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Friday Interview: Keynesian Overconsumption Comes Home to Roost

Mount Olive College economist explains why Say's Law offers better guidance

Ever since the recent financial crisis took hold, we’ve heard the name Keynes and the word “Keynesian” crop up in political and economic debates. John Maynard Keynes was a 20th-century British economist. One of his most famous sayings was “in the long run, we are all dead.” Paul Cwik, associate professor of economics at Mount Olive College, used Keynes’ line as the basis for a presentation this year to the John Locke Foundation’s Shaftesbury Society. Cwik spoke on the theme “Say’s Revenge: Living in Keynes’ Long Run.” Cwik discussed Keynes, Say, and competing economic ideas with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

Kokai: I guess before we get into a “Who’s on first?” routine, we ought to explain that “Say’s Revenge” is based on the fact that Say is a person. Who was Say?

Cwik: Well, Jean-Baptiste Say was an economist. Well, back then they didn’t have economists. But he was a political economist, and he wrote a book all the way back in 1803 called The Treatise on Political Economy. And, basically, this book was the first textbook used in the United States, and it went to 28 reprints just in the United States alone over a period of 60 years. He was the first educator of Americans in political economy.

Kokai: And out of this work there evolved something called Say’s Law. What was Say’s Law?

Cwik: Say’s Law actually is a long, complex thing. But what economists tend to do now is they tend to boil it all down into one distilled phrase. When they do that, they usually get it wrong, and we can talk about how that is. But to get it right, the actual phrase that we want to talk about is “we produce in order to consume.” And what that means is that I have to first make something, produce it for someone else, before I can then enter into the market and serve another person.

Kokai: Now, you mention that economists often get it wrong, and there’s an interesting story about this involving Keynes, the name that we’ve been hearing quite a bit. How did Keynes change the way we think about Say’s Law?

Cwik: Keynes wanted to reshape economics in his own image, so to speak. And so when he in 1936 came out with his own book, which was The General Theory of Employment, Interest and Money, what he did was, he wanted to recast economics into something that is very similar to Einstein’s general theory. So that was the sort of scope and grandiose vision that he had for reshaping economics. In this he had to first smash everything that came before him in order to put in place the things that he liked — his ideas.

So he wanted to get rid of Say’s Law. And he couldn’t argue with Say’s Law, so instead of actually taking it on and doing this refutation and being honest, like a scholar should have, what did he do? He redefined it in such a way that others were able to easily dismiss it. So what Keynes did was, he took the phrase “we produce in order to consume,” and he changed it. And the phrase that we see today in most modern textbooks is “supply creates its own demand.” Now, you can kind of think that “supply creates its own demand” [and] “we produce in order to consume” are fairly similar, right? Produce/supply, consume/demand — yeah, it looks all pretty much the same. The problem is that when we use the phrase “supply creates its own demand,” we can go down this path, and we can think of really silly things like, “Oh, I’m going to supply balloons made out of lead, and just because I supply them, people will demand them.” Well, that’s not true. And if that’s what Say’s Law says, well, that’s wrong, so we’re just going to shunt Say’s Law off to the side and dismiss it. But, what Keynes said Say said is not what Say said. Say said, “We produce in order to consume,” but Keynes redefined what Say said into something that’s just absolutely backwards.

Kokai: Now, when you have the situation [in which] Keynes comes along and rewrites or reformulates what Say said and changes Say’s Law, that did have an impact on economics for a number of years, didn’t it?

Cwik: We’re still living in this misdefinition of Say’s Law. So the ripples of the impact of Keynes are still felt, even today.

Kokai: But you mentioned in your presentation that, as the title says, there’s now sort of a “Say’s revenge.” What constitutes Say’s revenge?

Cwik: The fact is that this idea of spending and consuming, which is the core of Keynesian demand-side economics, has proven itself to be an absolute failure. And if we think about just how an economy works — just in general, broad-brush strokes — we’ve got demand, and we’ve got supply. What makes demand? Well, we’ve got things like wants, desires. Is that limited or unlimited? That’s unlimited. And then on the other side, we’ve got supply. That’s stuff. So is that limited or unlimited? That’s limited. So which is the limiting factor? Is it supply or demand? And the answer is, supply is the limiting factor. Can we just simply demand more and consume our way into prosperity? Well, no, because we have these limitations on the supply side.

Say’s Law — “we produce in order to consume” — says no, no, we have to start with production. And that is very important because what that does is, it focuses all of our attention away from consumption — because consumption will take care of itself — and back onto production. You say, “Well, how do I get what I want? How do I produce things and make the money in order to get it from other people?”

And I first have to serve another person. I have to become others-focused. I say, “I want to become rich.” Well, how do I do that? I have to go out, and I have to serve my fellow man. And after I serve my fellow man, then I get a coupon, a certificate that says I have served them. We call those dollars. Then we can take these dollars — these certificates of service, as Walter Williams calls them — and I can go into the store, and I can order a pizza. The pizza man says, “Have you served your fellow man?” I say, “Yes, I have, here’s my proof.” I hold up my $20. And that’s a certificate that says, “Yes, I’ve served someone else.”

So I first have to produce before I can go out and serve another person. And what Keynes does is, he flips it all around, and today what we’re living in is a world of overconsumption, where we’re consuming beyond our means. And what we see is that we have a government that is out of control, savings rates that are incredibly low, and that the future can be on a knife’s edge right now — you know, which way are we going to go?

Kokai: I mentioned at the top of the interview that one of the most famous sayings from John Maynard Keynes was “in the long run, we are all dead.” But you said in the presentation, we’re now in the long run.

Cwik: We’re in the long run that yesterday’s Keynesians told us not to worry about. So you go back a few decades ago, and they said, “People are hurting now. We need to be able to do something for these people.” Well, we did. And they said, “But what about all those ramifications down the road, decades later?” They said, “Ah, don’t worry about that. That’s the long run. It’ll take care of itself.” Well, we’re in that long run now, and we’re looking at budget deficits of $1.6 trillion. We’re looking at a national debt of $14.2 trillion.

Gross domestic product, which is how we measure the size of our economy, is only $14.6 trillion. So our national debt is almost the same size as our national income, or as our GDP. So we are in a very tight, precarious situation. And then if we look at all the promises that we’ve made, it’s scary. The unfunded liabilities are the promises that the federal government has made to other people. And if we were to fulfill all those promises, we would need a pile of money in the bank, right now, collecting interest. And the question is, how big of a pile of money? And from best estimates, it’s got to be about $113 trillion that we need right now, in the bank, collecting interest.