Say’s Law and the money economy
Let me begin with this quote from Tel in the comments on my previous post which was on the just published interview with me on Say’s Law. Tel begins with a quote from my post and then discusses the difficulty in dealing with savings in the form of money versus savings in the form of resources:
Say’s Law remains the single most important principle in all of economics.
Only because Keynesians need to insist they have disproven Say’s Law in order to perpetrate their price manipulation and power grab.
The problem being that there are methods to confuse a lot of people for a limited time, and give a convincing illusion that Say’s Law no longer applies. How long this illusion can be extended is questionable, but with sufficient power behind it, seems like quite a while.
That’s why I prefer the explanation, “Money is a veil over barter” which is easier to understand and contains within it the concept of two layers: the barter layer where every good or service exchanges for another good or service, plus the money layer which attaches prices to these things and (just like any “veil”) also hides something. Say’s Law in it’s pure sense applies to a barter economy and when all we have is a barter economy it becomes so obvious and irrefutable that it seems barely worth a mention. Once the veil is in place it’s possible to lose track of what’s happening underneath.
Say’s Law does, of course, apply to an economy in which money is the medium of exchange, a store of value and the unit of account. If it didn’t, there would be no point in mentioning it at all. And by coincidence, on the same day that Man and the Economy published my article on Say’s Law, Quadrant has published online my article on money and the real economy: That’s the Way the Money Goes. There is a lot in the article – it’s 4500 words long – but this is the core issue:
At the centre of a proper understanding of rates of interest is the recognition that when someone is looking to invest, what they borrow is money but what they are actually seeking are capital assets, labour time and other forms of input such as electricity and transport. There was therefore a dual focus [in pre-Keynesian economic theory] that was essential to make sense of what actually went on. One had to absolutely keep an eye on the market for money and credit, and at the same time to be completely mindful of the supply of real resources available for productive investment.
Money is more than a veil, of course. Things do not go on just as if it were all perfectly visible. The existence of money causes massive misdirection and distortions in the structure of production. You can barely make sense of anything unless you understand the role of money, but you also cannot understand the way money distorts economic reality unless you also understand Say’s Law which explains the nature of the actual reality the existence of money distorts.