Adam Smith on Say’s Law

The actual mechanism of exchange that is often mistaken for Say’s Law is the statement that demand is constituted by supply. Purchases are made with the money one has received from producing and selling. How odd that I had never noticed this in Adam Smith before where he writes exactly that. This is from the Introduction to Book II, “On the Nature, Accumulation, and Employment of Stock”:

When the division of labour has once been thoroughly introduced, the produce of a man’s own labour can supply but a very small part of his occasional wants. The far greater part of them are supplied by the produce of other men’s labour, which he purchases with the produce, or, what is the same thing, with the price of the produce of his own. But this purchase cannot be made till such time as the produce of his own labour has not only been completed, but sold.

Ah those two words, “but sold”. It’s not enough to produce something. Whatever one has produced must be then be converted into money before one can then buy something else: C-M-C’.

Smith also goes further in that same intro by discussing the role of the entrepreneur in finding value adding forms of work for employees who could not do so on their own. This is where Keynesian economics breaks down in the belief that a community can spend its money before it is earned. Perhaps an individual can, but not everyone together. In the passage below, the stock held by the employer would today basically consist of those lines of credit that allow employers to pay their workers before the goods they are producing find buyers. That stock must exist if individuals are to receive the goods they then purchase with their wages:

As the accumulation of stock is previously necessary for carrying on this great improvement in the productive powers of labour, so that accumulation naturally leads to this improvement. The person who employs his stock in maintaining labour, necessarily wishes to employ it in such a manner as to produce as great a quantity of work as possible. He endeavours, therefore, both to make among his workmen the most proper distribution of employment, and to furnish them with the best machines which he can either invent or afford to purchase. His abilities in both these respects are generally in proportion to the extent of his stock, or to the number of people whom it can employ. The quantity of industry, therefore, not only increases in every country with the increase of the stock which employs it, but, in consequence of that increase, the same quantity of industry produces a much greater quantity of work.

How much does any of this penetrate the conscious awareness of an economist today?

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