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Tuesday, June 9, 2015

Say's Law is a Myth!

In the Book Adam's fallacy, the author, Duncan K. Foley mentions Say's law, defined within as

"that in the aggregate there cannot be chronic excess supply of labor" (boy is that "law" a laugh)

He then makes the even more true observation that the immediate effects of increases in labor productivity is to impose increased costs on labor!

Basically the book "Adam's Fallacy" refutes Say's law and a number of other mythic elements to classical economics!


When I read "Investopedia" I read this definition of Say's Law:

"DEFINITION of 'Say's Law Of Markets' An economic rule that says that production is the source of demand. According to Say's Law, when an individual produces a product or service, he or she gets paid for that work, and is then able to use that pay to demand other goods and services." Investopedia Definition

Which isn't the same formulation, but gets the point accross. Foley writes:

"Smith acknowledges this effect of the increasing division of labor, but argues, on the basis of reasoning that later came to be known as “Say’s Law,” that in the aggregate there cannot be a chronic excess supply of labor. The argument is that the workers unemployed by technological change in one industry can eventually find jobs in other industries. The reasoning of Say’s Law is based on the idea that the source of demand for commodities over the economy as a whole is just the willingness of workers and the owners of capital and land to make their resources available for production."

And He continues with this salient point:

"In real life, this potential demand can become effective only if money is available to finance the start-up of production with the unemployed resources."

And this is where the fallacy lies.

"Smith and his successors who reason on the basis of Say’s Law are assuming that the financial system of the economy is flexible enough to allow all potentially productive resources to be employed. Thus Say’s Law is based on a belief in the efficiency of the financial institutions of a capitalist economy"

And he says, pointing out the fallacy of the argument:

"This is Adam’s Fallacy in action. The immediate effect of increases in labor productivity is to impose costs (unemployment) on a group (workers) who are in a weak position to protect themselves from these costs. Ordinary moral reasoning would regard this as a bad thing. Smith offers the hope that some of these displaced workers will eventually find alternative jobs (though some others may not), and that lower prices of products will benefit consumers of products. Thus the direct, concrete evil of unemployment is instrumental to achieving the indirect, abstract good of lower prices"

There are other ways that the system imposes costs on workers. Charging taxes on their payroll also reduces the worker's ability to buy goods with wage compensation. Charging interest on financial transactions also winds up being a cost on labor. The net result is that when productivity increases unemployment increases and the stability of the system is impacted as almost the entire theory of markets is premised on full employment. Unemployed people become debtors, scavengers or dole takers and cannot repay debts, provide for their children or participate in markets absent loans or gifts. Thus productivity increases, at least in the short run, increase the instability of economies in order to provide lower prices to consumers. It is the "weakness" of the worker's position that makes the assumptions of Say's law invalid. Strengthen worker's positions, compensate them fairly, and ironically the economy is more efficient.

"In real life, this potential demand can become effective only if money is available to finance the start-up of production with the unemployed resources."

Which means that unless money is made available to employ surplus resources and finance the increase in demand, it won't happen. Say's law is a bait argument with the reality of a System that relies on unemployment to keep a hierarchy intact. A fair system requires a banking system that keeps money in play locally and a system of investments that employs surplus labor. Otherwise Supply cannot create demand and the system will periodically frack up.

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