fondements de son pouvoir en dépouillant le pays conquis. L'invasion de la Grèce par les Turcs au XVe siècle parait devoir être le dernier triomphe de la barbarie sur la civilisation. La portion industrieuse et civilisée du globe est heureusement devenue trop considérable par rapport à l'autre, pour que nous ayons à redouter de nouveau un semblable malheur. Les progrès mêmes de l'art de la guerre ne permettent plus aucun succès durable à des barbares. Les instruments de la guerre exigent le développement d'une industrie très perfectionnée. Des armées beaucoup plus nombreuses que celles qu'on levait autrefois ne peuvent se recruter qu'au moyen d'une population considérable ; et les seuls pays civilisés peuvent être fort populeux. Enfin, des armées nombreuses, et des munitions de guerre et de bouche proportionnées entraînent des dépenses énormes auxquelles une industrie active et des accumulations multipliées, qui ne se rencontrent que chez des peuples très avancés, suffisent à peine.

Jean Baptiste Say, Traité d’économie politique II, Des revenus industriels

Finally, the success of industry and commerce were realised. Plunder and destroy the sources of wealth were no longer the aim of the wars between countries. Wars were conducted to dominate these sources. Since two centuries all the wars which were not conducted because of harmed vanity aimed to conquer colonies or to dominate a certain industry. It was no longer barbarians who plundered industrialised and civilised nations. It was civilised nations who fought each other and the winner had no intention to destroy the basis of his power by destroying the conquered country. It seems that the invasion of the Turks in Greece in XV century was the last victory of barbarism over civilastion. Fortunately, there is no risk to see a similar disaster happen again because the industrialised and civilised part of the world in relationship to the other has become to important. The progress in the art of warfare itself doesn't allow any persistent victory of the barbare. The instruments of war require the development of a very perfect industry. Bigger armies than those who existed before cannot be maintained but by a large population and only civilised nations can have large populations.Finally, big armies and the corresponding munitions and mouthes require enormous expenditures that even advanced countries find difficult to supply.

What he wanted to say is simple. In previous times, nations were plundered by other nations and the industrial infrastructure destroyed. In other words, instead of imposing a tax on the result of this industrial potential and get a continuos flow of income.

Nowadays, that's what he assumes; nations conquer other nations to get access to the sources of income, in other words, their industrial potential.

It is unclear to which war he refers to, but it can be said that the theory is difficult to prove. Sometimes, other countries were conquered to get access to raw materials, but the author knows there is no example where a country was conquered to exploit the industrial potential. This was always destroyed.

In summary, from all the classical authors, Jean-Baptiste Say describes best the dynamic of markets. We will see that more clearly in the chapters about entrepreneurship, services, investigation and development and about the demand. With dynamic, we mean that the economy depends on human decisions, know-how, preferences and incentives and is not a mere mechanical process that happens without human beings involved. (As it is the case in the theory of David Ricardo, where capitalist can actually be substituted by capital, because the capitalist is only characterised by having capital. This capital moves alone to the most profitable use. The end of this tendency we find in Marxism. Karl Marx called his book The Capital, not The Capitalists.)

However, he shares the same misleading concepts concerning capital, money, saving, interest rates, although there is a little improvement. Savings are not the result of labour squeezed out from the workers and corresponding to the amount of labour. For Jean-Baptiste Say, savings are just the result of non-consumed income of the past. This is the normal definition we find in textbooks about economics.

This definition is erroneous and misleading. The correct definition is this: Saving is the production of capital goods instead of consumer goods. For more details see interest rates or the booklet downloadable from the start of this website.

In the theory of Jean-Baptiste Say, savings can be derived from any kind of income: wages, labour, income from entrepreneurial activities and rent. The income derived from these prices of productive factors depend on the market prices, the supply and demand of these factors. It is, therefore, clear that although the basic error is the same, there are big differences between Jean-Baptiste Say and David Ricardo.

The reproach made to Keynes that he didn't distinguish between classical and neoclassical authors is somehow absurd. People who make this reproach could as well distinguish between David Ricardo and Jean-Baptiste Say. Actually, we have in classical and neoclassical thinking variations of the same error, but the basic error always remains the same. There is no need for further differentiations.

Concerning the pillars of market economies, Jean-Baptiste Say is a good introduction.

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The misfortune of I = S

The basic error of classical thinking is the idea that the interest rates equals savings and investment.

Related to this error is the idea that money is a pure veil, the idea that an increase or decrease of money leads to proportional increase or decrease of the prices.

This same error together with some others leads to the idea that market economies tend to equilibriums.

Due to the fact that these basic errors are always the same, actually we have variations of the same error, Keynes didn't distinguish between classical and neoclassical theory.

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