A Rehabilitation of Say’s Law

It should now be clear that the initiating cause of emerging recession which Say’s law explains is not the mere existence of widespread withheld productive capacity (wasteful idleness in assets and men or their wasteful use through confinement to “sub-optimal” activities). This is in itself the condition of chronic recession or depression. The relatively competitive sectors of the economy can adjust themselves to the wastefulness of defective pricing in other sectors without setting in motion further withholdings. But a wave of new withdrawals of inputs, each individual withdrawal tending to induce further withdrawals in other parts of the economy, in slowing down the rate of growth in input-flows, or causing an actual contraction in input-flows, must exercise a depressive influence upon the source of demands.

The path to recovery that is suggested by Say’s law—institutional reforms to release, encourage or permit incentives for market-selected adjustments, (a) of “unduly” high wage-rates (which reduce the wages-flow and the average wage-rate), or (b) of other input prices which exceed market-clearing values, may appear to some as a cruel remedy. It is all too easy to represent it as such. But if “a little inflation” can rectify the situation, then “a little wage-rate reasonableness” can also rectify it. Those economists who have defended the inflationary maintenance or restoration of “aggregate effective demand” in order to combat the evil of “unemployment” have never advocated more than very mild inflation. They have always confidently expected a small depreciation of the real value of the money unit (and hence small reductions of real wage-rates) to be sufficient to restore “full employment” and the wages-flow. Hence they must recognize the corollary, namely, that the wage-rate cuts needed to raise or fully restore the average money wage-rate without inflation would also be small.1 It is indeed an inescapable inference from the facts of inflation-induced recovery that in general elasticities of demands for labor must be high. If labor union officials as a body really wanted to avoid both cyclical layoffs and chronic unemployment, they would exercise leadership and habitually persuade the members of their unions not only to renounce the “wage-push” pressures which have for so long been repressing the wages-flow but, at appropriate times, to accept the temporary sacrifices needed to preserve or restore labor’s earnings.

The condition under which an infectious withholding of productive services generates worsening idleness or idling of men or assets is basically a pricing phenomenon, not a monetary phenomenon. As long as the right to suppress the social discipline of market pressures by pricing inputs (including the inputs we call “marketing”) in the private interest is tolerated (whether via government enactment; by strike, boycott or “predatory selling” duress; or by “peaceful” collusion), the automatic tendency to depression and unemployment which Say’s law so clearly explains is inevitable. Powerful inducements to the cumulative withdrawal of purchasing power (i.e., of “supplies”) will persist irrespective of the rate at which an anticipated inflationary monetary policy may be causing money-spending power to increase. Keynes’ legacy—the planned and progressive debasement of the money unit (of which we all feel so ashamed that we habitually resort to euphemistic descriptions of the process)—no longer effectively mitigates the depressive influence of input prices raised under the strike-threat or other forms of duress; for unions now make full allowance for the inflation that their pressures make expedient.

Incomes policies offer no solution. The whole history of attempts in that direction in Britain, the United States and elsewhere demonstrates their futility. For just as the poverty-creating consequences of the strike-threat system are tolerated ultimately because of the enormous vote-control power of those who administer that system, so must the political determination of wage-rates and prices be enforced for the private benefit of union leaders. And it is these organizations which must accept chief blame for the expediency of the chronic currency debasements that are sapping the economic health of the western communities.2

There can be no solution until opinion-makers recognize that recovery from recession can be achieved only if all employment outlets, however lowly paid initially, can be peacefully filled. And the wage-rate and price adjustments then needed will have to be market-selected, protected from strike-threat or other duress, and not imposed through such crude initiatives as Cost of Living Councils, Price Commissions and Pay Boards.

I have tried to show that Say’s law explains the fundamental reality on which an economic science relevant to an advanced division of labor has to be erected. An understanding of its implications by the world’s opinion-makers could result in an unparalleled amelioration of the material well-being and economic security of mankind. More important, it could bring within reach an unprecedented improvement in the quality of life. For the attainment of those non-material ends which non-economists tend to call “non-economic” is facilitated, not frustrated, by advances in the physical welfare of the people.

3In some occupations large wage-cuts would be required to maximize (as distinct from to restore) the wages-flow.

4See W. H. Hutt, The Strike-Threat System, Chapter 17.

• 1*In some occupations large wage-cuts would be required to maximize (as distinct from to restore) the wages-flow.
• 2*See W. H. Hutt, The Strike-Threat System, Chapter 17.
• 3The path to recovery that is suggested by Say’s law—institutional reforms to release, encourage or permit incentives for market-selected adjustments, (a) of “unduly” high wage-rates (which reduce the wages-flow and the average wage-rate), or (b) of other input prices which exceed market-clearing values, may appear to some as a cruel remedy. It is all too easy to represent it as such. But if “a little inflation” can rectify the situation, then “a little wage-rate reasonableness” can also rectify it. Those economists who have defended the inflationary maintenance or restoration of “aggregate effective demand” in order to combat the evil of “unemployment” have never advocated more than very mild inflation. They have always confidently expected a small depreciation of the real value of the money unit (and hence small reductions of real wage-rates) to be sufficient to restore “full employment” and the wages-flow. Hence they must recognize the corollary, namely, that the wage-rate cuts needed to raise or fully restore the average money wage-rate without inflation would also be small.* It is indeed an inescapable inference from the facts of inflation-induced recovery that in general elasticities of demands for labor must be high. If labor union officials as a body really wanted to avoid both cyclical layoffs and chronic unemployment, they would exercise leadership and habitually persuade the members of their unions not only to renounce the “wage-push” pressures which have for so long been repressing the wages-flow but, at appropriate times, to accept the temporary sacrifices needed to preserve or restore labor’s earnings.
• 4Incomes policies offer no solution. The whole history of attempts in that direction in Britain, the United States and elsewhere demonstrates their futility. For just as the poverty-creating consequences of the strike-threat system are tolerated ultimately because of the enormous vote-control power of those who administer that system, so must the political determination of wage-rates and prices be enforced for the private benefit of union leaders. And it is these organizations which must accept chief blame for the expediency of the chronic currency debasements that are sapping the economic health of the western communities.*