Further Implications Of Say's Law Of Markets: Take #2

Today is the 130th birth anniversary of Ludwig von Mises. This post is written in his honour. He hated the Keynesians and he upheld Say's Law against their vicious attacks. It is Say's Law that proves the truth of Mises' words below, written for the benefit of the working classes who mistakenly support socialism, unionism and Keynesianism:

In the capitalist society there is a place and bread for all. Its ability to expand provides sustenance for every worker. Permanent unemployment is not a feature of free capitalism.

Murali's comment to my previous post - on Jean Baptiste Say's Law of Markets, and its implications on the current economic crisis, has prompted me to write another post on this vital law, this time explaining some of its other practical implications. In the world of classical liberal political economy, if you were not an adept at Say's Law, you were not considered a political economist worth your salt. It is therefore important to know all about this law of markets - a law that John Maynard Keynes thought he had disproved.


First, let me restate the law:

The sale of X gives rise to the demand for all non-X.

If X sells, it creates the demand for all non-competing goods.

Thus, if a bhel-puri wallah sells his stock, he will be possessed of the means to purchase all other, non-competing goods on the market, except bhel-puri, which of course he will not buy. This disproves the deliberately misleading Keynesian formulation of Say's Law as "supply creates its own demand." The supply of bhel-puri does not create the demand for bhel-puri. The supply and sale of all other, non-competing goods and services do.  


Now, the first objection the Keynesian will have to this formulation is that the market tends towards over-production, so without Keynesian monetary boosts, recessions are inevitable. But Say's Law says:

Markets Clear - If Prices Are Not Rigid Downwards 
(due to interventionism).

Thus, ANYTHING PRODUCED will finally be sold - even as junk, if prices are allowed to fall. There is NO OVERPRODUCTION. And there is NO CASE for any monetary boost to "stimulate consumption." 

Indeed, as the Austrian School of economists have proved with theory, and as history has proved today as well, it is this sort of monetary tinkering based on Keynesian "macroeconomics" that is the root cause of all boom-and-bust "business cycles."

Say's Law asserts the obvious: That SAVING and INVESTMENT and INCREASED PRODUCTION lead to INCREASED DEMAND for ALL GOODS AND SERVICES. This is the ONLY WAY to boost demand permanently. 


Keynesian inflationism destroys savings; erodes capital; and thereby reduces production. If at all it boosts consumption, this is during the temporary, heady and short period of the artificial boom, for inevitably the bust must follow, and this is invariably of longer duration than the boom. Further, there have been historical periods of "stagflation," when inflationism failed to boost consumption at all, and economic stagnation combined with high inflation.  

Second: Say's Law proves that all businessmen are best off if they DO NOT COMBINE in protectionist groups. Such groups, if successful, reduce the supply and sales of all non-competing goods - and this reduces demand for all businessmen who do NOT compete with these goods. Thus, whereas Amul Cheese may want protection, it makes no sense for Kingfisher Beer to support this claim, and vice versa. 


Recall that, in our protectionist heydays, there was precious little available in Indian shops - and all businesses suffered. Our markets had zero catallactic energy. 


Thus, Say's Law proves that the business interests of a particular class of traders called "importers" must be supported by all. 


Further, it makes a rock-solid case for "rugged individualism" on the part of all businessmen. It opposes mixing politics - particularly protectionist politics - with business.

The same is true with regard to immigration restrictions. These exist in the West because of a few very powerful trade unions, like the US Automobile Workers' Union. These unions demand visa restrictions because they fear that immigrants will "take away their jobs." 


But the fact remains that all immigrants are NOT competing with autoworkers. Some may come as doctors and nurses. Some may come as dishwashers and construction labourers, restaurant waiters and cooks. And some as software engineers. After all, labour is NOT a homogeneous entity. And there is therefore nothing called "unskilled labour." Further, the demand for labour is always the demand for a particular skill.

If immigration was free, Say's Law proves that overall demand would rise, because as the workers in the non-competing areas managed to sell their services, they would buy whatever they needed from that very same market. I daresay if the USSA had opened up to immigration two years ago, their crisis in the housing market would well nigh be over.

There is more: Because automobile workers' unions are so influential and powerful, the US automobile industry has collapsed. General Motors has been nationalised! Obviously, an important cause of this collapse is the high cost of domestic labour. 

So here is a third and final implication of Say's Law: That all non-competing businessmen gain the most if ALL goods and services are sold at their most competitive price, which is, of course, the LOWEST PRICE.

THIS INCLUDES LABOUR.

Thus, cheap and abundant labour is good for an economy, just as cheap and abundant coal or oil or natural gas or timber is. If labour is cheap, all businesses benefit. All costs are lowered. More goods and services are produced and there is more competition. Thus, workers in all industries gain as consumers - even though their individual wages may be lower. For example: If waiters and cooks can be hired cheap, restaurants will be cheap, there will be more of them - and more workers will be able to eat out.


Cheap labour is beneficial to other, non-competing businesses in another, vital way: consumers have more to spend on the other offerings of the market. Thus, if cars are cheap in the US, the US consumer has money left over to buy beer, jeans, CDs and books. 


This implies that free immigration and cheap labour are GOOD for all American businessmen. Further, there is NO REASON for all workers to join socialist trade unions. Karl Marx's slogan, "Workers of the world - Unite!" makes as little sense as "Businessmen of the World - Unite for Protectionism!"

So, just as Say's Law of Markets suggests RUGGED INDIVIDUALISM as the best policy for businessmen, so also does it suggest the same for workers. Trade unionism and labour market restrictions hurt all workers outside the combination - and thereby hurt all other businesses, and the workers employed in them, too. Workers must compete with each other - just as businessmen must, too. After all, workers in the same factory compete for the next promotion, don't they? As Mises put it: 

Under capitalism everybody is the architect of his own fortune.

Say's "Law of Markets" thus makes a water-tight case for free trade, for free immigration, and for laissez faire. It supports the logic of open borders and the free mobility of capital, goods and labour. It tells us what really boosts demand permanently - which is, increased production of goods and services, based on higher savings and investment. It totally explodes the Keynesian myth that monetary stimulation to boost consumption is good for an economy.

Jean Baptiste Say was known as the "Adam Smith of France." His Law of Markets is as unshakable as the Law of Gravity - despite all the efforts of the evil, lying Keynesians. Truth keeps on working, as Mises said, even if the textbooks contain lies. This law makes a logically indestructible case for free markets and free competition. It makes a solid case for rugged individualism. It opposes politics - which is what the Keynesians, Marxists, protectionists and union bosses have injected overdoses of into our lives, thereby damaging civilisation, even to the point of destroying it.

If you want to learn more about Say's Law, I suggest the late Professor WH Hutt's A Rehabilitation of Say's Law, available from the Mises Institute in PDF, as an e-book, and also as a proper book. Follow this link.


WH Hutt was an outstanding classical liberal; that too, despite being educated at the London School of Economics during the heydays of Fabian Socialism. Hulsmann reports that Hutt, while a student at the LSE, attended a guest lecture by Mises - and then he "broke on through to the other side."


Hutt was born into the British working class - which is why his works against trade unionism are all the more worth studying.


Part 2 of this post can be read here.

To The Youth

In Puri, I noticed so much "real knowledge" ordinary Oriyas possess, that they never learnt at any school. Like the guy who gave me a great massage. The guys who do the cooking - and this includes some experimental "continental" stuff especially for the wandering gora. I bought some magnificent hand-painted postcards of Lord Juggernaut - as seen in the photo alongside. They are fabulous sculptors, too - in wood, metal and stone. They are an artistic and creative people - and on the radio in the tea-shack I heard great Oriya music. 

In this post, my central message to the youth is:

Stay away from State Education. 

There is a big world out there - and lots of real knowledge to obtain. To help you start off right, here is a short lesson for you all, things I have privately studied over many decades, and which I think it my duty to share with you all.

Let us begin with the understanding that Labour is suffering; it is disutility. The fun only begins when you start spending what you have earned with your labour. Our people work hard; they "labour" - but the little "fun" they have, they only get the worst ganja, the worst alcohol (some desi sharaab sells here) and the worst tobacco - bidis. This is a public health disaster - and it brings to mind the deep errors involved in the "labour theory of value" that the Property-hating Communists teach. What is happiness; what is anand? Value is "subjective." Utopia means Utopianism - each to his own, and to each his own: Property.

And then comes Liberty. Capitalist enterprise is the "service of your fellow man"? The camel guy on the beach answered, with the usual "wisdom" of our common people, "The service of man is the service of God." But that doesn't answer the question: What is the service of your fellow man?

The woman selling tea is serving her fellow men and women - and tirelessly so. The profit she earns is entirely honourable - shubh laabh. At the end of the day she packs up her cutlery and utensils, loads them on her head and walks home - and that is her Capital. Capitalism is poonjiwadi. Each operates with his own Capital. All are "private economies" run by subjectively valuing independent minds. This is what you see the ordinary, uneducated people doing all the time in any Indian city or town. They are going about buying and selling - and trying to "accumulate capital." 

So I told the camel guy, "God is very rich here; so many big temples; he doesn't think about you poor people and your suffering; so just serve your fellow man; serve him faithfully and honestly; and you will be Free."

Our country's problems are caused entirely by a faulty Economics - and its only cure can be the mass understanding of basic economic laws and principles that are correct and scientifically valid. One principle I have already enunciated - labour is NOT value. The second is that Inflationism erodes the Capital of all poor people. "Macroeconomics" is nonsense. And so is "Microeconomics" - but that's another story.

The "educators" of our The State have got everything totally wrong - they view Profit as Loss; and they view Loss as Profit.

They see the "population" as a Loss - but cows don't create wealth. The milkman does. Densely crowded cities and towns are richer than vacant countrysides. Our children are our wealth. They see them as a liability. 

And they view their "budget deficits" as "economic stimuli" - this is how they see Widespread Loss as Profit.

The "educators" and, hence, the "policy-makers," are thus blind to certain things that matter for economic success:

• they are blind to Markets

• since markets occur in cities and towns, they are blind to Urban Issues

• they are blind to Transportation - and all tradeables must be transported, which is why they say "every great city sits like a giant spider on its transportation network": and "all roads led to Rome."

Both their Theory and their History are wrong.

All they are doing is Misusing Force to take away Liberty and Property.

This is nothing but Arbitrary, Tyrannical Government.

It is FOOLISH to go to them for Education.

After all, they think you are the "population problem."

Indeed, in 1997, on the 50th Anniversary of Independence, the Parliament of India passed a "unanimous resolution" asserting that population was India's biggest problem. That is, in this Democracy, the "representatives of the people" think - in unanimous terms, that too - that their constituents are a Problem; and their children, too.

Sanjay Gandhi forcibly sterilised lakhs of poor people.

They are doing "rozgaar yojana" (in the villages) but they are stopping poor people from trading freely (in the cities).

They are destroying every city and town with overcrowding - thereby making an urban home even more difficult for the poor. And there is SO MUCH free land all around.

Whatever else you do, do NOT go to their institutions for Education.

Especially in Economics, Political Science, History and Law.

Do not study "Indian Economics." Burn all these books.

Do not study their "Civics." Burn all these books.

And stay tuned to this blog, which will try and guide your minds in the right direction as long as it is able, with a Daily Post.

Boom Shankar!

Bengal - As A "Nation Of Shopkeepers"

While some have concluded, quite correctly, that the West Bengal elections were won and lost on the issue of Private Property, this blog took the point further and argued that, for the new regime, road-construction must be a top priority, because roads automatically increase the value of lands they link to. Oddly enough, the news has it that the Mamata Banerjee government has 35 ministers - but no mention is made of a roads minister!

Today, there is another piece of news from Calcutta that suggests roads must be top priority. Referring to Calcutta's street hawkers, this news report concludes with the following paragraph:

The Chief Minister said she had been holding discussions with officials concerned for improving the traffic system that would entail, among other things, widening of some roads without evicting hawkers on the pavements.

Why are there so many street hawkers in Calcutta? Two reasons: First, Calcutta is the only Big City - and so it attracts migrants like a magnet; and second, these migrants cannot afford to buy shops. How will roads help?

With roads into the surrounds, satellite towns would develop, and more and more commercial property would be built, bringing down the cost of shops. In time, more and more of these hawkers would become regular shop-owners. That is the direction in which Bengal must proceed - build roads so as to urbanise aggressively; and put an end to zoning rules so that commercial property grows without any legal restrictions.

The West was also like this. I recall visiting the ancient City of Cologne in Germany some years back, and walking about its markets with a local journalist who told me that, in the olden days, one of the legal responsibilities of the City Mayor was to oversee the smooth conduct of all business on the streets: that is, business conducted by street hawkers and vendors. 

My guide told me that in ancient times, poor people from afar would travel to Cologne to sell their wares in its markets - and the Mayor had to look after their interests. But now, said my guide, everyone owns a shop - and this legal responsibility has recently been deleted from the duties of the City Mayor. The same can happen in West Bengal - a state that has many big cities and towns apart from Calcutta. Economic progress ought to mean that street-hawkers become shopkeepers.

Of course, western cities still have informal markets and street hawkers can still be found - as in Amsterdam - but these are run by quite prosperous folk, and they rake in bigger profits than regular shopkeepers because tourists prefer to shop in such informal markets. And overhead costs in informal markets are quite low.

It is also my opinion that aiming for a Bengal that is a "nation of shopkeepers" would totally destroy the appeal of Communism, which has held the average Bengali in its thrall for decades - and encouraged him to become a government clerk: a baboo. Indeed, the very word is Bengali. 

Bengal was the first province in India to be ruled by by the British - and it was Napoleon who ridiculed the British by calling them "a nation of shopkeepers." Napoleon preferred France to be "a nation of patriotic soldiers" - but it was Britain and not France that emerged victorious. It was the nation of shopkeepers that ruled the world. Mises says something noteworthy about these shopkeepers - and the civilisation they begat:

The much abused shopkeepers have abolished slavery and serfdom, made woman the companion of man with equal rights, proclaimed equality before the law and freedom of thought and opinion, declared war on war, abolished torture, and mitigated the cruelty of punishment. What cultural force can boast of similar achievements?

The Brits built all the great markets of Calcutta - the very old "New Market" was built by Sir Stuart Hogg - and a section of it is still named after him.

Bengal has voted for poriborton - or "change." Let that change first emerge in ideology. Let Capitalism replace Communism.  The common people of West Bengal, the peasants and the workers, swallowed all the commie propaganda - and lost. Lost badly. For them, I have another noteworthy quote from Mises:

There is but one way toward an increase of real wage rates for all those eager to earn wages: the progressive accumulation of new capital and the improvement of technical methods of production which the new capital brings about. The true interests of labor coincide with those of business.

So, it not only Private Property that matters for Bengal's future. It is the entire Capitalist prescription that needs to be implemented - beginning with Free Trade, so that all the swanking new shops will have shelves overflowing with the best goods from all over the world. Calcutta Port must become a very busy port. Since this is a river port, some deep water sea ports must also be found.

And add Sound Money to the list - for the same news report quoted above talks about Mamata Banerjee's "rice for 2 rupees a kg" scheme for the poor in Jangalmahal: the area where Maoism / Naxalism is rife. This may be necessary now, for where there is no peace there can be no market. Peace is another prescription for Bengal - if she wants Capitalism.  But so long as this cheap rice is paid for by printed paper rupees, it makes no sense - for the cost of everything else rises: inflation.

Thus, the poriborton that Bengal needs is just this: 

Communism must be replaced by Capitalism.

No more a "nation of baboos."

From now on, let Bengal be a Nation of Shopkeepers!


PS: Part 2 of this post can be read here.

Inflation - And the Crony Academic "Sophistocrat"

Pratap Bhanu Mehta (whom I have lambasted on an earlier occasion) chairs a State-owned "think tank" - and is best described as a "sophistocrat": like the sophists of old, he "specialises in ‘making the weaker argument the stronger,’ or, in other words, convincingly presenting lies as truth by dressing them in the misleading cloth of the arguer’s expertise." 

In his regular column, he has this time focused on inflation. This former Professor of Law & Government at JNU says inflation is "governance induced" and caused by "governance failures" - and I wonder why he does not use the word "government." The word "governance" is pure fiction - as I have explained in an earlier post. These are failures of The Government of India, Professor Mehta!

What is inflation? Older economists looked differently at this word. Ludwig von Mises (1881-1973) wrote how the very meaning of this word had changed during his lifetime:

What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation.

This is the "classical quantity theory of money" - which was NOT mechanistic and mathematical like that of Irving Fisher's MV = PT. But even Fisher knew that increases in the quantity of money cause a rise in all prices. The difference between the classical and modern quantity theories is just that the modern version says prices rise "proportionately" while the older economists knew that prices rise depending on "where the new money goes." So, if you "follow the money" all will be clear.

Today, money is NOT gold. It is just fiat paper - monopolistically produced by The State. Thus, increases in the supply of money are caused by The State. It is The State that produces inflation - deliberately, to fund its expenditures and to buy support. As Mises wrote:

The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.

Professor Mehta does not say this. Instead, he says:

When inflation is persistently high there is good reason to believe that there are significant supply bottlenecks in meeting increased demand. So the question is: what is it about the Indian economy that is making it difficult to generate supply responses to increased demand? In certain areas of agriculture there are long-term issues around productivity. There is simply no excuse why these issues should not have been addressed seven years into the UPA. But the supply of every single input cost, from energy to services, from land to credit for small businesses, seems to be alarmingly high. Each of these input costs can be directly linked to governance failures. Proper regulation is needed in many areas. But the form in which regulation is administered at so many levels of government is exacting a huge toll on the ability to create supply responses.

This is Professor Mehta's sophistry: to blame inflation on something else - like demand and supply of various goods, instead of nailing The State as the only cause. Yet, "creeping inflation" has been on for decades: when I was a little boy, a bottle of Coca-Cola cost 30 paise. When I bought my first motorcycle, petrol was 3 rupees a litre. When the first Maruti 800 rolled out, it cost 45,000 rupees. Inflation is nothing "new." As long as deficit financing continues, inflation will continue too.

Under the old International Gold Standard, if a nation "inflated" the supply of paper notes to finance The State, this would affect the foreign exchange market, and all foreign currencies would rise in value relative to the domestic currency. This would make imports expensive and exports cheaper. The public then viewed this as a "bad thing" - and condemned it. Today, however, people think this is a strategy to "boost exports" - and they cheer! This is because Keyenesian "education" has dulled and corrupted their minds. As Mises explains:

In the course of the depreciation, foreigners are in the profit-making position while domestic residents are in the losing position. Foreigners can buy more of the domestic products of the country that has inflated its currency and have to pay for their purchases by selling a smaller amount of their own products. The inflation-producing country, its is true, exports more, but it receives less for its exports. Inflation forces upon that nation a restriction on consumption. Only people completely blinded by mercantilist fallacies can view such an outcome as advantageous.

The Indian rupee has been losing value internally as well as externally - for decades. The US dollar was worth 8 rupees, the Deutsche Mark was 2.50 rupees, and the UK pound was 27 rupees in 1989, when I went to study abroad. Today, the dollar is 45 rupees, the Euro is over 60 rupees and the pound about 80 rupees. My course fee of £5000 cost me less than Rs. 1,50,000. Today, the same course would cost Rs.4,00,000 - and, yes, the exporters are laughing! When will we realise that foreign trade is about imports, about improving domestic consumption?


Indeed, Professor BR Shenoy's "Note of Dissent" to Nehru's Second Five-Year Plan was on precisely this point: inflationism. As Lord Bauer wrote in his tribute to this honest Indian economist:

They [the majority of economists] envisaged large-scale money creation for the financing of the highly ambitious Second Five Year Plan, maintenance and expansion of a wide range of economic controls, and extensive nationalization. In his Note of Dissent, Shenoy rejected the general spirit of the Majority Report as endangering personal freedom and a democratic political system. He also disagreed with several major proposals, including the scale of money creation, the maintenance and extension of state economic controls, and the scope of nationalization. He argued specifically that money creation on the scale envisaged by the Majority Report and under the Second Five Year Plan would result in inflation or a balance of payments crisis or both—a prediction that was fulfilled barely a year after the inception of the plan.

The difference between now and then is just this: then, they printed money to build steel plants under their ownership; today, they want to fund "welfare." And our chacha (and his guru Amartya Sen) were on the inflationary side then, just as they are now. Interestingly, both are from Cambridge, and both were taught their craft by Keynes' greatest disciple, Joan Robinson. In Sen's case, he was also a member of the secret Cambridge group called "The Apostles" - a group to which Keynes himself belonged, and who called themselves "amoralists." (See the wiki on Amartya Sen.)

Let us return to Professor Mehta's piece and his critique of chacha manmohan's claim that "there is a trade-off between inflation and unemployment." This is typical Keynesian bull - the notion that the more the government spends, the better the fate of the economy, "because there is more money floating around." 

In reality, this is but a means of cheating the working class - by agreeing to the trade unions' demand for higher wages, while at the same time engaging in inflationary finance. By inflation of the currency, The State "consumes capital." This is bad for the nation - though a handful of people gain, including crony exporters. The working classes lose because there is less Capital to invest, less jobs on offer, and wages cannot rise because productivity does not. Consumption falls - including consumption of imports (like oil). As Mises wrote:

Keynes did not teach us how to perform the miracle of turning a stone into bread, but the not at all miraculous procedure of eating the seed corn.

It is time we realised that the lesser a State spends, the better-off we all are: that is, the more of our income we ourselves retain, to save and invest; the less we pay in taxes; and that the same applies to government borrowings as well as money creation. I have an earlier post explaining this in full.

The only real solution is a return to the International Gold Standard - which will place "golden handcuffs" upon the wrists of every finance minister.

But there is still more sophistry in Professor Mehta: this time, he also talks about the high price of land - that is, urban land. Mehta writes, in support of a new Land Acquisition Act:

The bill will, if well drafted, help create fairness and transparency in compensation. But it will not solve all the principle land issues. It will solve the fairness issue. But whether it will solve the shortage or zoning issues is still an open question. Some land acquisition is location-specific. Land-acquisition problems are a product of the fact that the entire ecosystem for land planning is mismanaged. 

Actually, urban land is expensive only because of one reason: The State (of course!) which is a monopolist of urban land (the "urban development authorities") as well as a monopolist of roads. Around all our metropolitan cities there is abundant land - that is, "unowned land" that is not linked to the city by roads. 

Thus, the dual monopolist exploits us for his own, selfish gains. He makes urban land prohibitively expensive - deliberately; by "policy." Ditto for inflation, which is also "deliberate policy." 

All the urban development authorities must be abolished. And the road monopoly must go too. City mayors must be constitutionally installed - with the specific constitutional duty of providing roads to any real estate development coming up in the periphery of the city; further, roads must also be built to connect all the satellite towns to the primary city. 

Here again, all we have from Professor Mehta is blather and sophistry. Below are words that Mises' himself might have directed at Professor Mehta had he been alive now. But these words were targeted at people like him and his boss, chacha manmohan:

The pretended solicitude for the nations welfare, for the public in general, and for the poor ignorant masses in particular was a mere blind. The governments wanted inflation and credit expansion, they wanted booms and easy money.

Mises said "it is not the duty of the economist to be fashionable and popular; he has to be right. Those timid souls who fear challenging spurious doctrines and superstitions because they have the support of influential circles will never improve conditions. Let them call us "orthodox"; it is better to be an intransigent orthodox than an opportunist time-server." 

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.

Against State Spending: More they Spend, More YOU Lose!

Keynesian allies of central banking make the preposterous claim that higher State spending boosts "aggregate demand" - and that this is the way out of a "recession." To these Keynesians, State spending ADDS to "aggregate demand." If consumers are not spending and if investments are not forthcoming, they say, it is State spending that must lead the way. This will lead to "full employment" - of labour, that is. The textbooks are full of all this.

As we saw yesterday with Sudipto Mundle, professor emeritus of a State-owned institute of "public finance," no one asks: Where is the money coming from? Is it being borrowed, is it from taxation, or is it being printed? Professor Mundle himself begins by quoting total spending - with awe, for the numbers are staggering:

This financial year, starting April 1, 2011, the central government will spend Rs 12.6 lakh crore on various public services and development projects. Adding to that the expenditure of the state governments, total government spending in the country will be in the order of a massive Rs 36 lakh crore...

Since most people "think" like Keynesians, they will read these staggering figures and believe that their own businesses will see improved prospects - after all, there will be so much money floating around, demand for everything will rise, won't it?

So let's think a little harder. If the money is printed, it will cause inflation - and all ordinary people will lose. If the money is borrowed, private investors will not get to borrow it - and invest. The State will just take it and blow up the money, producing nothing - and repaying it out of future streams of taxation. Again, all ordinary people will lose. Lastly, if the money is from current taxes, surely we could have "stimulated the economy" by spending it ourselves! Do we need ministers and baboos to spend our money for us?


Think!


To help you do so, here is a Mises Institute article of today titled "Government Spending Is Bad Economics" by Jonathan M. Finegold Catalan. I quote excerpts from his conclusion:

Government spending is not a method of improving the market's efficiency, nor is it a method of employing allegedly idle resources. The result of government spending is foregone opportunities; the cost is the gain in wealth that would have occurred had economization been allowed to take place, minus the outcome of government spending. One can easily conclude that the notion of positive countercyclical fiscal stimulus is highly suspect, and that a better alternative would be to allow individual market agents to economize economic goods based on their own utility scales....

Government, in fact, is a large disequilibrating force on the market. It forcibly redistributes economic goods, removing them from a process of economization and instead investing them toward the realization of less important, or less preferred, ends. In other words, it distorts the continuous process of coordination....

Overall, we can safely conclude that government spending causes more harm than good; it redistributes the means of production toward the attainment of ends considered inferior by the individuals who make up the society that government is allegedly acting to improve.

Get it, dude?


We'd all be much better off spending (or saving) our own money.


Professor Mundle openly admits, in his opening remarks, that the common man in India thinks State spending is a colossal waste of resources:

There is a general impression, reinforced by daily headlines about new mega-scams and our individual experiences of poor performing government agencies, that the waste of public resources is colossal.

No roads, No highways. Shoddy railways. No electricity. No running water. Nothing.

Excise license, driving license, this permission and that and the other, fiat paper money, and cops - that's what we get: the danda.


This State produces no "goods"; only "bads."


So, never believe that soaring State spending is anything even remotely "good." It is BAD.


Very bad, indeed.


And if any Keynesian still hassles you with arguments about "full employment of labour" - then refute him with the section titled "Idle Resources" in the above article by Catalan. 


Catalan cites WH Hutt's The Theory of Idle Resources. I am a great admirer of the late Professor Hutt, having studied many of his excellent works. He is a must read for all serious economists. His books on trade unions, Say's Law of Markets, Immigration, the Politically Impossible and others are essential for all serious minds. You can download Professor Hutt's The Theory of Idle Resources here.


WH Hutt came from a "working class" background. While at the LSE, he attended a guest lecture by Ludwig von Mises - and "broke on through to the other side," realising that socialism harms the whole of society, working class included. Hutt's works cover areas not covered by any of the others - Mises himself, Hayek or Rothbard. Hence, reading Hutt is a must. He is another of those who richly deserved the Nobel Prize. Professor Hutt taught in South Africa.

You're Crazy, Mr. Customs Man!

Mint has had a conference on "luxury" - and two reports I read on that set me thinking. I have often written that our Customs Department ought to be closed down unilaterally and free trade instituted with all nations. But these reports - and other sundry observations - make it clear that those in charge of this massive power over the domestic economy are completely crazy. Mad.

Let us begin with the interview with Armando Branchini, executive director of Fondazione Altagamma, a trade body of 74 Italian luxury brands such as Gucci, Bulgari, Fendi and Valentino among others, having collective sales of €45-50 billion. He says that the customs duties on his products are so high in India that people prefer to buy them in Singapore and bring them in - by simply wearing them on their person, like a luxury bag or a watch or shoes or whatever. He says something on the regulation of "luxury brand retail" (some famous 51-49% scheme) - and it sounds ridiculous when you hear that they are willing to invest 100% in their own retail stores @ US$ 3 million per store for 50-60 stores a year! The interview concludes with the statement: "This market and economy is over regulated by the government." Betcha! They're nuts!

The second report is on luxury yachts - and since I have been living on the coast for a long time, it is my view that as the roads and highways are so horrible, free imports of all kinds of boats could allow our coastal cities and towns to decongest and let property and real estate be developed along the coasts. This report says that the Italian luxury yacht-maker interviewed sells 60 a year in Brazil, but only 2 or 3 in India - because of customs duties. We have a 3000 mile coastline! We can have many, many free trading port cities on these coasts. Where are we headed?

Actually, the same applies to luxury cars, to liquors and wines, and to everything else we desire to import. The import duty on cars is over 100% - and this makes no sense since so many MNCs have already set up base here. Does it make sense to charge 100% duty on an imported BMW or Mercedes while charging less for a locally assembled model? Certainly not to the consumer. Nor to the poor manufacturer. Is this some kind of return to the ghastly days of "import-substitution industrialisation"? As with boats and yachts and other luxury goods, the idea of automobilisation should be to see maximum ownership - that more and more Indians own good cars. And by "good cars" I don't mean Tata Nanos. I mean second-hand Mercedes or BMWs. They'd make great taxis - especially when a Bajaj auto-rickshaw costs over 4 lakh rupees (US$ 10,000).

Similarly, we could be big importers of wines, beers and quality liquors - which we don't produce domestically. There are 600 brands of beer in tiny Belgium, for example. What about Bohemian beers? There are so many beers of so many kinds in Germany. And Guinness? Irish pubs, here?

All this could be big business - for importers. A 100% duty on these merely makes the IMFL peddlers rich - while the poor Indian consumer gets screwed. A gourmet restaurant owner once told me she is forced to sell $5 wines for $30! A wine producer from California I once met in Nude Elly complained about our "tariff walls."

The term tariff WALL reflects the craziness of our rulers.

Obviously, with such high tariffs there is little or no trade, so there is little or no revenue. Why do they do it? Obviously, for bribes from domestic cronies. Or perhaps these are called "political contributions" to their parties. All this goes against the "national interest."

Frederic Bastiat was the greatest free trader ever. He put it squarely when he wrote way back then that a State can pursue either the "producers' interest" or the "consumers' interest." In the former case there will be shortages and scarcities. In the latter case, there will be abundance. Then, there will be Supermarkets all over the place with their shelves overflowing with goodies from all over the world, from Japanese saké to everything else that can be called "exotic." Thus, only the consumer interest coincides with the true national interest.

Socialists and communists - who lead trade unions - fool their followers with deluded ideas of a "workers' paradise": but workers are consumers too! Only Capitalism - which is mass production for mass consumption - makes ordinary workers enjoy consumption standards medieval monarchs would be envious of. Socialist, "centrally planned," and communist nations were hell for all consumers - especially their workers, who had to queue up for anything and everything, and where smuggled electronic toys were the rage. India was like that - and North Korea still is. The North Korean ideal is juche - which means nothing else but swadeshi.

Ludwig von Mises added the insight that protectionist producers are all "schizophrenic" - they exhibit "divided selves." They do not see themselves as both producer as well as consumer. They do not realise that while they sell just one thing, they buy everything else. It makes no sense to lose out as consumers. After all, we produce in order to consume. What is the point producing, say, a Bollywood blockbuster - and not being able to buy a yacht or speedboat and zipping off to Alibag after work every evening, just half an hour by sea? Makes no sense to drive 4 hours on a crowded, broken road - in a luxury car!

With unilateral free trade - the abolition of the Customs Department - all Indians will be better clothed, better fed, they will smoke and drink better, drive better, sail better. Everything they do, they will do better. Swadeshi is nonsense - another of those crazy Gandhian ideas that has resulted in Gujarat closing down all her port cities, including Porbandar, where Gandhi was born. Including Surat, where the East India Company first landed.

Gandhi is amazing in this sense, for both Bastiat as well as Adam Smith realised the vital importance of free trade because they lived in port cities: Bayonne in the case of Bastiat, and Glasgow in the case of Smith. And Gandhi was a bania!

I checked the Internet for our list of customs duties and found they have "98 Chapters" on these - different duties for different goods. And there are additional levies on these duties as well - including the famous "education tax"!

We Don't Need No State Education!

We Don't Need No Customs Department!

Song of the Day: Arlo Guthrie's "Coming into Los Angeles" - watch the video here.

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Deal of the Day from Amazon: The Best of Arlo Guthrie.