Our "Rightly Understood Interests"

I concluded my post of yesterday, in which I discussed the evils that arise from interventionism, with a promise to reveal to businessmen why their "rightly understood interests" lie in laissez faire. So, here goes:

Let us begin with Say's Law of Markets - a pillar of classical economics that Keynes and his acolytes hated. Jean-Baptiste Say was the "Adam Smith of France" - and John Rae records that Say travelled to Glasgow just to sit in Smith's chair at the university! Those were the days...

In a nutshell, Say's Law asserts that the production of X creates the demand for all non-X. Thus, if farmers grow wheat, this creates the demand for wine, shoes, and everything else, except wheat. This is because when the farmers sell their wheat, they will not buy wheat; rather, they will buy other goods and services.

Keynesians deliberately distorted Say's Law by teaching their unfortunate students that it means "supply creates its own demand." But the supply of wheat does not create the demand for wheat. Rather the supply of wheat creates the demand for all non-competing goods. And the demand for wheat comes from the supply of all non-competing goods. Savvy?

There are innumerable implications of Say's Law - but here I will detail only two of them: first - and this is what the Keynesians hate - that demand is created by producing goods and services, not paper money. Say's Law rules out "overproduction" - and asserts that anything produced will get sold, even as junk. That is, its price will drop until it is finally sold. This applies to labour too. Markets clear.


The second implication of Say's Law is that businessmen must see that the demand for their produce is entirely dependent on the production and sale of ALL NON-COMPETING GOODS.


Thus, when India Inc. gathers together and demands protectionist tariff barriers, they only hurt themselves. It might benefit Bajaj if foreign scooters are disallowed entry into the Indian market - but that does not benefit Mallya, whose booze would sell better if more scooters were sold, and more cars too, and TV sets as well.


So, if Bajaj, Mallya, Kurien, Tata, Mahindra et. al. lobby for protection - and get it - they all will actually come off losing, because overall demand will drop, despite all the Keynesian policies of the central bank. If cheese imports were free, for example, all except Kurien would gain. And so on...


The "collusion" between these businessmen is wrong-headed: they do not know their "true interests." They do not know the Science of Economics.


Indians of my age can find proof of the veracity of this classical law of markets by comparing demand in the years preceding 1991 to conditions today. Then, the shop shelves were bare. There was not much to be sold - and so overall demand was low. Markets possessed little catallactic energy.


Today, a host of goods and services are sold, many of them imported - like mobile phones, cameras, TV sets, jeans and so on. Cars and scooters and motorcycles are available off the shelf. Thus, the overall catallactic energy in our markets has multiplied - thereby raising the demand for everything that is NON-COMPETING.


The crux of the matter is that businesses that do not compete with each other hurt only themselves through protectionist collusion. Further, those employed in these businesses hurt themselves further as consumers. A sales manager in Bajaj
Auto in the bad old days might love his job because he has no work to do - but when he goes to market with his wages... It is there that he loses.


In yesterday's post I spoke of the "politicisation of economic life" that occurs because of interventionism - and I mentioned one of the"costs": that businessmen must devote more and more attention to cheap and dirty politics instead of simply tending to their businesses as they ought to. But there are other costs as well. If we add up all these costs of lobbying to the other costs of lowered demand and losses as consumers, surely any businessman will see that his "rightly understood interests" lie in laissez faire, in a completely Free Market.


While our businessmen mull over this, the fact remains that the vast majority are workers and peasants. For them, fully competitive, free trading societies are best - because, despite their meagre earnings, they succeed as consumers: they buy the best products in the world at the lowest prices. Thus, laissez faire - and not socialism or communism - leads to a "workers' paradise." American workers enjoy life - unlike their counterparts in the former Soviet Union. The East German worker always envied his counterpart in West Germany - who drove real cars, and not the silly Trabant.


Think it over - and you will realise laissez faire is best.


Recommended readings: 
1. My old column on Say's Law, available here.
2. WH Hutt's A Rehabilitation of Say's Law, which you can download free here.