|
|
|
CAPITALISM: |
|
The Clearest and
Most Comprehensive Contemporary Defense of the Capitalist
Economic System Available |
Literature and Lectures by Edith Packer, George Reisman, and Others |
|
|
|
|
|
From Chapter 15: The Role of Saving and Productive Expenditure in Aggregate Demand (pp. 682-685)This excerpt is taken from George Reisman, Capitalism: A Treatise on Economics. Ottawa, Illinois: Jameson Books, 1996. Copyright © 1996 by George Reisman. All rights reserved. May not be reproduced in any form without written permission of the author. The following limited exception is granted: Namely, provided they are reproduced in full and include this copyright notice and are made for noncommercial use, i.e., for use other than for sale, including use as part of any publication that is sold, copies of this excerpt may be downloaded into personal computers and distributed electronically or on paper printouts from a personal computer; reproduction on the internet is permitted provided the copy of the excerpt is accompanied by the following link to the Jefferson School's home page (which may, and hopefully will, be displayed elsewhere and more prominently): The Jefferson School of Philosophy, Economics, and Psychology. This limited right of reproduction expires on December 31, 1999. This page has been visited The Platonic-Heraclitean view of entities and the consequent double counting of consumers' goods is present in contemporary economics' notion of what constitutes total spending in the economic system. It appears to be present no less in the way the great majority of people think about the process of spending and income formation. For it is generally assumed that in buying consumers' goods, one buys more than consumers' goods--that one buys all the means or factors of production, however remote, which have directly or indirectly contributed to the production of the consumers' goods one buys. (Because the expression "means of production" can be taken to refer exclusively to previously produced means of production and thus to exclude human labor, as when one speaks of "private ownership of the means of production," it is necessary in the present context to use the expression "factors of production," which clearly embraces labor along with capital goods.) Indeed, the confusion is such that it is often assumed that in buying consumers' goods, one buys, interchangeably, the factors of production that have been used up in the past in producing the consumers' goods one buys, and the similar factors of production that the seller of the consumers' goods and his suppliers will buy in the future, in succeeding rounds of expenditure made with the money that one spends for the consumers' goods in question. To confuse matters even further, it is frequently assumed that in buying a given good, one buys the subsequent goods which will be produced by means of it and that in some sense one buys or pays for things that are physically unrelated to the consumers' good one buys but that the seller buys with the money one spends in buying from him. As examples of these confusions, it is assumed that in buying a loaf of bread, one buys the flour and wheat and the labor of bakers and millers that have been used to produce that bread, or have contributed to its production. It is also assumed that one buys the further flour and wheat and labor of bakers and millers which will produce or contribute to the production of bread in the future, and which the baker and miller buy in subsequent rounds of expenditure with the sum of money received from one's purchase of bread. In addition, it is often assumed that the buyer of bread buys toast or a quantity of sandwiches, if such is the use he makes of the bread. And it is also frequently assumed that the buyer of bread buys or pays for things that are physically unrelated to the bread, such as the advertising and research and development outlays of the baking company, or its political and charitable contributions. In sum, let there be knowledge of a connection between any two things, whether a causal connection in physical production or a connection by way of expenditure with the same physical units of money, and the things become fused together in people's minds, as though they were one and the same entity. Such confusions grossly exaggerate the role of consumer spending in the economic system. They make it appear that consumption expenditure is the total of expenditure, allegedly incorporating the expenditure for capital goods and labor, which in reality is made only by business firms, with funds that are not consumed, but saved and productively expended. [Productive expenditure is expenditure for the purpose of making subsequent sales. It includes all expenditures by business firms for capital goods and labor.] Moreover, the inability of people to see the role of saving and productive expenditure is compounded by a further set of confusions, which leads them to believe that saving is synonymous with hoarding. Indeed, with such an exaggerated view of the role of consumption expenditure as constituting virtually all spending, there is nothing left for the view of saving except to regard it as hoarding. The result of these confusions is a "macroeconomics" that is not at all a macroeconomics, but an economics virtually of consumption alone. It is an economics that has virtually obliterated the role of saving and productive expenditure, in the conviction that all economic activity is incorporated essentially just in consumption. It is an economics fully geared to the Keynesian fantasy world in which one not only can eat one's cake and have it too, but in which one bakes one's cake in the very act of eating it. The purpose of the present section is to set matters right by showing the enormous role of saving and productive expenditure in the generation of aggregate demand--a role which far exceeds that of consumption expenditure in size and in most respects is more fundamental than that of consumption expenditure. As an important part of this assignment, it will be necessary to present a system of aggregate economic accounting that, unlike contemporary national income accounting, reflects the full volume of production and the full volume of spending that takes place in the generation of revenue or income. This will be done in Section 3 of this chapter. The Demand for A Is the Demand for A The first point that must be driven home by all possible means is the proposition that the demand for A is the demand for A--that is, that the demand for any concrete good or service is simply and only a demand for that concrete good or service; that in buying anything, all that one buys is that which one agrees to receive from the seller and absolutely nothing else. The plain fact is that in buying a loaf of bread, one buys neither a quantity of flour, nor a quantity of wheat, nor the labor of a baker, nor the labor of a miller, nor a loaf of toast, nor anything else but a loaf of bread. One buys simply and only a loaf of bread, and not anything which has contributed to its production, nor anything which the seller of the bread may subsequently buy and which may thus contribute to the production of bread in the future, nor anything into which the bread itself may subsequently be made. Nor does one make the seller's political or charitable contributions. The purchase of any and all of these items is fully as much distinct from the purchase of a loaf of bread as these items themselves are physically distinct from a loaf of bread. Their purchase is something totally separate from and in addition to one's purchase of a loaf of bread. It is necessary to explain and illustrate this proposition even to the point of belaboring it, because apparently nothing less will suffice to establish it in the minds of most people. Well over a century ago, John Stuart Mill advanced the essentially similar proposition that "demand for commodities is not demand for labour." His exposition was both clear and, unfortunately, highly prophetic in its recognition that the proposition "is, to common apprehension, a paradox" and thus "greatly needs all the illustration it can receive." Mill deserves to be quoted at length on this subject: We pass now to a fourth fundamental theorem respecting Capital, which is, perhaps, oftener overlooked or misconceived than even any of the foregoing. What supports and employs productive labor, is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour when completed. Demand for commodities is not demand for labour. The demand for commodities determines in what particular branch of production the labour and capital shall be employed; it determines the direction of the labour; but not the more or less of the labour itself, or of the maintenance or payment of the labour. These depend on the amount of the capital, or other funds directly devoted to the sustenance and remuneration of labour. . . . This theorem, that to purchase produce is not to employ labour; that the demand for labour is constituted by the wages which precede the production, and not by the demand which may exist for the commodities resulting from the production; is a proposition which greatly needs all the illustration it can receive. It is, to common apprehension, a paradox; and even among political economists of reputation, I can hardly point to any, except Mr. Ricardo and M. Say, who have kept it constantly and steadily in view. Almost all others occasionally express themselves as if a person who buys commodities, the produce of labour, was an employer of labour, and created a demand for it as really, and in the same sense, as if he had bought the labour itself directly, by the payment of wages. It is no wonder that political economy advances slowly, when such a question as this still remains open at its very threshold. I apprehend, that if by demand for labour be meant the demand by which wages are raised, or the number of labourers in employment increased, demand for commodities does not constitute demand for labour. I conceive that a person who buys commodities and consumes them himself, does no good to the labouring classes; and that it is only by what he abstains from consuming, and expends in direct payments to labourers in exchange for labour, that he benefits the labouring classes, or adds any thing to the amount of their employment.16 Inasmuch as Mill's own exposition has passed entirely over the heads of his readers, it is necessary to advance a series of arguments in favor of the proposition that the demand for A is the demand for A, that is, in Mill's words, actually to give the proposition "all the illustration it can receive." i. Shadow Entities and Shadow PurchasesThe influence of the Platonic-Heraclitean view of entities leads people to believe such a thing as that the buyer of a loaf of bread is a buyer of flour and wheat, and the labor of bakers and millers, because it leads them to believe that these inputs physically exist in the loaf of bread and thus that its purchase is also their purchase. Such a view, however, has absolutely no connection with the facts of reality and contradicts the law of identity. If I wish to buy a loaf of bread and a sack of flour and a quantity of
wheat, I must buy three separate and distinct items: the bread, the flour, and the wheat.
Indeed, I can see myself actually going down the various aisles of a supermarket and
picking up from the shelves a loaf of bread, a bag of flour, and, if there is an
extensive-enough "health foods" section, a quantity of wheat stalks. My action
is very different than if I buy merely a loaf of bread alone. In the one case, I have
three items in my shopping cart when I reach the checkout stand, and I pay a sum of money
for each of them--one for the bread, another for the flour, and a third for the wheat. I
then receive into my possession the bread, the flour, and the wheat. In the other case, I
have only one item in my shopping cart--the bread--and when I reach the checkout stand, I
pay a sum of money only for the bread and receive into my possession only the bread. If I
buy a loaf of bread alone, I do not obtain flour and wheat in addition, or pay out the
additional sums required to obtain flour and wheat. The flour and wheat I am nevertheless
still supposed to purchase in the mere act of buying a loaf of bread represent, therefore,
purchases of a very peculiar kind: they are purchases which cost me absolutely nothing,
and purchases which bring into my possession absolutely nothing. In a word, they are
purchases which simply do not exist! The only entity I purchase is a loaf of bread,
and a loaf of bread is neither flour, nor wheat, nor anything else but a loaf of bread.
Indeed, people must dwell in a world of shadows and apparitions if they believe that they
obtain bread, flour, and wheat all for the price of the bread alone, all compressed within
the wrapper of the bread, and--for many perhaps, best of all--all for the same calories as
are present in the bread alone. If the prospect of eating flour and wheat does not give pause, then one should consider what it would be like to eat fertilizer or tractor parts, which are also supposed to be contained in bread because they have been used to help produce it and which, if bought in the act of purchasing bread, must be eaten in the act of eating bread. Incredibly, such prospects are unlikely to daunt many of today's alleged economists. For example, Prof. George Leland Bach, who at the time was a professor of economics at Stanford University, wrote in his widely used textbook: "For example, in converting the iron ore to steel above, Bethlehem adds something to the value of the product it passes along."17 The unmistakable meaning of this statement is that a steel company passes along iron ore in the steel it sells--that somehow steel is physically still iron ore. Similarly, Professors Alchian and Allen declare in their textbook: "For example, most steel bought from U.S. Steel by General Motors is not at that time bought by the final user, for General Motors later resells the steel as an automobile."18 In these passages, we have the baldly stated view that entities are the means of production that have been used up producing them--that automobiles are the steel sheet from the steel mills and, indeed, iron ore, and that that is what automobile owners drive. Indeed, the logic of confusing one thing with another merely because the one was used to produce the other, or merely because the matter that was present in the one now shows up in the other, implies such absurd propositions as that ice is in steam and ice heats houses. For consider. If a quantity of ice is melted into water, and then the water is boiled into steam, then on the same logic as that the wheat and flour are "in" the bread and are eaten when the bread is eaten, and that the iron ore and steel sheet are "in" the automobile and are driven when the automobile is driven, it follows that the ice is in the steam, and that ice heats houses when steam heats houses. ii. The Need for CapitalIf the demand for consumers' goods really were a demand for factors of production, then one would have to explain why it is necessary to possess capital before starting any business undertaking. Why, if the demand for consumers' goods is a demand for factors of production, is it not possible for every individual who should happen to be so inclined, to set up his own steel company or railroad line? If it really is the consumers rather than businessmen who pay for the factors of production, then why can't a prospective entrant into any line of business simply tell the workers he wants to hire and his prospective suppliers that they will be paid by the consumers of the products he will ultimately make possible, and thus should not bother him with their claims? The truth is, of course, that before entering into any business operation, one must possess the funds required for the purchase of the necessary factors of production, for which purchases one will only subsequently be compensated by one's customers. These funds, of course, are the capital the firm needs and without which it cannot proceed. Indeed, for the most part, the customers of business enterprises are other business enterprises. And all those business enterprises which sell to other business enterprises not only require capital of their own, but are dependent upon their customers possessing capital. Such enterprises are not even compensated by the consumers for their outlays, but only by other business enterprises, out of capital. The consumers compensate only those business enterprises for their outlays with which they themselves deal. iii. Buying the Inputs OR Buying the OutputA further proof that in buying from a business one does not buy what the business buys is the fact that if one really did buy what the business buys, one would not be a customer of the business--certainly not in that transaction. If, for example, one really did buy flour and labor to bake bread, then one would not buy bread--certainly not the bread made from that flour, by that labor. A real buyer of flour and the labor of a baker, compelled to buy bread that is baked from that flour by that labor, would be the victim of a robbery, for he would be forced to buy his own property! His position would be that of being presented with a check for a meal cooked in his own home, by his own housekeeper, with food he himself has paid for. In buying the flour and the labor of a baker, one obtains a natural and a legal title to the bread. One owns the bread by virtue of having bought the flour and the labor. One cannot then be asked to buy the bread. The principle that follows is that if one really does buy the inputs, one does not buy the output. If one buys the output, it is precisely because one has not bought the inputs. There is a further difficulty with the confusion that in buying the output one buys the inputs. This is the problem that the demand for the inputs--the demand for the factors of production--is a productive expenditure, while if the output is a consumers' good, the demand for the output is a consumption expenditure. In such cases, to claim that the demand for the product is a demand for the factors of production, is to claim that an expenditure which is not for the purpose of making subsequent sales--namely, the consumption expenditure which is the demand for the output--is an expenditure for the purpose of making subsequent sales--namely, the productive expenditure which is the demand for the inputs. Thus, it is to claim that one and the same expenditure is and is not a consumption expenditure, and is and is not a productive expenditure. . . . Notes16. John Stuart Mill, Principles of Political Economy, Ashley ed. (1909; reprint ed., Fairfield, N. J.: Augustus M. Kelley, 1976), pp. 7981. 17. George Leland Bach, Economics, 6th ed. (Englewood Cliffs, N. J.: Prentice-Hall, Inc., 1968), p. 40. Italics supplied. 18. Armen A. Alchian and William R. Allen, University Economics, 3d ed. (Belmont, Calif.: Wadsworth Publishing Company, 1972), p. 530. Italics supplied. |
||