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More to Say
Part 1 - 1920-1975

Hector McNeill1

Following something like 80 years, since the publication of Keynes' General Theory, the work of Jean Baptiste Say, the French economist and industrialist has come under increasing criticism based on a mis-interpretation of his work as a simplistic statement summarized as Say's Law.

This destruction of a conceptual model is so complete that today, economists, who should know better, live on air, laugh at the idea (literally) and dismiss it as a misunderstanding of supply and demand. If anyone wrote coherently on supply and demand, it was Say. Increasingly however, the copious evidence of the direction of our economic performance and its impact on society requires that economists revisit alternatives. Say's work has much to contribute.

In today's identity-associative structure, any critical analysis of the conventional "wisdom" underlying Keynesianism, monetarism, central bank behaviour and fiscal fiddling, risks being considered to be heretical and something to be condemned or dismissed on the basis of reflecting a lack of understanding of "economics". Even modest statements are considered to be strongly at variance with established beliefs or customs, in particular the accepted beliefs of most economic schools, faculties and organizations. This is in spite of the considerable volumes mounting evidence that the current theory and policies do not work.

Heretics used to be burnt at the stake but today they are "deplatformed" by universities, which are supposed to be centres of learning. The mainstream media, so-called, simply do not report on the suggestions made. These tendencies only augment the void concerning useful information on economic theory and practice when this should be occupied by an urgent quest for feasible alternatives to our failing economic system.


Jean Baptiste Say
Rather than speak of "demand", The French economist Jean Baptiste Say (17671832) in his "A Treatise on Political Economy" made a clear distinction between a nebulous concept of "demand" and "consumption", the sub-heading of his book was, "The Production, Distribution and Consumption of Wealth." His model created a dynamic balance between wages and disposable income and the levels of feasible consumption of the output of agriculture, industry and services. This consumption fed the supplying sector with their revenues. A century later, it would seem, Henry Ford (18631947) was asked why he paid his workers such high wages. His logic was that in this way they would be able to afford to buy the cars his company manufactured. Ford understood and responded in practice to the logic of the Say model.

It therefore becomes apparent that to maintain stability and a successful economy, nominal wages need to be related to both the feasible economic structures of companies and their unit prices, so as to maintain consumption and where technical innovation can result in the lowering of unit prices and/or raising of wages so as to result in real economic growth.

It is important to take on board that the successful ventures involved the efforts of people who understood the processes they deployed as well as the design of their products and the intricacies of the engineering details of the relationship between a perceived need and how to satisfy that need through the production of tangible products. The Say model drove this system forwards giving rise to the industrial revolution. However, in 1922, Thorstein Veblen observed that,

"Half a century ago it was still possible to construe the average business manager in industry as an agent occupied with the superintendence of the mechanical processes involved in the production of goods and services.

But in the later development the connection between the business manager and the mechanical processes, has on average, grown more remote; so much so, that his superintendence of the plant or of the processes is frequently visible only to the scientific imagination...

His superintendence is a superintendence of the pecuniary affairs of the concern, rather than of the industrial plant; especially is this true in the higher development of the modern captain of industry."

In this passage, Veblen identified the growth in financialization having begun around the 1870s and this led to productive investment being substituted by speculative investment in assets assisted by bank loans (debt) and collateral provisions by people who were in no position to do this because they did not have sufficient income to defend their collateral if their investments failed.

However, unlike Say's enclosed economy situation where savings would be destined for investment in productive technologies and equipment or in the case of any excess loans from an exogenous source into land and real estate, the pre-1929 situation was marked by the asset in question being company shares promoting a speculative frenzy. As a result share prices lost any relationship to the underlying productivity or profits of companies. In a final loss of confidence and rises in interest rates resulted in this bubble of "investment", in nothing more than the hope of rising share prices unrelated to corporate investment or prospects, bursting and failing in 1929.

Accordingly, this case study, a lack of financial regulatory controls and inept macroeconomic policies were a demonstration of the danger of inserting money into the economy, over and above what was required to maintain a stable equilibrium between production and consumption. As is well known, our case study extends into what became the Great Depression and mass unemployment.

No, lessons were not learned

The rise in share prices had risen by a factor of 6 in the eight years before the Crash. However the equilibrium production-consumption had not changed significantly in real terms. As a result this speculative frenzy saw a loss of relationship between the insertion of excessive money into assets, on the one hand, and the real productive or supply side economy, on the other. The lesson learned here, one would have thought, would be that loans need to be more strongly tied to production prospects and, above all, to those details which could maintain the equilibrium between production and the ability of wage earners to purchase their requirements through rising productivity, sliding unit prices and therefore rising real incomes as a result of the currency value increasing. However, rather than keep an eye on this systems approach, John Maynard Keynes concentrated on the issue of mass unemployment, a major issues following the 1929 Crash. What has since evolved into Keynesianism has greatly promoted debt and rising financialization at the expense of the necessary consideration of the role of technology and production efficiency and growth. Rising government expenditures on public works and falling unemployment were confused with economic growth without due consideration being given to the balance between wages and industrial investment and growth. As a result, Keynes introduced a system that introduced excessive amount of monetary injections by government without sufficient attention being given to the link up between engineering, technology and innovation driving the advance of increasingly accessible production within the consumption domain cash flow.

A paradoxical situation occurred between 1945 and 1965 when the British economy grew rapidly, as did wages, in a Say-like system. This coincided with a period during which no Keynesian policies were applied2. It is, however, notable that this period was governed by a tri-partite decision making system on industrial policy involving business, trade unions and government with both Labour and Conservative governments being at home with this system.

1 Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.

2 Robin Matthews completed the research work establishing the absence of Keynesian policies in this period.

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