Hi, I’m sorry if this is a bit of a noob question. But, regarding Say’s Law, what the hell does he mean by “for the value of money is also perishable.”?
I know that the value of fiat money is perishable, but I thought that if the money were gold, then its value would increase over time…
Good question. I suppose even during deflation money produces greater returns when invested than just lying around. Therefore businessmen are eager to put their money into new projects.
Good ole copy and paste will let me repeat something I wrote in another thread:
“More importantly, Say goes on to say that the producer is just as anxious to dispose of the money he receives from the sale of his goods because the value of money is also perishable. Why would Say state this?”
I saw an article that said, “Finally in regards to money, Say has been accused of missing the point that money is dynamic.[17] However, this is not the case. Say is a strong advocate of a hard currency and decries the state’s manipulation – usually through debasement – of the value of the currency. Quite astutely Say writes that the manipulation of the monetary value confuses the pricing system thus making the adventurer/entrepreneur hesitant to further invest in capital and production. In addition, grievous price controls and taxation usually follow such debasement, which together all greatly limit production and exchange.[18]”
Which makes me think that’s what he was talking about, the state debasing the currency. Maybe it was a problem in his day, and it’s what he’s referring to.
“Without inflation, wouldn’t a producer’s choice to hold money instead of immediately purchasing goods be rational choice based on the producer’s liquity preference (or whatever it’s called) since the value of his money could appreciate as easily as it could depreciate?”
Say had a footnote to the paragraph you quoted. He wrote: “Even when money is obtained with a view to hoard or bury it, the ultimate object is always to employ it in a purchase of some kind. The heir of the lucky finder uses it in that way, if the miser do not; for money, as money, has no other use than to buy with.”
Can somebody quote the context he wrote that in?
Here you go Jonathan,paragraph 8 of this page http://www.econlib.org/library/Say/sayT15.html
I’m almost tempted to claim that this is some sort of insight on marginal utility, but I don’t know Say well enough (I would prob. have to read the entire book) to comment,
It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products.
A seller will want to sell his product sooner rather than later, because there is no utility in holding the product (meant to be sold) for a longer period of time than necessary. The same is true of money. Individuals have a demand to hold a certain amount of money in their cash balance, for a certain period of time. Any money above their demand for money is likely to be exchanged for goods or services, while even after a certain period of time money held in cash balances will be exchanged, as well. There is a marginal utility to holding money, in other words, that is reflective on money’s role as a medium of exchange.
Of course, you could just as well argue that Say meant that the good and money lost exchange value over time. Like I said, I don’t know Say well enough. I just thought my possible interpretation was interesting.
Reading that article, one understands why Keynes was gunning for Say’s law, and would do anything to refute it, including lying about what it said.
Because here is a logical conclusion of Say’s law, as enumerated by him:
…The same principle leads to the conclusion, that the encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.
I can’t comment on Keynes’s views on consumption, but his argument is a bit more advanced that just “consume more”. Keynes saw a fundamental disconnect between savings and investment. Namely, he argued that an increase in savings, or a decrease in present consumption, necessarily leads to a fall in consumer prices. As a result, there is no incentive to invest in the capital goods market, since the price of the final good falls. He saw this as a weak link in capitalism, and therefore argued that government needed to socialize investment in order to make good on the savings.
There is, of course, more to Keynes than that, but Keynes recognized the importance of investment. I don’t mean to say that that was Keynes’s only reservation. Obviously, he didn’t see the rate of interest as a necessary coordinator of savings and investment, and thus believes that by lowering the rate of interest you could stimulate investment. This prob. stems from two observations made by Keynes,
The General Theory, which I have yet to read cover to cover, is actually a very interesting piece of literature. Very wrong mostly, but nonetheless Keynes makes some interesting comments on the capitalist system.
Very interesting post.
So far so good. Law of supply and demand restated.
OK, I think here is where Keynes entered the Twilight Zone. And I see a few flaws in this thinking, which I will number:
In the real world, people don’t save under the mattress. They put their savings in the bank. Hazlitt wrote that historically this is so, but for a trivial few dollars. So the decrease in savings Keynes is worried about actually leads to investment. And what is there to invest in but the capital goods market. There were no consumer loans whne he wrote his book.
If people are buying less cars, say, then it’s a very good thing that less in invested in producing cars. So it’s not a “weak link in capitalism” that incentive to make cars is reduced, it’s an important positive feature of capitalism. [Let me point out that the first point addresses investment in general, and this point is emphasising that one has to examine industry by industry what’s going on. And there one sees that the industries where demand is reduced should indeed not be invested in, and all that saved money sitting in the bank will go to profitable industries. Note that Say’s Law is important here, as it implies that cannot be a general glut of everything].
I’ve read here that lower consumer prices usually do not mean disaster for the producer, because his raw materials also cost less in a general deflation, so he can still make his profit.
Not sure what “make good on the savings” means.
I think the arguments against govt involvement in investing are well known. The ones I remember at the moment:
If we assume, unlike Keynes, that just digging ditches and filling them up again will not solve the problem, then the govt has to know which industries to invest in for them to solve Keyne’s [imaginary] problem. How can they possibly know? [Note that this is really three arguments against Keynes. First, his problem is a non issue, as explained above. Second his solution of govt spending on anything at all is mind boggling in its fallaciousness. The spending has to be productive, as Say’s law tells us. Third, assuming investment has to be in the right industry, how can govt, who loses nothing by guessing wrong, possibly be relied on to guess right.
And if they do know, how can they be trusted not to ignore their knowledge and just give the moolah to their buddies instead, as has happened every single time?
The famous that which is not seen argument, the general impoverishment caused by taking money away from the populace.
I truly don’t get this. Let us imagine a world where the govt has control of the printing press. There is no Fed, and the govt just up and prints money whenever it feels like it, with no relation to interest rates. Then I can see how having more printed money might be mistakenly confused with stimulating investment. Especially if interest rates are low, thus encouraging businesses to borrow that newly printed money.
But if there is no new money, then the banks will have to get the money they will lend from people depositing money in the banks. People will deposit their money only if interest rates are HIGH enough for them to feel it’s worthwhile. So that there is a tension going on. High interest rates encourage investors, low interest rates encourage businesses to borrow. Both elements, investors and businessmen borrowing, are needed for capital investment to take place. Obviously some magic number will have to be found, by market forces operating, that will be just the right interest rate to keep both sides happy.
So that saying low interest rates [when it is not a euphemism for printing money] encourages investments misses the boat.
Sorry, those two points just sailed right by me.
He was no dummy. The qustion is, was he just tricking the less intellectually gifted with clever sophistries, or is there any substance to his comments.
Smiling Dave,
It has nothing to do with “saving under mattresses”. Whether you save under your mattress or you save in savings accounts it doesn’t matter in Keynes’s theory. Keynes’s theory is not one of monetary disequilibrium. It’s about a disincentive to investment as a result in the fall in the price of consumer goods.
People will deposit their money only if interest rates are HIGH enough for them to feel it’s worthwhile.
A small correction, time preference decides the rate of interest, not the other way around.
He was no dummy. The qustion is, was he just tricking the less intellectually gifted with clever sophistries, or is there any substance to his comments.
He persuaded a lot of intellectually gifted people.
Once we grant that the saved money will be put in the bank, then I think it’s mate in one move against his theory. Because what happens to the money in the banks that people have deposited and are gathering interest from? The banks will just sit on the deposited money for lack of someone to lend to? They will return the money to the depositors, saying, “Sorry Charlie, we don’t want to pay you interest for money we don’t need”? Has this ever happened? Is that what kept Keynes awake at night?
Yes, I remember reading that in Mises somewhere. I think that the gist of the argument remains the same, that too low an interest rate will discourage people from putting it in the bank. I speak from personal experience here.
Once we grant that the saved money will be put in the bank, then I think it’s mate in one move against his theory.
No, Hayek’s explanation of the pricing process is “mate” against Keynes’s theory. That savings is stored in banks doesn’t say anything within itself, because Keynes’s point still holds. Hayek shows us how the pricing process actually works. By the way, it’s not that banks won’t lend, it’s that people won’t borrow to invest. Keynes’s believed that this was the cause of the business cycle, so the huge drop in aggregate demand would represent banks not lending for investment.
Yes, I remember reading that in Mises somewhere. I think that the gist of the argument remains the same, that too low an interest rate will discourage people from putting it in the bank. I speak from personal experience here.
You don’t save just to earn interest. You save in order to put off present consumption for future consumption, because you believe that whatever you will consume is the futuer will garner more satisfaction than what you will consume in the present. Mises is explicit in saying that the rate of interest does not determine time preference.
Of course people would save even if they couldn’t earn any interest, because they need make sure they’ll have money for when they retire, for example. But I can’t understand how the rate of interest doesn’t at least affect time preference… I mean, if I have 100 today and I have the opportunity to put it into a savings account and get 110 a year from now, I might decide to save the money; but if the interest rate is so low that the 100 that I have today can only grow to 102 in the future, I might decide to spend the 100 today on a trip or something…
But I can’t understand how the rate of interest doesn’t at least affect time preference…
Time preference is roughly a subjective price of future money in terms of present money (or vice versa, depending on definition). It is not affected by interest rate (the market price of future money in terms of presennt money) any more than other preferences by other market prices. No matter how much oz of gold the market asks for pounf of apples, your preference between gold and apples does not change (e.g., you always prefer 1 oz of gold to 123 pounds of apples, but 124 pounds of apples over 1 oz of gold - no matter the market price).
That said, actors’ decisions are affected by market prices (so if apples cost 1 oz of gold per 100 pounds, you sell; if 1 per 200 - you buy). There is no contradiction here - BTW, a similar misunderstanding frequently occurrs regarding supply and demand, but I guess discussing this would go too much off-topic.
Don’t I always have to eat one way or another, so that if the price of food in general goes up, I’ll be always willing to spend more? Won’t my choice of buying the apple depend on the prices of other goods as well?
Yes and no.
Here’s our man Mises on the subject, [emphasis mine]:
People do not save and accumulate capital because there is interest. Interest is neither the impetus to saving nor the reward or the compensation granted for abstaining from immediate consumption. It is the ratio in the mutual valuation of present goods as against future goods.
The loan market does not determine the rate of interest. It adjusts the rate of interest on loans to the rate of originary interest as manifested in the discount of future goods.
What the bolded part is saying [translated into English] is that if the rate the banks are divvying out is less than the originary rate of interest, I won’t give them the money. Because my time preference tells me it’s not worth the piddling few pennies they are giving me.
So that the original claim a few posts ago stands, that lowering interest rates [in the absence of money printing] will not automatically encourage investment. Quite the contrary, at times.
You highlighted the wrong part,
People do not save and accumulate capital because there is interest.
And you misunderstood Mises where you did highlight him. The loan market rate of interest is reflective on the rate of originary interest, but the former attempts to adjust to the latter, not the other way around.
So that the original claim a few posts ago stands, that lowering interest rates [in the absence of money printing] will not automatically encourage investment. Quite the contrary, at times.
It will, but instead of causing an investment boom, it will create a shortage of credit.
The point that i think Say might have been making is of the loss of value over time, due to technological advancement and the way new technology will be worth more than old technology. Take for example the CPU, if you had a core 2 duo chip then you should sell it as soon as possible because they already have core i5 chips and they loose value over time.
That part is not relevant, as will soon be clear.
I’m glad we agree on that second sentence. I’ll explain what I meant:
Let me make it simple. I have money in my pocket. Do I want to deposit it in the bank [= loan the bank the money]? Depends. If they are willing to pay me the originary rate of interest, fine. If they are only willing to pay me less than the originary rate, my time preference tells me not to lend the bank the money [=deposit it]. So once again, the original post stands, that lowering the interest rate [below the originary rate] in the absence of money printing, will not automatically encourage investment. Quite the contrary at times. Indeed, as you say, it will create a shortage of credit.
Keynes flops again.
Hey Smiling Dave, how can I counter the Keynesian accusation that Say assumes a “barter model of money”?