There I was just yesterday quoting Kevin Williamson in discussing Economics is quite simple and straightforward when today I find that he has now gone all the way and invoked Say’s Law.
Dollars have value because of the things for which we can trade them: Picasso paintings (or, ideally, paintings by some superior artist), coffee, cotton, cheeseburgers, sofa beds . . . checks, chickens, or pesos. This is an aspect of what in economics is known as Say’s Law, which holds that goods are paid for in goods — i.e., that we manufacture widgets or grow tomatoes or write novels because we wish to consume shoes and poached salmon and Buicks. The dollar or the euro is just a way to avoid the difficulties of trading a truckload of chickens (or a convoy of them) for Les Femmes d’Alger.
Say’s Law really wouldn’t be adding much of a point at all if the only thing it said was that spending is based on selling. What makes it important in a world of Keynesian economics is that it points out that demand which is not based on having produced and sold, ultimately leads to a fall in output and employment. Where spending is greater than available supply, the economy finds there are more than 100 units of output being bought for ever 100 units of output having been produced. It takes a while for the problems to show up, but eventually they must. When those down the expenditure track try to spend the dollars they receive, they find they cannot buy as much as they thought they would. Some firms therefore cannot pay all their bills and the economy slips a bit further back. The wheels of the economy do not mesh, but given the way we teach macro, hardly one in a million can understand why. Indeed, the worse our economies perform, it is often the very businesses being cheated by these deficits which ask governments for even more of the same to get them out of the problems that the first set of deficits had caused.
Modern economics is based on the fallacy that demand can be manufactured before there is production to match the spending. You can see that such policies do not work by the dismal state of those economies which tried deficit spending to generate growth. You just cannot find these policy failures explained in any of our economics texts, other than, of course, my own.
[My thanks to Dimitri for sending the link along.]