An Austrian Perspective on the History of Economic Thought

1.1   The Smithian conquest of France

One of the great puzzles in the history of economic thought, as we have indicated, in Volume 1, is why Adam Smith was able to sweep the field and enjoy the reputation of ‘founder of economic science’ when Cantillon and Turgot had been far superior, both as technical economic analysts and as champions of laissez-faire. The mystery is particularly acute for France, since in Britain the only schools competing with the Smithians were the mercantilists and the political arithmeticians. The mystery deepens when we realize that the great leader of French economics after Smith, Jean-Baptiste Say (1767–1832), was really in the Cantillon-Turgot tradition rather than that of Smith even though he greatly neglected the former and proclaimed that economics began with Adam Smith. He, Say, was supposedly only systematizing the wonderful but inchoate truths found in the Wealth of Nations. We shall see below the precise nature of Say’s thought and his contributions, as well as his decidedly ‘French’ non-Smithian, and ‘pre-Austrian’ logical clarity and emphasis on the praxeologic axiomatic-deductive method, on utility as the sole source of economic value, on the entrepreneur, on the productivity of the factors of production, and on individualism.

Specifically, in his brief treatment of the history of thought in his great Treatise on Political Economy, Say makes no mention whatever of Cantillon. Despite the considerable influence of Turgot on his doctrine, he brusquely dismisses Turgot as sound on politics but of no account in economics, and asserts that political economy in effect began with Adam Smith’s Wealth of Nations. This curious and wilful neglect of his own forbears is made obscure by the scandalous fact that there is not a single biography of Say in the English language, and precious little even in French.

Perhaps we can understand this development given the following. In France, economics had long been associated with the physiocrats, les économistes. The ouster from the controller-generaliship of the great Turgot in 1776 and the consequent demise of his liberal reforms served to discredit the entire physiocratic movement. For Turgot was unfortunately considered in the public eye as merely a fellow-traveller of physiocracy and its most influential follower in government. After this loss of political influence, the French philosophes and the leading intelligentsia felt free to heap mockery and ridicule upon the physiocrats. Some of the fanatical cult aspects of physiocracy left it vulnerable to scorn, and the encyclopédistes, though themselves generally pro-laissez-faire, led the attack.

The advent of the French Revolution accelerated the demise of physiocracy. In the first place, the Revolution was itself too intensely political to allow much sustained interest in economic theory. Second, the physiocrats’ strategic devotion to absolute monarchy tended to discredit them in an era when the monarch had been toppled and destroyed. Moreover, the physiocrats, with their emphasis on the exclusive productivity of land, were associated with devotion to the landed, aristocratic interest. The French Revolution against aristocratic rule and against feudal landholding had no patience for physiocracy. The impatience was aggravated by the emergence of industrialism and the Industrial Revolution, which increasingly rendered obsolete the physiocratic devotion to the land. All these factors served to discredit physiocracy totally, and since Turgot was unfortunately identified as a physiocrat, his reputation was dragged down at the same time. This situation was aggravated by the fact that Turgot’s former aide and close friend, editor and biographer was the last of the physiocrats, the statesman Pierre Samuel DuPont de Nemours (1739–1817), who added to the problem by deliberately distorting Turgot’s views to make them appear as close to physiocracy as possible.

Originally, Smith’s Wealth of Nations was poorly received in France. The then dominant physiocrats scorned it as a vague and poor imitation of Turgot. However, the great libertarian Condorcet, who had been a close friend and biographer of Turgot, wrote admiring notes appended to several French translations of the Wealth of Nations. And Condorcet’s widow, Madame de Grouchy, continued the family interest in Smithian studies by preparing a French translation of the Theory of Moral Sentiments. Later, in the 1790s, the physiocratic remnants latched gratefully on to the Smithian coat-tails. Smith, after all, favoured laissez-faire, and he was almost outlandishly pro-agriculture, holding that agricultural labour was the chief source of wealth. As a result, most of the later physiocrats became early Smithians in France, led by the Marquis Germain Garnier (1754–1821), the first French translator of the Wealth of Nations, who presented Smithian doctrine to France in his Abrège elementaire des principes de l’économie politique (1796).

1.2   Say, de Tracy and Jefferson

The leadership of the French Smithians was quickly gained by Jean-Baptiste Say, when the first edition of his great Traité d’Économie Politique was published in 1803. Say was born in Lyons to a Huguenot family of textile merchants, and he spent most of his early life in Geneva, and then in London, where he became a commercial apprentice. Finally, he returned to Paris as an employee of a life insurance company, and the young Say quickly became a leader of the laissez-faire group of philosophes in France. In 1794, Say became the first editor of the major journal of this group, La Décade Philosophique. A champion not only of laissez-faire but also of the burgeoning industrielisme of the Industrial Revolution, Say was hostile to the absurdly pro-agricultural physiocracy.

The Décade group called themselves the ‘ideologists’, later sneeringly dubbed by Napoleon the ‘ideologues’. Their concept of ‘ideology’ simply meant the discipline studying all forms of human action, a study meant to be a respecter of individuals and their interaction rather than a positivistic or scientistic manipulating of people as mere fodder for social engineering. The ideologues were inspired by the views and the analysis of the late Condillac. Their leader in physiological psychology was Dr Pierre Jean George Cabanis (1757–1808), who worked closely with other biologists and psychologists at the École de Midécine. Their leader in the social sciences was the wealthy aristocrat Antonie Louis Claude Destutt, Comte de Tracy (1754–1836).1 Destutt de Tracy originated the concept of ‘ideology’, which he presented in the first volume (1801) of his five-volume Éléments d’idéologie (1801–15).

De Tracy first set forth his economic views in his Commentary on Montesquieu, in 1807, which remained in manuscript due to its boldly liberal views. In the Commentary, de Tracy attacks hereditary monarchy and one-man rule, and defends reason and the concept of universal natural rights. He begins by refuting Montesquieu’s definition of freedom as ‘willing what one ought’ to the far more libertarian definition of liberty as the ability to will and do what one pleased. In the Commentary, de Tracy gives primacy to economics in political life, since the main purpose of society is to satisfy, in the course of exchange, man’s material needs and enjoyments. Commerce, de Tracy hails as ‘the source of all human good’, and he also lauds the advance of the division of labour as a source of increasing production, with none of the complaints about ‘alienation’ raised by Adam Smith. He also stressed the fact that ‘in every act of commerce, every exchange of merchandise, both parties benefit or possess something of greater value than what they sell’. Freedom of domestic trade is, therefore, just as important as free trade among nations.

But, de Tracy lamented, in this idyll of free exchange and commerce, and of increasing productivity, comes a blight: government. Taxes, he pointed out, ‘are always attacks on private property, and are used for positively wasteful, unproductive expenditure’. At best, all government expenditures are a necessary evil, and most, ‘such as public works, could be better performed by private individuals’. De Tracy bitterly opposed government creation of and tampering with currency. Debasements are, simply, ‘robbery’, and paper money is the creation of a commodity worth only the paper on which it is printed. De Tracy also attacked public debts, and called for a specie, preferably a silver, standard.

The fourth volume of de Tracy’s Elements, the Traité de la volonté (Treatise on the Will), was, despite its title, de Tracy’s treatise on economics. He had now arrived at economics as part of his grand system. Completed by the end of 1811, the Traité was finally published at the overthrow of Napoleon in 1815, and it incorporated and built upon the insights of the Commentary on Montesquieu. Following his friend and colleague J.B. Say, de Tracy now heavily emphasized the entrepreneur as the crucial figure in the production of wealth. De Tracy has been sometimes called a labour theory of value theorist, but ‘labour’ was instead upheld as highly productive as compared to land. Furthermore, ‘labour’ for de Tracy was largely the work of the entrepreneur in saving and investing the fruits of previous labour. The entrepreneur, he pointed out, saves capital, employs other individuals, and produces a utility beyond the original value of his capital. Only the capitalist saves part of what he earns to reinvest it and produce new wealth. Dramatically, de Tracy concluded: ‘Industrial entrepreneurs are really the heart of the body politic, and their capital is its blood.’

Furthermore, all classes have a joint interest in the operations of the free market. There is no such thing, de Tracy keenly pointed out, as ‘unpropertied classes’, for, as Emmet Kennedy paraphrases him, ‘all men have at least their most precious of all properties, their faculties, and the poor have as much interest in preserving their property as do the rich’2 At the heart of de Tracy’s central emphasis on property rights was thus the fundamental right of every man in his own person and faculties. Abolition of private property, he warned, would only result in an ‘equality of misery’ by abolishing personal effort. Moreover, while there are no fixed classes in the free market, and every man is both a consumer and a proprietor and can be a capitalist if he saves, there is no reason to expect equality of income, since men differ widely in abilities and talents.

De Tracy’s analysis of government intervention was the same as in his Commentary. All government expenditures are unproductive, even when necessary, and all embody living off the income of the producers and are therefore parasitic in nature. The best encouragement government can give to industry is to ‘let it alone’, and the best government is the most parsimonious.

On money, de Tracy took a firm hard-money position. He lamented that the names of coins are no longer simple units of weight of gold or silver. Debasement of coins he saw clearly as theft, and paper money as theft on a grand scale. Paper money, indeed, is simply a gradual and hidden series of successive debasements of the money standard. The destructive effects of inflation were analysed, and privileged monopoly banks were attacked as ‘radically vicious’ institutions.

While following J.B. Say in his emphasis on the entrepreneur, de Tracy anticipated his friend in rejecting the use of mathematics or statistics in social science. As early as 1791, de Tracy was writing that much of reality and human action is simply not quantifiable, and warned against the ‘charlatan’ application of statistics to the social sciences. He attached the use of mathematics in his Mémoire sur la faculté de penser (Memoir on the faculty of thought) (1798), and in 1805 broke with his late friend Condorcet’s stress on the importance of ‘social mathematics’. Perhaps influenced by Say’s Traité two years earlier, de Tracy stated that the proper method in the social sciences is not mathematical equations but the drawing forth, or deduction, of the implicit properties contained in basic ‘original’ or axiomatic truths – in short, the method of praxeology. To de Tracy, the fundamental true axiom is that ‘man is a sensitive being’, from which truths can be obtained through observation and deduction, not through mathematics. For de Tracy, this ‘science of human understanding’ is the basic foundation for all the human sciences.

Thomas Jefferson (1743–1826) had been a friend and admirer of the philosophes and ideologues since the 1780s when he served as minister to France. When the ideologues achieved some political power in the consular years of Napoleon, Jefferson was made a member of the ‘brain trust’ Institut National in 1801. The ideologues – Cabanis, DuPont, Volney, Say, and de Tracy – all sent Jefferson their manuscripts and received encouragement in return. After he finished the Commentary on Montesquieu, de Tracy sent the manuscript to Jefferson and asked him to have it translated into English. Jefferson enthusiastically translated some of it himself, and then had the translation finished and published by the Philadelphia newspaper publisher William Duane. In this way, the Commentary appeared in English (1811), eight years before it could be published in France. When Jefferson sent the published translation to de Tracy, the delighted philosopher was inspired to finish his Traité de la volonté and sent it quickly to Jefferson, urging him to translate that volume.

Jefferson was highly enthusiastic about the Traité. Even though he himself had done much to prepare the way for war with Great Britain in 1812, Jefferson was disillusioned by the public debt, high taxation, government spending, flood of paper money, and burgeoning of privileged bank monopolies that accompanied the war. He had concluded that his beloved democrat-republican party had actually adopted the economic policies of the despised Hamiltonian federalists, and de Tracy’s bitter attack on these policies prodded Jefferson to try to get the Traité translated into English. Jefferson gave the new manuscript to Duane again, but the latter went bankrupt, and Jefferson then revised the faulty English translation Duane had commissioned. Finally, the translation was published as the Treatise on Political Economy, in 1818.3

Former President John Adams, whose ultra-hard money and 100 per cent specie banking views were close to Jefferson’s, hailed the de Tracy Treatise as the best book on economics yet published. He particularly lauded de Tracy’s chapter on money as advocating ‘the sentiments that I have entertained all my lifetime’. Adams added that

banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation, than they... ever will do good.

Our whole banking system, I ever abhorred, I continue to abhor, and shall die abhorring... every bank of discount, every bank by which interest is to be paid or profit of any kind made by the deponent, is downright corruption.

As early as 1790, Thomas Jefferson had hailed The Wealth of Nations as the best book in political economy, along with the work of Turgot. His friend Bishop James Madison (1749–1812), who was president of William & Mary College for 35 years, was the first professor of political economy in the United States. A libertarian who had emphasized early that ‘we were born free’, Bishop Madison had used the Wealth of Nations as his textbook. Now, in his preface to de Tracy’s Treatise, Thomas Jefferson expressed the ‘hearty prayer’ that the book would become the basic American text in political economy. For a while William & Mary College adopted de Tracy’s Treatise under Jefferson’s prodding, but this status did not last long. Soon Say’s Treatise surpassed de Tracy in the race for popularity in the United States.

The calamitous ‘panic’ of 1819 confirmed Jefferson in his stern hard-money views on banking. In November of that year, he elaborated a remedial proposal for the depression which he characteristically asked his friend William C. Rives to introduce to the Virginia legislature without disclosing his authorship. The goal of the plan was stated bluntly: ‘The eternal suppression of bank paper’. The proposal was to reduce the circulating medium gradually to the pure specie level; the state government was to compel the complete withdrawal of bank notes in five years, one-fifth of the notes to be called and redeemed in specie each year. Furthermore, Virginia would make it a high offence for any bank to pass or accept the bank notes of any other states. Those banks who balked at the plan would have their charters forfeited or else be forced to redeem all their notes in specie immediately. In conclusion, Jefferson declared that no government, state or federal, should have the power of establishing a bank; instead, the circulation of money should consist solely of specie.

1.3   The influence of Say’s Traité

J.B. Say was made a member of the governing tribunate during the Napoleonic consulate regime in 1799. Four years later, his Traité was published, soon establishing him as the outstanding interpreter of Smithian thought on the continent of Europe. The Traité went through six editions in Say’s lifetime, the last in 1829, then double in size from the original edition. In addition, Say’s Cours complet d’économie politique (1828–30) was reprinted several times, and the extract from the Traité printed as the Catéchisme d’Économie politique (1817), was reprinted for the fourth time shortly after Say’s death. Every great European nation translated Say’s Traité into its own language.

In 1802, Napoleon cracked down on the ideologues, a group he had once courted, but had always detested for its liberal economic and political views. He recognized the ideologues as the staunchest opponents, in theory and practice, of his intensifying dictatorship.4 Napoleon forced the senate to purge itself and the tribunate of the ideologues, thus ousting J.B. Say from his tribunal post. The ideologues were philosophers, and the Bonapartists saw philosophy itself as a threat to dictatorial rule. As Joseph Fievée, editor of the Bonapartist Journal de l’Empire, put it, ‘philosophy is a means of complaining about the government, of threatening it when it departs from the principles and the men of the Revolution’.5

Two years later, shortly after becoming emperor, Napoleon again went after Say, refusing to allow a second edition of the Traité to be published unless Say changed an offending chapter. When Say refused to do so, the new edition was suppressed. Ousted from the French government, Say became a successful cotton manufacturer for ten years. In fact, Say became one of the leading new-style manufacturers in France. As his biographer writes, Say was ‘intimately involved in the emergence of large scale industry. He was, in effect, one of the most remarkable types of these manufacturers of the Consulate and of the Empire, of these first great entrepreneurs who sought to place the new technological processes in operation’.6

After Napoleon’s fall in 1814, the second edition of the Traité was finally published, and in 1819 Say embarked on a new professorial career, first at the Conservatoire National and finally at the College de France. The admiring Jefferson, himself steeped in laissez-faire economic thought, assured Say that he would find a hospitable climate in the United States. Jefferson was joined in those wishes by President Madison. Indeed, Jefferson wanted to offer Say the professorship of political economy at his newly founded University of Virginia.

Say’s Traité exerted great influence in Italy. At first, Smith’s Wealth of Nations had little impact on Italian economics. Italy had already had a flourishing free trade tradition, notably in the systematic Meditations on Political Economy (1771) (Meditazioni sull’economia politico) of the Milanese Count Pietro Verri (1728–97). There was no mention of Smith in the 1780 work of the Neapolitan Gaetano Filangieri (1752—88), in the writings of Count Giovanni Battista Gherardo D’Arco (1785), or even as late as Francesco Mengotti’s free trade work // Colbertismo (1792) – and even though the Wealth of Nations had been translated into Italian in 1779.

The spread of the French revolutionary regime into Italy brought Adam Smith’s influence along with the soldiers. Smith became the leading economic authority during the early Napoleonic years. After 1810, Say and de Tracy swept Italian economics into their camp. The views of Say were propounded in the lucid treatise, the Elementi di economie politica (1813) by Luca De Samuele Cagnazzi of Altamura (1764–1852), and in the treatise by Carlo Bosellini of Modena, Nuovo esame delle sorgenti della privata e della pubblica richezza (1816). The courageous Abbate Paolo Balsamo (1764–1816) spread Smithian and later Say’s views throughout Sicily, calling for free trade in agriculture, and for the freeing of Sicilian agriculture from the restrictions of feudalism (particularly in his Memorie economiche ed agrarie, Palermo, 1803, and his Memorie inedite di pubblica economia, Palermo, 1845).

Say’s friend and colleague Destutt de Tracy also wielded enormous influence in Italy. His Elements was translated into a ten-volume edition (Milan, 1817–19) by the former priest Giuseppe Compagnoni (1754–1833). Furthermore, high up in the revolutionary government of Naples in the 1820s were the elderly statesman and philosopher Melchiorre Delfico, head of the provisional revolutionary junta and correspondent and admirer of de Tracy, and the follower of de Tracy, Pasquale Borelli, head of the Neapolitan revolutionary parliament.

Spain and the new Latin American countries were also influenced by de Tracy. One of the leaders of the liberal Spanish revolution of 1820 against absolute monarchy was Dom Manuel Maria Gutierrez, the translator of the Traité into Spanish (1817), and professor of political economy at Malaga. Furthermore, a member of the revolutionary Spanish Cortes of 1820 was Ramon de Salas, the translator of de Tracy’s Commentary, who returned from exile in France to take part in the struggle. And still another member of the Cortes, J. Justo Garcia, had translated de Tracy’s book on Logic, In Latin America, de Tracy’s admirer and follower, Berardino Rivadavia, became president of the newly independent Republic of Argentina.7 Tracy also became highly popular in Brazil as well as Argentina, and in Bolivia his ‘ideology’ became the official doctrine of the state schools in the 1820s and 1830s.

It is hardly surprising that the second wave of Smithian writers in Germany were strongly influenced by J.B. Say’s Traité. Ludwig Heinrich von Jakob (1759–1827) was, like Kraus, a Kantian philosopher as well as economist. Studying at the University of Halle, he became professor of philosophy there. Von Jakob published a Smithian treatise on general economic principles, the Grundsätze der Nationalökonomie (Principles of Economics) (Halle, 1805). Later editions, up to the third, published in 1825, incorporated Sayite emendations. Furthermore, von Jakob was so impressed with Say’s work that he translated the Traité into German (1807) and into Russian. Von Jakob, indeed, helped spread enlightened views in Russia in more ways than by publishing a translation of Say. He taught for a while at the University of Kharkov, and was a consultant to several official commissions at St Petersburg.

The most interesting and thoroughing Sayite in Germany was Gottlieb Hufeland (1760–1817). Hufeland was born in Danzig, where he became mayor, and studied at Gottingen and Jena, where he became professor of political economy. In his Neue Grundlegung der Staatswirtschaftskunst (Giessen, 1807–13), Hufeland adopted all the important innovations of J.B. Say – or rather his return to the French-continental, pre-Smithian tradition. Thus, Hufeland brought back the entrepreneur, and carefully separated his pure profits from confronting risk, from his interest return and from the rent or wage for his managerial abilities. Furthermore, Hufeland adopted a utility-scarcity theory of value, stressing the cause of value as the valuations of a stock of goods by individual consumers.

The influence of Say and de Tracy in Russia strikes an ironic note. In 1825, one of the leading liberal Decembrists, Pavel Ivanovich Pestel, who considered de Tracy’s Commentary as his Bible, tried to assassinate the absolute ruler Csar Nicholas I. Nicholas, in turn, proceeded to have Pestel hanged, even though he himself was educated in the Smithian and Sayite Cours d’Economie Politique of Heinrich Freiherr von Storch.8

The English translation of the fourth edition of Say’s Traité appeared in London in 1821, as The Treatise on Political Economy. The free trade Boston journal, the North American Review, reissued the Treatise in the United States the same year, with American annotations by the free trade champion Clement C. Biddle. Say’s Treatise quickly became and remained the most popular textbook on economics in the United States down through the Civil War.9 Indeed, it was still being reprinted as a college text in 1880. During that period, the Treatise had gone through 26 American printings, in contrast to only eight in France.

The untranslated writings of the ideologues had an unexpected influence in Great Britain. Thomas Brown, friend and successor to Dugald Stewart in the chair of moral philosophy at Edinburgh, was fluent in French, and was heavily influenced by the philosophy of de Tracy. Furthermore, James Mill was a philosophic disciple of Dr Brown, and was himself an admirer of Helvetius, Condillac and Cabanis. It is not surprising, therefore, that Mill should have been the first in Great Britain to appreciate the importance of Say’s law of markets.

It is no wonder that the Say version of Smithianism became the most popular economics work on the European continent and in the United States. Not being able to call himself a physiocrat, Say called himself a Smith follower, but he was one largely in name only. As we shall see, his views were really post-Cantillon and pre-Austrian rather than Smithian classical.

One crucial difference between Say and Smith was in the limpid clarity and lucidity of Say’s Treatise. Say quite justly called the Wealth of Nations a ‘vast chaos’, and ‘a chaotic collection of just ideas thrown indiscriminately among a number of positive truths’. At another point, he calls Smith’s work ‘a promiscuous assemblage of the soundest principles..., an ill-digested mass of enlightened views and accurate information’. And again, with great perceptiveness, Say charges that ‘almost every portion of it [the Wealth of Nations] is destitute of method’.

Indeed, it was precisely Say’s great clarity which, while winning him world wide popularity, lowered his stock among the British writers who unfortunately ruled the roost of economic thought. (The fact that he was not British himself doubtless added to this deprecation.) In contrast to the inchoate Smith, or to the tortured and virtually unreadable Ricardo, Say’s clarity and felicity, the very ease of reading him, made him suspect. Schumpeter puts it very well:

His argument flows along with such easy limpidity that the reader hardly ever stops to think and hardly ever experiences a suspicion that there might be deeper things below this smooth surface. This brought him [Say] sweeping success with the many; it cost him the good will of the few. He sometimes did see important and deep-seated truths; but when he had seen them, he pointed them out in sentences that read like trivialities.

Because he was a splendid writer, because he avoided the rough and tortured prose of a Ricardo, because, in Jefferson’s phrase, his book was ‘shorter, clearer, and sounder’ than the Wealth of Nations, economists then and later tended to confuse smoothness of surface with superficiality, just as they so often confound vagueness and obscurity with profundity. Schumpeter adds:

Thus he never got his due. The huge textbook success of the Traité – nowhere greater than in the United States – only confirmed contemporaneous and later critics in their diagnosis that he was just a popularizer of a Smith. In fact, the book got so popular precisely because it seemed to save hasty or ill-prepared readers the trouble of wading through the Wealth of Nations. This was substantially the opinion of the Ricardians, who... put him down as a writer – see McCulloch’s comments upon him in the Literature of Political Economy – who had been just able to rise to Smithian, but had failed to rise to Ricardian, wisdom. For Marx he is simply the “insipid” Say.10

1.4   The method of praxeology

A particularly outstanding feature of J.B. Say’s treatise is that he was the first economist to think deeply about the proper methodology of his discipline, and to base his work, as far as he could, upon that methodology. From previous economists and from his own study, he arrived at the unique method of economic theory, what Ludwig von Mises was, over a century later, to call ‘praxeology’. Economics, Say realized, was not based on a mass of inchoate particular statistical facts. It was based, instead, on very general facts (fait généraux), facts so general and universal and so deeply rooted in the nature of man and his world that everyone, upon learning or reading of them, would give his assent. These facts were based, then, on the nature of things (la nature des choses), and on the deductive implications of these facts so broadly rooted in human nature and in natural law. Since these broad facts were true, their logical implications must be true as well.

In his introduction to the Treatise, which sets forth the methodological nature and implications of his work, Say begins by being critical of the physiocrats and of Dugald Stewart for confounding the sciences of politics and of political economy. Say saw that if economics, or political economy, was to progress, it must stand on its own feet as a discipline without being intimately mixed from the start with political science – or the science which sets forth the correct principles of the political order. Political economy, wrote Say, is the science of wealth, its production, distribution and consumption.

Say goes on to mention the popularity of the Baconian method of induction from a mass of facts in the formation of a science, but then adds that there are two kinds of facts, ‘objects that exist’ and ‘events that take place’. Clearly, objects that exist are primary, since events that take place are only movements or interactions of existing objects. Both classes of facts, noted Say, constitute the ‘nature of things’, and ‘a careful observation of the nature of things is the sole foundation of all truth’.

Facts may also be grouped into two kinds: general or constant, and particular or variable. About the same time as Stewart, but far more comprehensively, Say then launched into a brilliant critique of the statistical method, and of the difference between it and political economy. Political economy deals with general facts or laws:

Political economy, from facts always carefully observed, makes known to us the nature of wealth; from the knowledge of its nature deduces the means of its creation, unfolds the order of its distribution, and the phenomena attending its destruction. It is, in other words, an exposition of the general facts observed in relation to this subject. With respect to wealth, it is a knowledge of effects and of their causes. It shows what facts are constantly conjoined with; so that one is always the sequence of the other.

Say then added an important point, that economics ‘does not resort for any further explanation to hypothesis’. In short, unlike the physical sciences, the assumptions of economics are not tentative hypotheses which, or the deductions from which, must be tested by fact; on the contrary, each step of the logical chain rests on definitely true, not ‘hypothetical’, general facts. (It might be added that it is precisely this crucial difference between the method of economics and of physical sciences that has brought so much contumely on the head of praxeology during the twentieth century.) Instead of framing hypotheses, economic science must perceive connections and regularities ‘from the nature of particular events’, and ‘must conduct us from one line to another, so that every intelligent understanding may clearly comprehend in what manner the chain is united’. ‘It is this’, Say concludes, ‘which constitutes the excellence of the modern method of philosophizing’.

In contrast, statistics exhibit particular facts, ‘of a particular country, at a designated period’. They are ‘a description in detail’. Statistics, Say added, ‘may gratify curiosity’, but they can ‘never be productive of advantage’ if they do not indicate the ‘origin and consequences’ of the collected facts and this can only be accomplished by the separate discipline of political economy. It is precisely the confounding of these two disciplines that made Smith’s Wealth of Nations, in Say’s perceptive words, an ‘immethodical’ and ‘irregular mass of curious and original speculations, and of known demonstrated truths’.

A crucial difference between statistics and political economy, Say goes on, is that the latter’s general principles or ‘general facts’ may be discovered, and therefore may be known with certainty. The principles of political economy, wherever they rest on ‘the rigorous deductions of undeniable general facts’, ‘rest upon an immovable foundation’. They are what von Mises would later call ‘apodictic’. Political economy, indeed, ‘is composed of a few fundamental principles, and of a great number of corollaries or conclusions, drawn from these principles’. The particular facts of statistics, on the other hand, are necessarily uncertain, incomplete, inaccurate and imperfect. And even when true, Say correctly notes, they ‘are only true for an instant’. Again, on statistics, ‘how small a number of particular facts are completely examined, and how few among them are observed under all their aspects? And in supposing them well examined, well observed, and well described, how many of them either prove nothing, or directly the reverse of what is intended to be established by them[?]’ And yet the gullible public is often dazzled by ‘a display of figures and calculations... as if numerical calculations alone could prove anything, and as if any rule could be laid down, from which an inference could be drawn without the aid of sound reasoning’.

Say goes on to a blistering critique of the use of statistics without theory:

Hence, there is not an absurd theory, or an extravagant opinion that has not been supported by an appeal to facts; and it is by facts also that public authorities have been so often misled. But a knowledge of facts, without a knowledge of their mutual relations, without being able to show why the one is a cause and the other a consequence, is really no better than the crude information of an office-clerk...

Say then denounces the idea that a good theory is not ‘practical’, and that the ‘practical’ is somehow superior to the theoretical:

Nothing can be more idle than the opposition of theory to practice11. What is theory, if it be not a knowledge of the laws which connect effects with their causes, facts with facts? And who can be better acquainted with facts than the theorist who surveys them under all their aspects, and comprehends their relation to each other? And what is practice without theory, but the employment of means without knowing how or why they act?

Say then brilliantly points out why it is impossible for peoples or nations to ‘learn from experience’ and to adopt or discard theories correctly on that basis. Since the early modern era, he notes, wealth and prosperity have increased in western Europe, while at the same time nation-states have compounded restrictions of trade and multiplied the interference of taxation. Most people then superficially conclude that the latter caused the former, that trade and production increased as a result of the interference of government. On the other hand, Say and the political economists argue the reverse, that ‘the prosperity of the same countries would have been much greater, had they been governed by a more liberal and enlightened policy’. How can facts or experience decide between these two clashing interpretations? The answer is that they cannot; that only correct theory, theory deducible from a few universal general facts or principles, can do so. And that is why, notes Say, ‘nations seldom derive any benefit from the lessons of experience’. To do so, ‘the community at large must be enabled to seize the connexion between causes and their consequences; which at once supposes a very high degree of intelligence and a rare capacity for reflection’. Thus, to arrive at the truth, only the complete knowledge of a few essential general facts is important; ‘every other knowledge of facts, like the erudition of an almanac, is a mere compilation, from which nothing results’.

Furthermore, in arguments about public policies, when ‘facts’ are allegedly set against the ‘system’ of economic theory, it is actually one theoretical ‘system’ poised against another, and, again, only theoretical refutation can prevail. Thus, said Say, if you talk about how free trade between nations is advantageous to all the participants, this is accused of being a ‘system’, to which is opposed worry about deficits in the balance of trade – itself a system, but a fallacious one. Those who assert (as had the physiocrats) that luxury fuels trade whereas thrift is ruinous, are setting forth a ‘system’, and then, in an exact prefiguring of the Keynesian multiplier, ‘some will assert that circulation enriches a state, and that a sum of money, by passing through twenty different hands, is equivalent to twenty times its own value’ – also a system.

In a surprising and perceptive prefigurement of modern controversies, Say goes on to explain why the logical deductions of economic theory should be verbal rather than mathematical. The intangible values of individuals, with which political economy is concerned, are subject to continuing and unpredictable change: ‘subject to the influence of the faculties, the wants and the desires of mankind, they are not susceptible of any rigorous appreciation, and cannot, therefore, furnish any data for absolute calculations’. The phenomena of the moral world, noted Say, are not ‘subject to strict arithmetical computation’.

Thus we may know absolutely that, in any given year, the price of wine will depend on the interaction of its supply, or stock to be sold, with the demand. But to calculate the two mathematically, these two elements would have to be decomposed precisely into the separate influence of each of their elements, and this would be so complex as to be impossible. Thus:

it is not only necessary to determine what will be the product of the succeeding vintage, while yet exposed to the vicissitudes of the weather, but the quality it will possess, the quantity remaining on hand of the preceding vintage, the amount of capital that will be at the disposal of the dealers, and require them, more or less expeditiously, to get back their advances. We must also ascertain the opinion that may be entertained as to the possibility of exporting the article, which will altogether depend upon our impressions as to the stability of the laws and government, that vary from day to day, and respecting which no two individuals exactly agree. All these data, and probably many others besides, must be accurately appreciated, solely to determine the quantity to be put in circulation; itself but one of the elements of price. To determine the quantity to be demanded, the price at which the commodity can be sold must already be known, as the demand for it will increase in proportion to its cheapness; we must also know the former stock on hand, and the tastes and means of the consumers, as various as their persons. Their ability to purchase will vary according to the more or less prosperous condition of industry in general, and of their own in particular; their wants will vary also in the ratio of the additional means at their command of substituting one liquor for another, such as beer, cider, etc. I suppress an infinite number of less important considerations, more or less affecting the solution of the problem...

In short, the enormous number of imprecise, changing and quantitatively unknown determinants make the application of the mathematical method in economics impossible. And therefore those who

have pretended to do it, have not been able to enunciate these questions into analytical language, without divesting them of their natural complication, by means of simplifications, and arbitrary suppressions, of which the consequences, not properly estimated, always essentially change the condition of the problem and pervert all its results; so that no other inference can be deduced from such calculations than from formula arbitrarily assumed.

Mathematics, seemingly so precise, inevitably ends in reducing economics from the complete knowledge of general principles to arbitrary formulas which alter and distort the principles and hence corrupt the conclusions.

But how then is the political economist, knowing the general principles with certainty, to apply these principles to specific problems such as the condition of the wine market? Here, too, Say anticipated the brilliant conclusions of Ludwig von Mises on the proper relationship between theory and history, theory and specific application. Such applied theory in economics, Say indicated, is an art rather than a strict science:

What course is then to be pursued by a judicious inquirer in the elucidation of a subject so much involved? The same which would be pursued by him, under circumstances equally difficult, which decide the greater part of the actions of his life. He will examine the immediate elements of the proposed problem, and after having ascertained them with certainty (which in political economy can be effected), will approximately value their mutual influences with the intuitive quickness of an enlightened understanding, itself only an instrument by means of which the mean result of a crowd of probabilities can be estimated, but never calculated with exactness.12

J.B. Say then relates the fallacies of the mathematical method in economics to the teachings of his great mentor, the physiologist Cabanis. He quotes Cabanis on how writers on mechanics grievously distort matters when they deal with the problems of biology and medicine. Citing Cabanis:

The terms they employed were correct, the process of reasoning strictly logical, and, nevertheless, all the results were erroneous... it is by the application of this method of investigation to subjects to which it is altogether inapplicable, that systems the most whimsical, fallacious, and contradictory, have been maintained.

Say then adds that whatever has thus been pointed out about the fallacies of the mechanistic method in biology is a fortiori applicable to the moral sciences, which is why we are ‘always being misled in political economy, whenever we have subjected its phenomena to mathematical calculation. In such case it becomes the most dangerous of all abstractions’.

Finally, Say perceptively points to another problem that, then as now, leads learned people to dismiss the principles and conclusions of economics. For they

are too apt to suppose that absolute truth is confined to the mathematical and to the results of careful observation and experiment in the physical sciences; imagining that the moral and political sciences contain no invariable facts or indisputable truths, and therefore cannot be considered as genuine sciences, but merely hypothetical systems, more or less ingenious, but purely arbitrary.

To bolster this view, the critics of economics point to a great many differences of opinion in that discipline. But so what? Say asks. After all, the physical sciences have always been rent by controversy, sometimes clashing ‘with as much violence and asperity as in political economy’.

The mathematical method was not the only system of abstraction to suffer a trenchant demolition by J.B. Say. For Say was also sharply critical of verbal methods of logic that took off into the empyrean without continuing groundwork in, and repeated checking by, reference to general and universal facts. This was Say’s main methodological stricture against the physiocrats. ‘Instead of first observing the nature of things, or the manner in which they take place, of classifying these observations, and deducing from them general propositions’ – that is, instead of being praxeologists, the physiocrats

commenced by laying down certain abstract general propositions, which they styled axioms, from supposing them to contain inherent evidence of their own truth. They then endeavoured to accommodate the particular facts to them and to infer from them their laws; thus involving themselves in the defence of maxims evidently at variance with common sense and universal experience...

In short, a system of economic theory must not only be axiomatic-deductive; it must always make sure to ground those axioms in ‘common sense and universal experience’.

In his Introduction to the fourth edition, Say levelled similar strictures against David Ricardo and the Ricardian system. Ricardo, too, ‘sometimes reasons upon abstract principles to which he gives too great a generalization’. Ricardo, he charged, begins with observations founded on facts, but then ‘pushes his reasonings to their remotest consequences, without comparing their results with those of actual experience’. After a certain point in the reasoning, ‘the facts differ very far from our calculation’ and ‘from that instant nothing in the author’s work is represented as it really occurs in nature’. ‘It is not sufficient’, Say concludes, ‘to set out from facts; they must be brought together, steadily pursued, the consequences drawn from them constantly compared with the effects observed’, so that

the science of political economy... must show, in what manner that which in reality does take place, is the consequence of other facts equally certain. It must discover the chain which binds them together, and always, from observation, establish the existence of the two links at their point of connexion.

1.5   Utility, productivity and distribution

In contrast to the Smith-Ricardo mainstream of Smithians who set forth the labour theory (or at very best, the cost-of-production theory) of value, J.B. Say firmly re-established the scholastic-continental-French utility analysis. It is utility and utility alone that gives rise to exchange value, and Say settled the value paradox to his own satisfaction by disposing of ‘use-value’ altogether as not being relevant to the world of exchange. Not only that: Say adopted a subjective value theory, since he believed that value rests on acts of valuation by the consumers. In addition to being subjective, these degrees of valuation are relative, since the value of one good or service is always being compared against another. These values, or utilities, depend on all manner of wants, desires and knowledge on the part of individuals: ‘upon the moral and physical nature of man, the climate he lives in, and on the manner and legislation of his country. He has wants of the body, wants of the mind, and of the soul; wants for himself, others for his family, others still as a member of society’. Political economy, Say sagely pointed out, must take these values and preferences of people as givens, ‘as one of the data of its reasonings; leaving to the moralist and the practical man, the several duties of enlightening and of guiding their fellow-creatures, as well in this, as in other particulars of human conduct’.

At some points, Say went up to the edge of discovering the marginal utility concept, without ever quite doing so. Thus he saw that relative valuations of goods depends on ‘degrees of estimation in the mind of the valuer’. But since he did not discover the marginal concept, he could not fully solve the value paradox. In fact, he did far less well at solving it than his continental predecessors. And so Say simply dismissed use-value and the value paradox altogether, and decided to concentrate on exchange-value. As a result, however, he could no more than Smith and his British successors, devote much energy to analysing consumption or consumer behaviour.

But whereas Say simply discarded use-value, Ricardo made the value paradox and the unfortunate split between use- and exchange-value the key to his value theory. For Ricardo, iron was worth less than gold because the labour cost of digging and producing gold was greater than the labour cost of producing iron. Ricardo admitted that utility ‘is certainly the foundation of value’, but this was apparently of only remote interest, since the ‘degree of utility’ can never be the measure by which to estimate its value. All too true, but Ricardo failed to see the absurdity of looking for such a measure in the first place. His second absurdity, as we shall see further below, was in thinking that labour cost provided such a ‘true’ and invariable measure of value. As Say wrote in his annotations on the French translation of Ricardo’s Principles, ‘an invariable measure of value is a pure chimera’.

Smith, and still more Ricardo, were pushed into their labour cost theory by concentrating on the long-run ‘natural’ price of products. Say’s analysis was aided greatly by his realistic concentration on the explanation of real market price.

Costs, of course, are intimately related to the pricing of factors of production. One question that cost-value theorists have difficulty answering is if, indeed, costs are determining, where do they come from? Are they mandated by divine revelation?

One of the anomalies of Say’s discussion is that, even though a subjective value and utility theorist, he uncomprehendingly rejected the insight of Genovesi and of his own ideologue forbear Condillac, that people exchange one thing for another because they value the thing they acquire more than what they give up – so that exchange always benefits both parties. And in denying this mutual gain, Say is inconsistent with much of his own position on utility.

In spurning Condillac, Say is being not only ungenerous but almost wilfully obtuse. First he notes that Condillac ‘maintains that commodities, which are worth less to the seller than to the buyer, increase in value from the mere act of transfer from one hand to another’. But Condillac insists, for example, that ‘equal value is really given for equal value’, so that when Spanish wine is bought in Paris, ‘the money paid by the buyer and the wine he receives are worth one another’ – to which we might ask, to whom’? He then admits that the selfsame wine is worth more in Paris than it had been when grown in Spain, but he insists that the increase in the value of the wine took place not ‘at the moment of handing over the wine to the consumer, but comes from the transport’.

But St Clair trenchantly takes Say to task: ‘In reality, the transfer to the consumer is the essence of the transaction; the long transport is subsidiary to this purpose; the change of locality is merely a means to this end, and would not have been necessary if consumers willing to buy the same quantity and pay the same price could have been found on the spot’.

Say continues obstinately to assault Condillac’s insight: “The seller is not a professional cheat, nor the buyer a dupe, and Condillac is not justified in saying that if the values exchanged were always equal neither party would gain anything by exchange’. But in reality, of course, Condillac was perfectly right; why should anyone bother exchanging X for Y of equal value?

St Clair reacts brilliantly in exasperation:

Lord, how these economists do misunderstand one another! Condillac does not suggest that the wine merchant is a rogue and the customer a fool; he does not suggest that the merchant robs either the consumer or the producer; his doctrine is that products increase in utility and value by being transferred from the producer to the consumer, and that both parties benefit by the intervention of the merchant who brings about the exchange. To the producer the merchant is a consumer-finder; to the consumer he is a commodity-finder; with the merchant as medium of exchange, the producer gets a better price for his produce and the buyer better value for his money.13

One of Say’s great contributions was to apply utility theory to the theory of distribution, in brief by discovering the productivity theory of the pricing, and hence the income, accruing to factors of production. In the first place, Say pointed out that, in contrast to Smith, all labour, not just labour embodied in material objects, is ‘productive’. Indeed, Say brilliantly pointed out that all the services of factors of production, whether they be land, labour, or capital, are immaterial, even though they might result in a material product. Factors, in short, provide immaterial services in the process of production. That process, as Say pointed out clearly for the first time, was not the ‘creation’ of material products. Man cannot create matter; he can only transform it into different shapes and moulds, in order to satisfy his wants more fully. Production is this very transformation process. In the sense of such transformation, all labour is productive ‘because it concurs in the creation of a product’, or, metaphorically, in the creation of ‘utilities’. If, as can happen, labour has been expended to no ultimate benefit, then the result is error: ‘folly or waste in the person bestowing’ the labour. One example of unproductive labour is crime, not only a non- but an anti-market activity: there ‘trouble [effort] is directed to the stripping another person of the goods in his possession by means of fraud or violence...[it] degenerates to absolute criminality and there results no production, but only a forcible transfer of wealth from one individual to another’.

J.B. Say also put clearly for the first time the insight that wants are unlimited. Wrote Say: ‘there is no object of pleasure or utility, whereof the mere desire may not be unlimited, since every body is always ready to receive whatever can contribute to his benefit or gratification’. Say denounced the proto-Galbraithian position of the British mercantilist Sir James Steuart, in extolling an ascetic reduction of wants as a solution to desires outpacing production. Say heaps proper scorn on this doctrine: ‘Upon this principle, it would be the very acme of perfection to produce nothing and to have no wants, that is to say, to annihilate human existence.’

Unfortunately, Say proceeds to fall prey to this very Galbraithian trap by attacking luxury and ostentation, and by maintaining that ‘real wants’ are more important to the community than ‘artificial wants’. Say hastens to add, however, that government intervention is not the proper road to achieving proper affluence.

On the valuing or pricing of the services of the factors (or as Say would put it, ‘agents’) of production, Say adopted the proto-Austrian in direct contrast to the Smith-Ricardo tradition. For since subjective human desire for any object creates its value, and reflects its utility, productive factors receive value because of their ‘ability to create the utility wherein originates that desire’. Ricardo, writes Say, believes ‘that the value of products is founded upon that of productive agency’, i.e. that the value of products is determined by the value of their productive factors, or their cost of production. In contrast, Say declares, ‘the current value of productive exertion is founded upon the value of an infinity of products compared one with another... which value is proportionate to the importance of its cooperation in the business of production...’. In contrast to consumer goods, Say points out, the demand for productive factors does not originate in immediate enjoyment, but rather in the ‘value of the product they are capable of raising, which itself originates in the utility of that product, or the satisfaction it may be capable of affording’. In short, the value of factors is determined by the value of their products, which in turn is conferred by consumer valuations and demands. The causal chain, for Say as for the later Austrians, is from consumer valuations to consumer goods prices to the pricing of productive factors (i.e. to costs of production). In contrast, the Smithian, and especially the Ricardian, causal chain is from cost of production, and especially labour cost, to consumer goods prices. By speaking of the ‘proportionate’ value of each factor, Say once again comes to the edge of a marginal productivity theory of imputation of consumer to factor valuations, and to the edge of a variable proportions analysis. But he does not reach it.

Say did not rest content with a general, even if pioneering, analysis of the pricing of productive factors. He goes on to virtually create the famous ‘triad’ of classical economics: land (or ‘natural agents’), labour (or ‘industry’ for Say), and capital. Labour works on, or employs ‘natural agents’ to create capital, which is then used to multiply productivity in collaboration with land and labour. Although capital is the previous creation of labour, once in existence it is used by labour to increase production. If there are classes of factors of production, what easier trap to fall into than to maintain that each class receives the kind of income attributed to it in common parlance: i.e. labour receives wages; land receives rent; and capital receives interest? Surely a common-sense approach! And so Say adopted it. While useful as a first attempt (excepting the forgotten Turgot) to clarify production theory out of Adam Smith’s muddle, this superficial clarity comes at the expense of deep fallacy, that would not be uncovered until the Austrians. In the first place, these three rigidly separated categories already begin to break down in Say’s interesting insight that labourers ‘lend’ their services to owners of capital and land and earn wages thereby; that landowners ‘lend’ their land to capital and labour and earn rent; and that capitalists ‘lend’ their capital to earn interest. For how exactly do these payments differ? How does rent as a ‘loan’ price compare with interest as a loan? And how do wages differ from interest or rent? In fact, the muddle is even worse, for workers and landowners don’t ‘lend’ their services; they are not creditors. On the contrary, in a deep sense, capitalists lend them money by giving them money in advance of selling the product to the consumers; and so workers and landowners are ‘debtors’ to the capitalists, and pay them a natural rate of interest. And finally, this classical triad rests on a basic equivocation, as Böhm-Bawerk would eventually point out, between ‘capital’ and ‘capital goods’. Capital as a fund of savings or lending may earn interest; but capital goods – which are the real physical factors of production rather than money funds – do not earn interest. Like all other factors, capital goods earn a price, a price per unit of time for their services. If you will, capital goods, land, and labourers all earn such prices, in the sense of ‘rents’, defining a rental price as a price of any good per unit of time. This price is determined by the productivity of each factor. But then where does interest on capital funds come from?

Thus, in grappling with the problem of interest, Say criticizes Smith and the Smithians for focusing on labour as the sole factor of production, and neglecting the cooperating role of capital. Tackling the Smith-Ricardian (and what would later be the Marxian) riposte: that capital is simply accumulated labour, Say replies yes, but the services of capital, once built, are there and continue anew and must be paid for. While satisfactory enough on one level, the answer does not solve the problem of where the net return on capital funds comes from, a return which Turgot and then the Austrians explained as the price of time-preference, of the fact, in short, that capital is not only accumulated labour but also ‘accumulated time’.

Despite the lack of resolution of the problem of interest, Say set forth an excellent analysis of capital, in the sense of capital goods, and its crucial role in production and in increasing economic wealth. Man, he pointed out, transforms natural agents into capital, to work further with nature to arrive at consumer goods. The more he has built capital goods – the more tools and machinery – the more can man harness nature to make labour increasingly productive. More machinery means an increase in productivity of labour and a fall in the cost of production. Such increase in capital is particularly beneficial to the mass of consumers, for competition lowers the price of product as well as the cost of production. Furthermore, increased machinery permits a superior quality of product, and allows the creation of new products which would not have been available under handicraft production. The enormous increase in production and rise in the standard of living releases human energies from the scramble for subsistence to permit cultivation of the arts, even of frivolity, and most importantly for ‘the cultivation of the intellectual faculties’.

Say follows Smith in his discussion of the division of labour, and in pointing out that the degree of that division is limited by the extent of the market. But Say’s discussion is far sounder. He shows, first, that expanding the division of labour needs a great deal of capital, so that investment of capital becomes the crucial point rather than its division per se. He also points out that, in contrast to Smith, the crucial specialization of labour is not simply within a factory (as in Smith’s famous pin factory) but ranges over the entire economy, and forms the basis for all exchange between producers.

Say also saw that the essence of investing capital is advancing money payments to factors of production, an advance that is repaid later by the consumer. Thus ‘the capital employed on a productive operation is always a mere advance made for payment of a productive service, and reimbursed by the value of their resulting product’. Here he captured the essence of the Austrian insight into capital as a process over time and one that involves payment in advance for production. Say also anticipated the Austrian concept of ‘stages of production’. He pointed out that, instead of waiting a long time for reimbursement by the consumer, the capitalist at each stage of production purchases the product of the previous stage and thereby reimburses the previous set of capitalists. As Say lucidly puts it:

The miner extracts the ore from the bowels of the earth; the iron-founder pays him for it. Here ends the miner’s production, which is paid for by an advance out of the capital of the iron-founder. This latter next smelts the ore, refines and makes it into steel, which he sells to the cutler; thus is the production of the founder paid, and his advance reimbursed by a second advance on the part of the cutler, made in the price of the steel. This again the cutler works up into razor-blades, the price for which replaces his advance of capital, and at the same time pays for his productive agency.

Generalizing:

Each successive producer makes the advance to his precursor of the then value of the product, including the labour already expended upon it. His successor in the order of production, reimburses him in turn, with the addition of such value as the product may have received in passing through his hands. Finally, the last producer, who is generally the retail dealer, is compensated by the consumer for the aggregate of all these advances, plus the concluding operation performed by himself upon the product.

In the end, the money paid by the consumers for the final product, say razor blades, repays capitalists for their previous advances for the various services of the factors of production.

Turning to wages and the labour market, Say pointed out that wages will be highest relative to the price of capital and land, where labour is scarcest relative to the other two factors. This will be either whenever land is virtually unlimited in supply; and/or when an abundance of capital creates a great demand for labour. Furthermore, wage rates will be proportionate to the danger, trouble, or obnoxiousness of the work, to the irregularity of the employment, to the length of training, and to the degree of skill or talent. As Say puts it: ‘Every one of these causes tends to diminish the quantity of labour in circulation in each department, and consequently to vary its’ wage rate. In recognizing the differences of natural talent, Say advanced far beyond the egalitarianism of Adam Smith and of neoclassical economics since Smith’s day.

In the long run, capital will earn the same return in all firms and industries; but this is only true in the long run, since for one thing there are inevitable immobilities of land, labour and capital. To Say, the ‘profits’ or interest, on capital stems from its productive services – again, a fundamental confusion between capital as a fund, which earns interest, and capital goods, which are productive factors and earn prices and incomes for their productivity. But despite this basic error, Say had many shrewd things to say about interest. He was possibly the first economist, for example, to show that risk premiums are added to the basic interest rate, so that riskier debtors will pay higher interest. Risk, he pointed out, depends on expected safety of the investment, the personal credit and character of the borrower, the past record of the borrower, and the ability or willingness of the government of the debtor’s country to enforce the payment of debt. Furthermore, Say introduced an innovation theory of profit by stating that since new methods of employing capital are more uncertain they are especially risky, and hence they will tend to be more profitable. Thus, innovation profits are subsumed under risk.

Say was also insistent that interest on the loan market is determined by the demand for capital (to which it is directly proportional) and the supply of capital (inversely proportional). A champion of freedom of the loan market -’usury’ is no worse morally than rent or wages – he also demonstrated that it was a fallacy that the quantity of money either lowers or raises the rate of interest. Say perceptively pointed out that it is ‘an abuse of words to talk of the interest of money’; it is really interest on savings, not money, and loans can and do occur in kind as well as in money. Wrote Say: the ‘abundance or scarcity of money or of its substitutes... no more affects the rate of interest, than the abundance or scarcity of cinnamon, or wheat, or of silk’.

1.6   The entrepreneur

If Adam Smith purged economic thought of the very existence of the entrepreneur, J.B. Say, to his everlasting credit, brought him back. Not quite as far back to be sure as in the days of Cantillon and Turgot, but enough to continue fitfully and ‘underground’ in continental economic thought even though absent from the dominant mainstream of British classicism.

Emphasis on the real world rather than on long-run equilibrium almost forced a return to the study of the entrepreneur. For Say, the entrepreneur, the linchpin of the economy, takes on himself the responsibility, the conduct, and the risk of running his firm. He almost always owns some of the firm’s capital, Say being familiar with the fact that the dominant entrepreneur and risk-taker in the economy is the one who is also a capitalist, an owner of capital. The owner of capital or land or personal service hires these services out to the ‘renter’ or entrepreneur. In return for fixed payments to these factors, the entrepreneur takes upon himself the speculative risk of gaining profit or suffering loss. ‘It is a sort of speculative bargain, wherein the renter takes the risk of profit and loss, according to the revenue he may realize, or the product obtained by the agency transferred, shall exceed or fall short of the rent or hire he is to pay’.

The entrepreneur, Say adds, acts as a broker between sellers and buyers, applying productive factors proportionate to the demand for the products. The demand for the products, in turn, is proportionate to their utilities and to the quantity of other products exchanging for them. The entrepreneur constantly compares the selling prices of products with their costs of production; if he decides to produce more, his demand for productive factors will rise.

Part of the profits accruing to the capitalist-entrepreneur will be the standard return on capital. But apart from that, Say declared, there will be a return to the ‘peculiar character’ of the entrepreneur. The entrepreneur is a manager of the business, but his role is also broader in Say’s view: the entrepreneur must have judgement, perseverance, and ‘a knowledge of the world as well as of business’, as he applies knowledge to the process of creating consumer goods. He must employ labourers, purchase raw material, attempt to keep costs low, and find consumers for his product. Above all, he must estimate the importance of the product, the probable demand for it, and the availability of the means of production. And, finally, he ‘must have a ready knack of calculation to compare the charges of production with the probable value of the product when completed and brought to market’. Those who lack these qualities will be unsuccessful as entrepreneurs and suffer losses and bankruptcies; those who remain will be the skilful and successful ones earning profits.

Say was critical of Smith and the Smithians for failing to distinguish the category of entrepreneurial profit from the profit of capital, both of which are mixed together in the profits of real world enterprises.

Say also appreciated entrepreneurship as the driving force of the allocations and adjustments of the market economy. He summed up those workings of the market by stating that the wants of consumers determine what will be produced: ‘The product most wanted is most in demand; and that which is most in demand yields the largest profit to industry, capital, and land, which are therefore employed in raising this particular product in preference; and, vice versa, when a product becomes less in demand, there is a less profit to be got by its production; it is, therefore, no longer produced’.

Such astute analysts as Schumpeter and Hébert are critical of Say as having a view of the entrepreneur as a static manager and organizer rather than as a dynamic bearer of risk and uncertainty. We cannot share that view. It seems to us that Say is instead foursquare in the Cantillon-Turgot tradition of the entrepreneur as forecaster and risk-bearer.

From his analysis of capital, entrepreneurship, and the market, J.B. Say concluded for laissez-faire: ‘The producers themselves are the only competent judges of the transformation, export, and import of these various matters and commodities; and every government which interferes, every system calculated to influence production, can only do mischief.’

1.7   Say’s law of markets

While J.B. Say has been almost totally ignored by mainstream economists and historians of economic thought, this is not true for one relatively minor facet of his thought that became known as ‘Say’s law of markets’. The one point of his doctrine that the active and aggressive British Ricardians got out of Say was this law. James Mill, the ‘Lenin’ of the Ricardian movement (see below), appropriated the law in his Commerce Defended (1808), and Ricardo adopted it from his discoverer and mentor.14

Say’s law is simple and almost truistic and self-evident, and it is hard to escape the conviction that it has stirred up a series of storms only because of its obvious political implications and consequences. Essentially Say’s law is a stern and proper response to the various economic ignoramuses as well as self-seekers who, in every economic recession or crisis, begin to complain loudly about the terrible problem of general ‘overproduction’ or, in the common language of Say’s day, a ‘general glut’ of goods on the market. ‘Overproduction’ means production in excess of consumption: that is, production is too great in general compared to consumption, and hence products cannot be sold in the market. If production is too large in relation to consumption, then obviously this is a problem of what is now called ‘market failure’, a failure which must be compensated by the intervention of government. Intervention would have to take one or both of the following forms: reduce production, or artificially stimulate consumption. The American New Deal in the 1930s did both, with no success in relieving the alleged problem. Production can be reduced, as in the case of the New Deal, by the government’s organizing compulsory cartels of business to force a cut in their output.

Stimulating consumer demand has long been the particularly favoured programme of interventionists. Generally, this is done by the government and its central bank inflating the money supply and/or by the government incurring heavy deficits, its spending passing for a surrogate consumption. Indeed, government deficits would seem to be ideal for the overproduction/ underconsumptionists. For if the problem is too much production and/or too little consumer spending, then the solution is to stimulate a lot of unproductive consumption, and who is better at that than government, which by its very nature is unproductive and even counter productive?

Say understandably reacted in horror to this analysis and to the prescription.15 In the first place, he pointed out, the wants of man are unlimited, and will continue to be until we achieve genuine general superabundance – a world marked by the prices of all goods and services falling to zero. But at that point there would be no problem of finding consumer demand, or, indeed, any economic problem at all. There would be no need to produce, to work, or to worry about accumulating capital, and we would all be in the Garden of Eden.

Thus Say postulates a situation where all costs of production are at last reduced to zero: ‘in which case, it is evident there can no longer be rent for land, interest upon capital, or wages on labour, and consequently, no longer any revenue to the productive classes’. What will happen then?

What then, I say, these classes would no longer exist. Every object of human want would stand in the same predicament as the air or the water, which are consumed without the necessity of being either produced or purchased. In like manner as every one is rich enough to provide himself with air, so would he be to provide himself with every other imaginable product. This would be the very acme of wealth. Political economy would no longer be a science; we should have no occasion to learn the mode of acquiring wealth; for we should find it ready made to our hands.

Since, apart from the Garden of Eden, production always falls short of man’s wants, this means that there is no need to worry about any lack of consumption. The problem that limits wealth and living standards is a deficiency of production. On the market, Say points out, producers exchange their products for money and they use the money to buy the products of others. That is the essence of the exchange, or market, economy. Therefore the supply of one good constitutes, at bottom, the demand for other goods. Consumption demand is simply the embodiment of the supply of other products, whose owners are seeking to purchase the products in question. Far better to have demand emerging from the supply of other products, as on the free market, than for the government to stimulate consumer demand without any corresponding production.

For the government to stimulate consumption by itself ‘is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire for consumption; and we have seen that production alone, furnishes the means’. Since genuine demand only comes from the supply of products, and since the government is not productive, it follows that government spending cannot truly increase demand:

a value once created is not augmented... by being seized and expended by the government, instead of by an individual. The man, that lives upon the productions of other people, originates no demand for those productions; he merely puts himself in the place of the producer, to the great injury of production...

But if there can be no general overproduction short of the Garden of Eden, then why do businessmen and observers so often complain about a general glut? In one sense, a surplus of one or more commodities simply means that too little has been produced of other commodities for which they might exchange. Looked at in another way, since we know that an increased supply of any product lowers its price, then if any unsold surplus of one or more goods exists, this price should fall, thereby stimulating demand so that the full amount will be purchased. There can never be any problem of ‘overproduction’ or ‘underconsumption’ on the free market because prices can always fall until the markets are cleared. While Say did not always put the matter in these precise terms, he saw it clearly enough, particularly in his Letters to Malthus, in his controversy with the Rev. Thomas Robert Malthus over Say’s law. Those who complain about overproduction or underconsumption rarely talk in terms of price, yet these concepts are virtually meaningless if the price system is not always held in mind. The question should always be: production or sales at what price! Demand or consumption at what price! There is never any genuine unsold surplus, or ‘glut’, whether specific or general over the whole economy, if prices are free to fall to clear the market and eliminate the surplus.

Moreover, Say wrote in his Letters to Malthus, ‘if the quantity sent in the slightest degree exceeds the want, it is sufficient to alter the price considerably’. It is this notion of what we would now call ‘elasticity’, and resulting sharp changes in price, that for Say leads many people to mistake a ‘slight excess’ of supply ‘for an excessive abundance’.

The policy implications of attending to the price system are crucial. It means that to cure a glut, whether specific or pervasive, the remedy is not for the government to spend or create money; it is to allow prices to fall so that the market will be cleared.

In his Letters to Malthus, Say offers the following example. One hundred sacks of wheat are produced and exchanged for 100 pieces of cloth (or rather, each is exchanged for money and then for the other commodity). Suppose that productivity and output of each is doubled, and now 200 sacks of wheat are exchanged for 200 pieces of cloth. How is superabundance or overproduction going to affect either or both commodities? And if by producing 100 units of each product, the producer made 30 francs’ profit, why couldn’t the resulting increase of production and fall in the price of each product still reap 30 francs’ profit for each seller? And how can general glut arise? Yet Malthus would have to maintain that part of the new production of cloth would find no buyers.

Say then notes that Malthus in a sense conceded the point about prices falling due to increased production, and then fell back on a second line of defence: that ‘productions will fall to too low a price to pay for the labour necessary to their production’. Here we come to the nub of the overproductionist/underconsumptionist complaints – if we can get past their foggy aggregative concepts and their real or seeming neglect of the fact that a lower price of any product can always clear the market.

In reply, Say noted that Malthus, having unfortunately adopted the labour theory of value, neglected to add the productive services of land and capital to labour in the costs of production. So that the assertion is that selling prices will fall below the costs of production.

But where do ‘costs’ come from? And why are they somehow fixed, exogenous to the market system itself? How are they determined? Although Ricardo joined with Say on the question of overproduction, it was easy for a British follower of Smith and Ricardo (such as Malthus) on cost theories of value to fall into this trap and to assume that costs are somehow fixed and invariant. Say, believing as we have seen that costs are determined by selling price rather than the other way round, was impelled to a far clearer and more correct picture of the entire matter. Returning to his example, Say points out that if the wheat and cloth producers double the quantity produced with the same productive services, this means not only that the prices of wheat and cloth will fall, but also that factor productivity has risen in both industries. A rise of factor productivity means a lowering of cost. But this means that an increase in output will not only lower selling price; it will also lower costs, so there is no reason to assume grievous losses or even a lessening of profit if prices fall.

Apparently, Say continued, Malthus is worried about the prices of productive services remaining high and therefore keeping costs too high as production increases. But here Say brings in a brilliantly perceptive point: prices of productive factors must be high for a reason; they are not preordained to be high. But this high wage or rent in itself precisely ‘denotes that what we seek for exists, that is to say, that there is a mode of employing them so as to make the produce sufficient to repay what they cost’. In short, factor prices being high means that they have been bid up to that height by alternative uses for them. If the costs of these factors seriously impinge upon or erase the profits of a firm or industry, this is because these factors are more productive elsewhere and have been bid up to reflect that vital fact. Say’s reasoning is strikingly similar to the modern free trade reply to the ‘cheap labour’ argument for protective tariffs. The reason why labour is more expensive, say, in the United States or other industrialized country, is that other American industries have bid up these labour costs. These industries are therefore more efficient than the industry suffering from competition, and hence the latter should cut back or shut down and allow resources to shift to more efficient and productive fields.

In more peripheral but still relevant areas, J.B. Say engaged in some lovely and powerful examples of reductio ad absurdum argument. Thus, on the importance of demand vis-à-vis supply, and on the question of gluts, he asked what would have happened if a merchant shipped a current cargo to the site of New York City in the early seventeenth century. Clearly, he wouldn’t have been able to sell his cargo. Why not? Why this glut? Because no one in the New York area was producing enough other goods to exchange for this cargo. And why would this merchant be sure to sell his cargo nowadays in New York City? Because there are now enough producers in the New York area to make and import products, ‘by the means of which they acquire that which is offered to them by others’.

It would have been absurd to state that the problem about the seventeenth century cargo was there was too many producers and not enough consumers. Say adds that ‘the only real consumers are those who produce on their part, because they alone can buy the produce of others, [while]... barren consumers can buy nothing except by the means of value created by producers’. He concludes eloquently that ‘it is the capability of production which makes the difference between a country and a desert’.

The other potent reductio, also in his Letters to Malthus, is part of his defence of innovation and machinery against charges of overproduction. Malthus, Say notes, concedes that machinery is beneficial when the production of the product is so increased that employment in that field increases also. But, Say adds, new machinery is advantageous even in the seeming worst case, when production of the particular good is not increased and labourers are discharged. For, first, in the latter case as well as the former, productivity increases, selling prices fall, and standards of living rise. Besides, writes Say, bringing in the reductio, tools are vital to mankind. To propose, as Malthus does, to limit and restrain the introduction of new machinery is to argue implicitly that ‘we ought (retrograding rather than advancing the career of civilization) successively to renounce all the discoveries we have already made, and to render our arts more imperfect in order to multiply our labour by diminishing our enjoyments’.

As to labourers disemployed by the introduction of new machinery, Say writes that they can and will move elsewhere. After all, he adds caustically, the employer who brings in new machinery ‘does not compel them [the labourers] to remain unemployed, but only to seek another occupation’. And many employment opportunities will open up for these labourers, since income in society has increased due to the new machinery and product.

Echoing Turgot, Say also counters the Malthus-Sismondi worry about the leaking out of savings from vital spendings, pointing out that savings do not remain unspent; they are simply spent on other productive (or reproductive) factors rather than consumption. Rather than injuring consumption, saving is invested and thereby increases future consumer spending. Historically, savings and consumption thereby grow together. And just as there is no necessary limit to production, so there is no limit to investment and the accumulation of capital. ‘A produce created was a vent opened for another produce, and this is true whether the value of it is spent’ on consumption or added to savings.

Conceding that sometimes the savings might be hoarded, Say was for once less than satisfactory. He pointed out correctly that eventually the hoard will be spent, either on consumption or investment, since after all that is what money is for. Yet he admitted that he too deplored hoarding. And yet, as Turgot had hinted, hoarded cash balances that reduce spending will have the same effect as ‘overproduction’ at too high a price: the lower demand will reduce prices all round, real cash balances will rise, and all markets will again be cleared. Unfortunately, Say did not grasp this point.16

Say, however, was again powerful and hard-hitting in his critique of Malthus’s belief in the importance of maintaining unproductive consumption by government: income and consumption by government officials, soldiers, and state pensioners. Say argued that these people live off production, whereas productive consumers add to the supply of goods and services. Say continued sardonically: ‘I cannot think that those who pay taxes would be at a loss what to do with their money if the collector did not come to their assistance; either their wants would be more amply satisfied, or they would employ the same money in a reproductive manner’.

In contrast to his opponents, who wished the government to stimulate consumer demand, Say believed that problems of glut, as well as poverty in general, could be solved by increasing production. And so he inveighed in many passages against excessive taxation, which raised the costs and prices of goods, and crippled production and economic growth. In essence, J.B. Say countered the statist proposals of the underconsumptionists Malthus and Sismondi by an activist programme of his own: the libertarian one of slashing taxation.

Say combined his anti-tax insights with his critique of Malthus’s fondness for government spending via a trenchant attack on Malthus and the public debt. Say noted that Malthus, ‘still convinced that there are classes who render service to society simply by consuming without producing, would consider it a misfortune if the whole or a great part of the English national debt were paid off’. On the contrary, rebutted Say, this would be a highly beneficial event for England. For the result would be

that the stock-holders [government bond-holders], being paid off, would obtain some income from their capital. That those who pay taxes would themselves spend the 40 millions sterling which they now pay to the creditors of the State. That the 40 millions of taxes being taken off, all productions would be cheaper, and the consumption would considerably increase; that it would give work to the labourer, in place of sabre cuts, which are now dealt out to them; and I confess that these consequences do not appear to me of a nature to terrify the friends of public welfare.

1.8   Recession and the storm over Say’s law

We come now to a final, critical question about Say’s law. Why did the storm over the law appear only in two massive clusters? For the timing of the swirling controversy over the law is no accident. J.B. Say coined the law in 1803, and James Mill brought it to Britain in 1808, converting Ricardo and his disciples. But why was there no particular controversy over the law until much later? Specifically, the storm erupted in 1819, when the French-Swiss economist Jean Charles Leonard Simonde de Sismondi (1773–1842) published his Nouveaux principes d’économie politique (New Principles of Political Economy). Sismondi’s book was followed the next year by the Rev. Thomas Robert Malthus’s (1766–1834) Principles of Political Economy (1820). The odd point is that both these men had been ardent Smithians for two decades; why publish these heretical underconsumptionist views at virtually the same moment?

Sismondi’s aristocratic Florentine family had settled in France, only as Huguenots to be driven by persecution to settle in Geneva, the Calvinist heartland. Sismondi was born in Geneva, the son of a Calvinist clergyman. When the radical influence of the French Revolution reached Geneva, the Sismondis moved to London, where young Sismondi had a chance to study and participate in English business affairs.

Sismondi settled down as a farmer in Tuscany in the late 1790s, publishing a physiocratic tract on Tuscan agriculture in 1801. Soon after, he became an ardent follower of Adam Smith, and published his two-volume Smithian work, De la richesse commerciale (On Commercial Wealth) in Geneva in the same year – 1803 – that Say published his famous Traité. While Say skyrocketed to influence and fame, Sismondi’s work was ignored, and remained totally unknown outside France. Perhaps resentment at this fate played a role is Sismondi’s radical conversion, embodied in his Nouveaux Principes. But the timing, the prompting for this conversion, was critical, namely: the end, in 1815, of a generation of massive war and inflation in Europe led quickly and inevitably to a post war deflation and depression. Recessions, especially on such a grand scale, were new phenomena in Europe; there was therefore no body of theoretical explanation, and hence the typical business cry of ‘glut’ or ‘overproduction’ struck a chord among many observers. In the case of Sismondi, it led him straightaway and permanently into a thoroughgoing and lifelong statism, including the advocacy of a comprehensive welfare state, a deep hostility to capitalism and the factory system, and a call for return to a simple agrarian economy. In the second edition of his Nouveaux Principes in 1827, Sismondi, in his preface, proclaims the ‘new economics’ or ‘new liberalism’ which ‘invokes government intervention’ instead of laissez-faire.

Sismondi was offered a professorship of political economy at the University of Vilna on the strength of his first book; the Nouveaux Principes brought him an offer from the Sorbonne. But Sismondi preferred to remain in Geneva, churning out a remarkably prolific series of historical works (including a 16-volume history of the Italian republics in the Middle Ages, and a 31-volume history of the French), and tending to the life of a gentleman farmer. On his farm he fought against overproduction in his own dotty way: making sure that production would be as low as possible by choosing the feeblest workers for employment on the farm, and deliberately having his house repaired by an incompetent worker. One wonders why he did not go all the way in his living the exemplary life of underproduction, and stop working or producing altogether. Thoroughly embittered at the lack of recognition of his socialistic views, Sismondi write shortly before his death in 1842: ‘I leave this world without having made the slightest impression, and nothing will be done’. Would that he had been right.

Far more of an impact at the time was made by the simultaneous conversion to underconsumptionism by the Rev. Malthus. Malthus, son of an aristocratic country gentleman, graduated from Cambridge with honours in mathematics, and was ordained in the Anglican clergy. After serving as a fellow of a college in Cambridge, Malthus became a country curate, writing his famous Essay on Population in 1798. Malthus was more than the gloomy population theorist that made his name: he was also an ardent Smithian economist. In 1804, Malthus became the first academic economist in England, taking up a chair of history and political economy at the new small East India College of Haileybury, established by the East India Company to train future employees. Not only was he the first, Malthus was to remain the only academic political economist in England for the next two decades.

Malthus was a firm friend of Ricardo, and his break with the Smith-Ricardo tradition on underconsumption did not mar their close friendship. The controversy gave rise to a famous correspondence between them, and when Ricardo died in 1823 he left Malthus a small legacy as a token of their camaraderie. More important is the fact that Malthus lost interest in his underconsumptionist heresy after 1824, and quickly reverted to being a leader of Smithian classical economics. Clearly the reason for Malthus’s loss of interest was the fact that Britain recovered from the post-Napoleonic depression after 1823, and the first storm over Say’s law was over.

Despite the fact that Malthus’s interest in his underconsumption theory was generated and maintained solely by the postwar recession, his doctrine was, oddly enough, not a cyclical theory at all but an alleged tendency of free markets to a permanent depression. It should also be noted that Malthus was not worried about savings leaking out into hoarding and remaining unspent, He was an overproductionist as well as an underconsumptionist, so that invested savings only made matters worse by increasing production: ‘If... commodities are already so plentiful that an adequate portion of them is not profitably consumed, to save capital can only be still further to increase the plenty of commodities, and still further to lower already low profits’.

While Say, in reply to critics, did not of course come up with a full-fledged theory to explain the general recession and ‘overproduction’ in relation to a profitable selling price, he did offer some remarkably prescient insights which have been completely overlooked by historians, perhaps because they were presented in his Letters to Malthus rather than in his Treatise.

First, Say takes up the postwar depression in the United States, for Malthus had claimed in response to Say, that since the US enjoyed low taxes and free markets, their absence could not be the reason for the glut suffered there. Say very sensibly attributes the basic problems in the US to the great prosperity that country had enjoyed as a neutral during most of the Napoleonic wars, so that, unburdened by blockade, its exports and its commerce enjoyed unusual prosperity. Thus, with the end of the wars in 1815, and the swift return of European maritime trade in both hemispheres, the US was found to have overexpanded its mercantile products and, in contrast, underproduced agricultural or manufactured goods. So in a deep sense, the problem is not general overproduction, but an overproduction of some goods and underproduction of others. What the United States is suffering from, then, is underproduction of these other goods. The Americans could have used the increased production to exchange for more of the goods offered by the resurgent European maritime trade. Prophetically, Say predicted that ‘A few years more and their [American] industry altogether will form a mass of productions, amongst which will be found articles fit to make profitable returns or at least profits, which the Americans will employ in the purchase of European commodities’. And then Americans and Europeans will each produce whatever they are best and most efficient at.

Those commodities which the Europeans succeed in making at least expense will be carried to America, and those which the American soil and industry succeed in creating at a lower rate than others, will be brought back. The nature of the demand will determine the nature of the productions; each nation will employ itself in preference about those productions in which they have the greatest success; that is, which they produce at least expense, and exchanges mutually and permanently advantageous will be the result.

And how about European business? What is the problem there? Why is it depressed? Here, Say put his finger on the heart of the problem: ‘costs of production multiplied to excess’. In short, the problem with the European depression was not that there was a ‘general overproduction’ but that entrepreneurs had bid up costs of production (factor prices) too high, so that consumers were not willing to purchase the products at prices high enough to cover costs. The problem, in fact, was neither the producing of too many goods nor not buying enough, but a bidding up of costs to too high a level. Say goes on to say that these excessive costs created ‘disorders... in the production, distribution, and consumption of value produced; disorders which frequently bring into the market quantities greater than the want, keeping back those that would sell, and whose owner would employ their price in the purchase of the former’. In short, the bidding up of excess costs in some way distorted the production structure so as to cause a massive overproduction of some goods and an underproduction of others.

After these passages, pregnant with hints of the later Austrian theory of the trade cycle, Say unfortunately goes off on a tangent in ascribing the excess costs to the taxation of industry and the market. But then he returns with a remarkably perceptive passage, attributing seeming ‘superabundance’ to massive ignorance and error on the part of the entrepreneurs:

This superabundance... depends also upon the ignorance of producers or merchants, of the nature and extent of the want in the places to which they sent their commodities. In later years there have been a number of hazardous speculations, on account of the many fresh connexions with different nations. There was everywhere a general failure of that calculation which was requisite to a good result...

In short, the problem centres on a general failure of entrepreneurial forecasting and ‘calculation’ leading to what turns out to be an excessive bidding up of costs. Unfortunately, Say does not pursue this crucial point to query why such an unusual entrepreneurial failure should have taken place. But he does go on to anticipate von Hayek’s important point about entrepreneurs and producers employing the market as a learning experience, to become better at estimating costs and demands on the market. Say writes:

but because many things have been ill done does it follow that it is impossible, with better instruction, to do better? I dare predict, that as the new connexions grow old, and as reciprocal wants are better appreciated, the excess of commodities will everywhere cease; and that a mutual and profitable intercourse will be established.

With the recovery of Europe from the postwar depression, Say’s law – at least in the rather vulgarized form adopted by the British classical school17 – became absorbed into the mainstream of economic thought and was challenged only by cranks and crackpots who properly constituted what Keynes later called ‘the underworld’ of economics. These denizens were resurrected by John Maynard Keynes in his General Theory, which, written during the depths of another and even more intense depression (1936), hailed them all – from Malthus to later underconsumptionists and to the egregious German-Argentinian merchant Silvio Gesell (1862–1930), who urged that the government force everyone to spend money in a brief period of time after receiving it. Gesell’s objective, as in the case of all the most flagrant money cranks, was to lower the rate of interest to zero, a goal Keynes was later to echo in his call for the ‘euthanasia of the rentier [bond-holder]’. It is perhaps fitting that this Gesell, whom Keynes called ‘the strange, unduly neglected prophet’, capped his dubious career by becoming the finance minister of the short-lived revolutionary Soviet republic of Bavaria in 1919.

Keynes’s own doctrine followed in the line of Malthus and the others, except that underspending in general was substituted for underconsumption as the allegedly critical economic problem. Keynes made a denunciation of Say’s law the centrepiece of his system. In stating it, Keynes badly vulgarized and distorted the law, leaving out the central role of price adjustments18, and had the law saying simply that total spending on output will equal total incomes received in production19.

Since Keynes’s day, economists have managed to obfuscate Say’s rather simple notion with a welter of turgid discussions of Say’s alleged ‘principle’ or ‘identity’, made all the more obscure by a plentiful use of mathematics, a form of alleged explication particularly out of place when dealing with such an anti-mathematical theorist as J.B. Say.

1.9   The theory of money

Say’s excellent discussion of money, like most of the rest of his doctrine, has been grievously neglected by historians of thought. He begins by setting forth a theory of how money originates that was later to be developed in a famous article by Carl Menger and would form the basis of the first chapter in every money and banking text for generations. Money, he pointed out, originates out of barter. To facilitate exchanges and overcome the difficulties of barter, people on the market begin to use particularly marketable commodities as media of exchange. Specifically, under barter everyone, in order to buy a product, must find someone who desires his own specific product, and this soon becomes very difficult. Thus: ‘The hungry cutler must offer the baker his knives for bread; perhaps, the baker has knives enough, but wants a coat; he is willing to purchase one of the tailor’s with his bread but the tailor wants not bread, but butcher’s meat; and so on to infinity’.

How to overcome this problem of what later came to be called the ‘double coincidence of wants?’ By finding a more generally marketable commodity which the seller will take in exchange:

By way of getting over this difficulty, the cutler, finding he cannot persuade the baker to take an article he does not want, will use his best endeavours to have a commodity to offer, which the baker will be able readily to exchange again for whatever he may happen to need. If there exist in the society any specific commodity that is in general request, not merely on account of its inherent utility, but likewise on account of the readiness with which it is received in exchange for the necessary articles of consumption... that commodity is precisely what the cutler will try to barter his knives for; because he has learnt from experience, that its possession will procure him without any difficulty, by a second act of exchange, bread or any article he may wish for.

That commodity is precisely the money in that society.

Say then goes into a by now familiar analysis of which commodities are most likely to be chosen on the market as monies. A money commodity must have a high inherent value – this is, value in its pre-monetary use. It must also be physically easily divisible, preserving a proportionate quota of its value when divided; it should have a high value per unit weight, so that it will both be scarce and valuable, and easily portable; and it must be durable, so it can be retained as value for a long time. Of course, once a commodity is chosen as a general medium of exchange, its value becomes much higher than it had been in the pre-monetary state.

Say follows the continental tradition of assimilating money to all other commodities; i.e., the value of money, as of all other commodities, is determined by the interaction of its supply and its demand. Its value, its purchasing power on the market – moves directly with its demand and inversely with its supply. While he lacked the marginal approach, Say pointed the way to the eventual integration of a utility theory of goods with money. Since money, too, is an object of desire, its utility is the basis for its demand on the market. Say also criticized Ricardo and the British classical school for attempting to explain the value of money, not by utility or supply and demand, but, as in the case of all other goods, by its cost of production. In the case of money, only the supply of money and not the demand was considered important and the supply was supposedly governed by the cost of mining gold or silver.

Say was a hard-money man, insistent that all paper must be instantly convertible into specie. Irredeemable paper expands rapidly in quantity and depreciates the value of the currency, and Say pointed to the recent issue by the revolutionary French government of the assignats, inconvertible paper that depreciated eventually to zero. Say was thus able to analyse one of the first examples of runaway inflation.

If the national money is deteriorated, it becomes an object to get rid of it in any way, and exchange it for commodities. This was one of the causes of the prodigious circulation that took place during the progressive depreciation of the French assignats. Everybody was anxious to find some employment for a paper currency, whose value was hourly depreciating; it was only taken to be re-invested immediately, and one might have supposed it burnt the fingers it passed through.

Say also pointed out that inflation systematically injures creditors for the benefit of debtors.

Say was highly critical of the Smith-Ricardo yen to find an absolute and invariable measure of the value of money. He pointed out that while the relative values of money to other prices can be estimated, they are not susceptible to measurement. The value of gold or silver or coin is not fixed but variable as is that of any commodity.

One of the splendid parts of Say’s theory of money was his trenchant critique of bimetallism. He was insistent that the government’s fixing the ratio of the weights of the two precious metals was doomed to failure, and only caused perpetual fluctuations and shortages of one or the other metals. Say called for parallel standards, that is, for freely fluctuating exchange rates between gold and silver. As he pointed out: ‘gold and silver must be left to find their own mutual level, in the transactions in which mankind may think proper to employ them’. And again, the relative value of gold and silver ‘must be left to regulate itself, for any attempt to fix it would be in vain’.

While at one point Say inconsistently looks with favour on Ricardo’s plan for a central bank redeeming its notes only in gold bullion and not even coin, the general thrust of his discussion is for ultra-hard money. On the whole, Say comes out for 100 per cent specie money, for a money where paper is only a ‘certificate’ backed fully by gold or silver, ‘A medium composed entirely of either silver or gold, bearing a certificate, pretending to none but its real intrinsic value, and consequently exempt from the caprice of legislation, would hold out such advantages to every department of commerce’ that it would be adopted by all nations. So insistent was Say on separating money from government that he called for changing the national names of monies to actual units of weight of gold or silver e.g. grams instead of francs. In that way, there would be a genuinely worldwide commodity money, and the government could not impose legal tender laws for paper money or debase currency standards. The entire current monetary system, Say writes happily, ‘would thenceforth fall to the ground; a system replete with fraud, injustice, and robbery, and moreover so complicated, as rarely to be thoroughly understood, even by those who make it their profession. It would ever after be impossible to effect an adulteration of the coin...’. In short, Say concludes eagerly, ‘the coinage of money would become a matter of perfect simplicity, a mere branch of metallurgy’.

Indeed, the only role that Say would, inconsistently, reserve for government is a monopoly of the coinage, since that coinage was to be this simple ‘branch of metallurgy’ that government could presumably not cripple or destroy.

There is not a great deal of analysis of banking in Say’s Treatise. But despite his aberration in being favourable to the Ricardo plan for a central bank bullion standard, the main thrust of his discussion is, once, again, to separate government from bank credit expansion, either by a 100 per cent reserve banking system, or by freely competitive banking, which would presumably approximate that condition. Thus Say writes highly favourably of the 100 per cent reserve banks of Hamburg and Amsterdam. Free banks of circulation (issuing bank notes) he holds to be far better than a monopoly central bank, for ‘the competition obliges each of them to court the public favour, by a rivalship of accommodation and solidity’. And if these banks are not to be based on 100 per cent specie reserve, which Say indicates would be the best system, competition would keep them investing in sound, very short-term credit which could easily be used to redeem their bank notes.

1.10   The state and taxation

Amidst the morass of bland economic writings on taxation, Jean-Baptiste Say stands out like a beacon light. It is true that he was unusually devoted – even in that generally liberal era – to laissez-faire and the rights of private property, and only waffled a very few times in that creed. But for some reason, most laissez-faire and libertarian thinkers in history have not really considered taxation to be an invasion of the rights of private property. In J.B. Say, however, an implacable hostility to taxation pervades his work; he tended to make it responsible for all the economic evils of society, even, as we have seen, for recessions and depressions. Say’s discussion of taxation was brilliant and unique; and yet, as with almost all his work, it has received no attention whatever from the historians of economic thought.

In contrast to almost all other economists, Say had an astonishingly clearsighted view of the true nature of the state and of its taxation. In Say there was no mystical quest for some truly voluntary state, nor any view of the state as a benign semi-business organization supplying services to a public grateful for its numerous ‘benefits’. No; Say saw clearly that the services government indubitably supplies are to itself and to its favourites, and that all government spending is therefore consumption spending by the politicians and the bureaucracy. He also saw that the tax funds for that spending are extracted by coercion at the expense of the tax-paying public.

As Say points out: ‘The government exacts from a tax-payer the payment of a given tax in the shape of money. To meet this demand, the tax-payer exchanges part of the products at his disposal for coin which he pays to the tax-gatherers.’ The money is then spent for the government’s ‘consumption’ needs, so that ‘the portion of wealth, which passes from the hands of the tax-payer into those of the tax-gatherer, is destroyed and annihilated’. Were it not for taxes, the tax-payer would have spent his own money on his own consumption. As it is, the state ‘enjoys the satisfaction resulting from that consumption’.

Say goes on to attack the ‘prevalent notion’ that tax monies are no burden on the economy, since they simply ‘return’ to the community via the expenditures of government. Say is indignant:

This is gross fallacy; but one that has been productive of infinite mischief, inasmuch as it has been the pretext for a great deal of shameless waste and dilapidation. The value paid to government by the tax-payer is given without equivalent or return: it is expended by the government in the purchase of personal service, of objects of consumption...

Thus, in contrast to the naive Smith’s purblind assumption that taxation always confers proportional benefit, we see J.B. Say treating taxation as very close to sheer robbery. Indeed, at this point Say revealingly quotes with approval Robert Hamilton’s likening of government to a large-scale robber. Hamilton had been refuting this very point: taxation is harmless because the money is recirculated into the economy by the state. Hamilton had likened such impudence to the ‘forcible entry of a robber into a merchant’s house, who should take away his money, and tell him he did him no injury, for the money, or part of it, would be employed in purchasing the commodities he dealt in, upon which he would receive a profit’. (Hamilton might have added a Keynesian touch: that the robber’s spending would benefit his victim many-fold, by the benign operations of the magical multiplier.) Say then comments on Hamilton’s point that ‘the encouragement afforded by the public expenditure is precisely analogous’.20

Say then bitterly goes on to denounce the ‘false and dangerous conclusion’ of writers who claim that public consumption (government expenditures) increases general wealth. But the damage is not really in the writing: ‘If such principles were to be found only in books, and had never crept into practice, one might suffer them without care or regret to swell the monstrous heap of printed absurdity...’. But unfortunately, these precepts have been put into ‘practice by the agents of public authority, who can enforce error and absurdity at point of the bayonet or mouth of the cannon’. In short, once again, Say sees the uniqueness of government as the exercise of force and coercion, particularly in the way it extracts its revenue.

Taxation, then, is the coercive imposition of a burden upon the members of the public for the benefit of the government, or, more precisely, of the ruling class in command of the government. Thus Say writes:

Taxation is the transfer of a portion of the national products from the hands of individuals to those of the government, for the purpose of meeting the public consumption or expenditure... It is virtually a burthen imposed upon individuals, either in a separate or corporate character, by the ruling power... for the purpose of supplying the consumption it may think proper to make at their expense; in short, an impost, in the literal sense.

He is not impressed with the apologetic notion, properly ridiculed in later years by Schumpeter, that all society somehow voluntarily pays taxes for the general benefit; instead, taxes are a burden coercively imposed on society by the ‘ruling power’. Neither is Say impressed if the taxes are voted by the legislature; to him this does not make taxes any more voluntary: for ‘what avails it... that taxation is imposed by consent of the people or their representatives, if there exists in the state a power, that by its acts can leave the people no alternative but consent?’

Moreover, taxation cripples rather than stimulates production, since it robs people of resources that they would rather use differently:

Taxation deprives the producer of a product, which he would otherwise have the option of deriving a personal gratification from, if consumed... or of turning to profit, if he preferred to devote it to an useful employment... [T]herefore, the subtraction of a product must needs diminish, instead of augmenting, productive power.

Say engages in an instructive critique of Ricardo, which reveals the crucial difference over the latter’s long-run equilibrium approach and the great difference in their respective attitudes toward taxation. Ricardo had maintained in his Principles that, since the rate of return on capital is the same in every branch of industry, taxation cannot really cripple capital. For, as Say puts it, ‘the extinction of one branch by taxation must needs be compensated by the product of some other, towards which the industry and capital, thrown out of employ, will naturally be diverted’. Here is Ricardo, blind to the real processes at work in the economy, stubbornly identifying a static comparison of long-run equilibrium states with the real world. Say replies forcefully and trenchantly:

I answer, that whenever taxation diverts capital from one mode of employment to another, it annihilates the profits of all who are thrown out of employ by the change, and diminishes those of the rest of the community; for industry may be presumed to have chosen the most profitable channel. I will go further, and say, that a forcible diversion of the current or production annihilates many additional sources of profit to industry. Besides, it makes a vast difference to the public prosperity, whether the individual or the state be the consumer. A thriving and lucrative branch of industry promotes the creation and accumulation of new capital; whereas, under the pressure of taxation, it ceases to be lucrative; capital diminishes gradually instead of increasing; wealth and production decline in consequence, and prosperity vanishes, leaving behind the pressure of unremitting taxation.

Say then adds a charming sentence, taking a praxeological slap at Ricardo’s fondness for what might be called his method of utterly unrealistic, verbal mathematics, ‘Ricardo has endeavoured to introduce the unbinding maxims of geometrical demonstration; in the science of political economy, there is no method less worthy of reliance’.

Say then goes on to heap scorn on the argument that taxes can positively stimulate people to work harder and produce more. Work harder, he replies, to furnish funds to allow the state to tyrannize still further over you! Thus:

To use the expedient of taxation as a stimulative to increased production, is to redouble the exertions of the community, for the sole purpose of multiplying its privations, rather than its enjoyments. For, if increased taxation be applied to the support of a complex, overgrown, and ostentatious internal administration, or of a superfluous and disproportionate military establishment, that may act as a drain of individual wealth, and of the flower of the national youth, and an aggressor upon the peace and happiness of domestic life, will not this be paying as dearly for a grievous public nuisance, as if it were a benefit of the first magnitude?

What, then, is the bottom line; what is Say’s basic prescription for taxation? Indeed, what is his prescription for total public spending? Basically, it is what one might expect from a man who believed the state to be a ‘grievous public nuisance’ and ‘an aggressor upon the peace and happiness of domestic life’. Quite simply, ‘the best scheme of [public] finance, is to spend as little as possible; and the best tax is always the lightest’. In the next sentence, he amends the latter clause to say ‘the best taxes, or rather those that are least bad...’.

In short, J.B. Say, unique among economists, offered us a theory of total government spending as well as a theory of overall taxation. And that theory was a lucid and remarkable one, amounting to: that government is best (or ‘least bad’) that spends and taxes least. But the implications of such a doctrine are stunning, whether or not Say understood them or followed them through. For if, in the Jeffersonian phrase, that government is best that governs least, then it follows that ‘least least’ is zero, and therefore, as Thoreau and Benjamin R. Tucker were later to point out, that government is best that governs – or in this case, spends and taxes – not at all!

1.11   Notes

Moreover, almost all of Say’s Letters to Malthus, in particular p. 1–68, are taken up with defence of Say’s law and his critique of Malthus’s (and the Frenchman Simonde de Sismondi’s) worry about general overproduction and complaint about alleged underconsumption. Historians of economic thought have often found Say’s Letters superficial and erroneous, but in fact his being forced to give attention to the law carried him to the heart of the differences and led him to express his views in a lucid and pungent manner. See J.B. Say, Letters to Mr. Malthus (1821, New York: M. Kelley, 1967).

For an anthologizing of Book I, Chapter XV as the statement of Say’s law, see Henry Hazlitt (ed.), The Critics of Keynesian Economics (1960, New Rochelle, New York: Arlington House, 1977), pp. 12–22.

• 1We should also mention as prominent in the ideologue group the historian Constantin François Chasseboeuf, Comte de Volney (1757–1820).
• 2Emmet Kennedy, Destutt De Tracy and the Origins of ‘Ideology’ (Philadelphia: American Philosophical Society, 1978), p. 199.
• 3It might be noted that de Tracy’s intermediary in the negotiations with Jefferson on the translation was their mutual friend, the last of the physiocrats, DuPont de Nemours, who had emigrated to Wilmington, Delaware in 1815 to found his famous gunpowder manufacturing dynasty.
• 4Thus in a famous speech in February 1801, Napoleon denounced the ideologues as the most harmful class of men. They were ‘windbags and ideologues. They have always fought the existing authority’, he thundered. ‘Always distrusting authority, even when it was in their hands, they always refused to give it the independent force needed to resist revolutions’. See Kennedy, op. cit., note 2, pp. 80ff.
• 5Or as Emmet Kennedy commented, ‘political theory could not be tolerated in a state where politics was not’. Ibid.
• 6Ernest Teilhac, L’Oeuvre economique de Jean-Baptiste Say (Paris: Librairie Felix Alcan, 1927), pp. 24–6. Quoted and translated in Leonard P. Ligglio, ‘Charles Dunoyer and French Classical Liberalism’, Journal of Libertarian Studies, 1 (Summer 1977), pp. 156–7.
• 7For a while, Rivadavia was also working on a translation of Bentham.
• 8Storch’s Cours, published in Russia in 1815, was reprinted in Paris in 1823, with notes appended by Say. Storch accused Say of theft in publishing the French edition without his consent, whereupon Say riposted that Storch lifted the bulk of the work from himself, de Tracy, Bentham, and Sismondi.
• 9The sixth and last American edition of 1834, edited by Biddle, incorporated changes made in the final French edition of 1826.
• 10J.A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 491.
• 11We should also mention as prominent in the ideologue group the historian Constantin François Chasseboeuf, Comte de Volney (1757–1820).
• 12This distinction between certain theory and its application by an ‘enlightened understanding’ approximates von Mises’s later distinction between conceptual theory (‘Begreiffen’) and understanding (‘Verstehen’).
• 13Oswald St Clair, A Key to Ricardo (New York: A.M. Kelley, 1965), pp. 295–6.
• 14In the first annotated biography of economics ever written, John R. McCulloch, along with James Mill, the leading British Ricardian, noted of Say that he was a lucid writer but stubbornly refused to accept all the great advances of Ricardo. The only creative insight McCulloch credited to Say was his law. John Ramsay McCulloch, The Literature of Political Economy (1845, London: London School of Economics, 1938), pp. 21–2.
• 15Discussion of Say’s law is made more complicated by the fact that Say, of course, did not set aside some particular passage or sentence and call it ‘my law’. The locus classicus of Say’s law is generally held to be Book 1, Chapter XV of the Treatise, and it indeed has been anthologized as ‘the’ statement of the law. Treatise, pp. 132–40. Actually, there are important and relevant passages scattered throughout the Treatise, especially pp. 109–19, 287–8, and pp. 303^1.
• 16But Schumpeter and other historians are grossly unfair in ridiculing one of Say’s arguments against Malthus: that there cannot be overproduction because ‘to create a thing, the want of which does not exist, is to create a thing without value; this would not be production. Now from the moment it has a value, the producer can find means to exchange it for those articles he wants’. While this appears to eliminate the problem by defining it out of existence, there are two comments that may be made on Say’s behalf. First, this is indeed a charming but unconvincing argument, but it is tangential, and does not vitiate the value of Say’s law or its creator’s crushing arguments on its behalf. In the heat of debate, Say, like many another intellectual combatant, sometimes used any argument that came to hand. But second, this point is not wholly valueless. For it focuses attention on a key question which Say raised but did not fully answer: why in the world did the producers make goods that, it turned out later, the consumers did not want to buy -at least at profitable prices? Needless to say, Say’s opponents provided no satisfactory answer. For Schumpeter’s attitude, see Schumpeter, op. cit„ note 10, pp. 619–20.
• 17The vulgarization took two forms. Most of Say’s emphasis on price adjustments was omitted, as was any hint of entrepreneurial failure in bidding up costs, or in the idea that specific classes of overproduction and underproduction might be the hallmark of recessions. Another item was the Mills’s formulation that ‘commodities pay for commodities’ rather than all supplies of goods and services pay for each other. This was a legacy of Smith’s stress that the only productive labour was that embodied in material objects, or commodities.
• 18By leaving out three important sentences in his quotation from John Stuart Mill’s summary of Say’s law, Keynes omits any hint of the price system as equilibrating force. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936), p. 18. On this point, see Hazlitt, op. cit., note 14, p. 23.
• 19Keynes also summed up Say’s law as holding that ‘supply creates its own demand’ – a formulation followed by virtually all economists since Keynes, including Schumpeter, Mark Blaug, Thomas Sowell and Axel Leijonhufvud. As Professor Hutt writes, in correcting this distortion: ‘But the supply of plums does not create the demand for plums. And the word “creates” is injudicious. What the law really asserts is that the supply of plums constitutes demand for whatever the supplier is destined to acquire in exchange for the plums under barter, or with the money proceeds in a money economy’. W.H. Hutt, A Rehabilitation of Say’s Law (Athens, Ohio: Ohio University Press, 1974), p. 3 and 3n.
• 20The quotation comes from a critique of the British national debt by the Scottish mathematician Robert Hamilton (1743–1829). This work was An Inquiry Concerning the Rise and Progress, the Redemption and Present State, and the Management of the National Debt of Great Britain and Ireland (Edinburgh, 1813, 3rd ed., 1818). Hamilton was born in Edinburgh and, after leaving college, worked as a banker. Shifting to academic pursuits, he became rector of the Academy of Perth in 1769. Ten years later he became professor of mathematics at the University of Aberdeen.