The Modernity of Say’s Treatise on Political Economy

Does a foreign tourist who spends $2,000 in America bring $2,000 in benefits? Of course not. But this was not always obvious. In fact, it is still not obvious to many of our contemporaries. But it was already well explained by Jean-Baptiste Say in his book A Treatise on Political Economy, first published in 1803. Say explains that, for his $2,000, the tourist obtains the equivalent value in goods and services, and it is just as if he had imported goods worth $2,000 to wherever he lives. It is an exchange like any other exchange of something for something else, from which each party to the exchange benefits, but nobody gives away money.

Another example of elementary economic truth explained in the Treatise relates to compulsory legal holidays. Are they a free gift from the state? On the contrary, they are equivalent to a tax on production and moreover a tax that reduces production without bringing any revenue to the public treasury.

Knowledge is cumulative. As in other fields of knowledge, some old economic books we read only for their historical value, to understand how they constituted an imperfect step, but a step nonetheless, in the development of economic theory. Many old economics books are disappointing from the vantage point of what we have learned since. Jean-Baptiste Say’s Treatise is better than that: somebody not familiar with economics can learn from it many economic concepts and theories that are still current today. And the Treatise can help understand what has been built on these foundations.

The first edition of the Traité d’économie politique (the original French title) was published more than two centuries ago. The fourth French edition appeared in 1819, and an English translation in 1821. The latter was revised by an American editor who apparently tried to incorporate elements of the fifth French edition. A further sixth French edition (the last one done by Say himself) was published in 1826. Consequently, the English edition shows some differences with the fifth and sixth French editions (and with the seventh one, which was not materially different from the sixth).

Jean-Baptiste Say (1767-1832) was a French economist and businessman. At the beginning of his career, he worked for an insurance company and then as a journalist and editor. He made a short stint in politics, but was purged by Napoléon Bonaparte. He then moved to northern France where he opened a cotton spinning mill that ended up employing more than 400 employees. In 1815, he became the first professor of political economy in France. He published many books, among which the Treatise on Political Economy stands as his major work. He was an admirer but also a critic of Adam Smith (1723-1790). He was, during his lifetime, famous in France, Europe, and America. There are good reasons for this.

Say defines the entrepreneur as one who does the “setting in motion of every class of industry whatever; that is to say, the application of acquired knowledge to the creation of a product for human consumption.” He was one himself. Since the term “entrepreneur” had not yet passed into the English language, the translator rendered it as “adventurer” – the same term that Adam Smith used. In a sense, the term is not badly chosen for it conveys a good part of today’s economic idea of the entrepreneur’s role. It still remains too narrow, too closely tied to merchant adventurers on 18th or 19th century oceans.

Although Say must be viewed, like Adam Smith, as part of the classical school of economics, and although he was attacked as such by John Maynard Keynes, he made discoveries that predated by several decades the birth, at the end of the 19th century, of the neo-classical and Austrian schools of economics.

Say well understood simple economic notions, for example, that producing more of something implies producing less of something else. He also understood more complex ideas, which many of our contemporaries still don’t grasp. One example is the theory of tax incidence, whereby an indirect tax charged to producers is often shifted to consumers or to the producers’ employees. If an excise tax is levied against manufacturers of a given product, their (marginal) cost will rise, pushing up the product’s price on the market, which means that consumers effectively support part of the tax. But if a tax hits an immobile factor such as land, it will only reduce the value of the land (falling only on the landowner) and change nothing in its production (except if it justifies abandoning the land). All that is in Say.

And there is much more. Say’s theory of value is quite modern, as it is entirely based on utility. Say defines “utility” as the capacity of certain things “to satisfy the various wants of mankind.” Wealth – the topic of the Treatise – comprises all things that have utility. Like modern economists, Say put consumers before producers: “the welfare of [the class of consumers], wherein all others are comprised, constitutes the general wellbeing and prosperity of a nation.”

Say also criticizes Adam Smith’s labor theory of value. The value of capital and land, he argues, is also incorporated in the value of products. Moreover, it is utility and demand that ultimately give value to things.

All economic activities, in agriculture, manufacturing, or commerce, add utility to things and thus create wealth. The grocer and the retailer add value to products by bringing them closer to the consumer: “The merchant that exports silks to Germany or to Russia, and sells at Petersburg for 40 cents per yard, stuffs that have cost but 30 cents at Lyons, creates a value of 10 cents per yard.” Speculation is also productive because it transports goods in time (buying now for the purpose of selling later when the price is expected to be higher), as opposed to transporting them in space.

Another fundamental observation underlies Say’s analysis: all parties to an exchange benefit from it. Otherwise, at least one of them would have abstained.

Say was among the earliest economists to understand the concept of opportunity cost. Take the example of war. “The charges of war would be very incorrectly estimated,” the Treatise tells us, “were we to take no account of the havoc and destruction it occasions. . . . War costs a nation more than its actual expense; it costs besides all that would have been gained, but for its occurrence.” In other words, the opportunity cost of war is what is forgone by not choosing the next best alternative.

To give another example of the pearls that we find the Treatise, Say anticipated the concept of human capital that was to be developed only in the second part of the 20th century. In a remarkable paragraph, he writes about “human faculties of mind and body” which, although they “can never be the subject of actual exchange,” have a value “grounded upon the value they may be capable of producing.” An artisan who earns “wages of 1 dollar a day, or of 365 dollars a year” has capacities that “may be reckoned equivalent to a vested capital yielding an equal annual income.” Say also writes, beautifully: “A full-grown man is an accumulated capital.”

Another crucial economic notion that the reader will discover, or rediscover, in the Treatise is that all prices are relative prices. (I remember when, as a graduate economics student at the University of Toronto, I said something in class about the price of a good, and a professor – it must have been H.A.J. Green – interrupted me and insisted: “the relative price.” The price of a good is always expressed in terms of another good, whether this other good is money or something else. The price of apples in terms of oranges is the inverse of the price of oranges in terms of apples. “Being a relative price, the price of a house, for instance, may be valued in corn or in money.” Say also writes:

If this be all that is meant by the term, measure of value, I admit that money is such a measure; but so, it should be observed, is every other divisible commodity, though not employed in the character of money. The ratio of the one house to the other will be equally intelligible, if one be said to be worth 1000, and the other only 500, quarters of wheat.

When one thinks in terms of relative prices, it becomes easy to understand how the price of money can change, for it is only saying that the price of goods in terms of money is changing. The price of money is the goods that money can buy. If the general level of prices rises, it means nothing but that the price (the value) of money has decreased; and mutatis mutandis in the case of deflation. Again, Say expresses the idea clearly:

There is, in fact, no such thing as a measure of value, because there is nothing possessed of the indispensable requisite, invariability of value.

The author of the Treatise has more to say about money. His analysis is very close to the theory developed by Carl Menger seven decades later. Money is a medium of exchange that spontaneously appears because it is useful. The usefulness of money comes from the difficulty of obtaining from barter what one wants for what one has produced. Say believed that gold and silver had the necessary qualities for efficient money, but that private banks should be free to issue “paper currency” backed by such precious metals.

If there is not enough money in the economy, “merchants know well enough how to find substitutes for the product serving as the medium of exchange or money,” that is, substitutes in the form of credit such as “bills at sight, or after date, bank-notes, running-credits, write-offs, &c. as at London and Amsterdam.” As for paper-money forced on the public by government, it is “an exertion, not of legitimate, but of arbitrary authority.”

Say argues that the rate of interest is not the price of money, but the price of borrowing and lending. He also understands that the velocity of money is just another word for (the inverse of) the demand for money.

One must peek behind the veil of money (as we would say today) and look at real phenomena, at things in real terms. For example, Say shows that a capitalist who pays taxes in money is in fact paying them with the goods produced by the capital he has lent to an entrepreneur.

Say is now mainly known for “Say’s Law,” against which Keynes built his own system. This principle was offered as a criticism of the common opinion (the “vulgar apprehensions,” in Say’s words) that there can be an overproduction of goods because money is scarce. Say explains how there cannot be overproduction because everything that is produced is produced for the very purpose of consuming, today or tomorrow, an equivalent value. All revenues come from production, and they are thus sufficient to buy all production. Under the veil of money, products are exchanged against products. In other words, supply creates its own demand – the standard formulation of Say’s Law.

One implication is that, contrary to what mercantilism claimed, the balance of trade between countries does not matter. Imports raise no problem because “nothing can be bought from strangers, except with native products.” Imports stimulate domestic production, for it is the latter that pays for the former. And foreign trade is beneficial because it is irrational to produce domestically what can be purchased cheaper from foreign lands.

The emphasis put on production does not imply that demand has no importance. Say correctly understood that the value of a factor of production (labor, for example) is derived from the value of the goods it serves to produce. As today’s economists would say, the demand from a factor of production is a derived demand.

The Treatise contains elements of public choice theory, which was to be developed only in the second part of the 20th century. The “true reason why those engaged in any particular branch of trade are so anxious to have themselves made the subject of regulation,” Says observes, is to obtain “a transfer from … the consumers.” The “men in power” gladly oblige because it is flattering to their vanity and it confirms their authority. Also incorporated in Say’s elementary public choice analysis are the incentives of government bureaucrats, “who will deceive [the monarch and the nation] when it is their interest to do so.” All this is very close to our current economic thinking, up to and including governments conceived as production monopolies when they “get into the hands of usurpation and tyranny.”

Say is very critical of government finances. “The best tax,” he wrote, “is always the lightest.” Taxes should only finance the essential functions of the state. He suggested that, whenever possible, a tax should be paid by those who benefit from the public expenditure it finances. He favored local taxation to finance local government.

The state is dangerous. The author of the Treatise notes that “in private life, the mistakes of individuals can never ruin but a small number of families, whilst those of princes and ministers spread desolation over a whole country.” Regulation harms production and wealth. Sometimes, we get the impression that Say is speaking of 21st-century states, of our states:

Louis XIV. towards the close of his reign, having utterly exhausted the resources of a noble territory, was reduced to the paltry shift of creating the most ridiculous offices, making his counsellors of state, one an inspector of fagots, another a licenser of barber-wig-makers, another, visiting inspector of fresh, or taster of salt, butter, and the like.

Today’s governments are full of inspectors of fagots, licensers of barber-wig-makers, and visiting inspectors of everything.

Say’s economic analysis produces a strong plea for economic freedom. He claims to be more free-market than Adam Smith. Although he makes more exceptions than immediately meet the eye, he argues for absolute liberty:

The healthy state of industry and wealth is the state of absolute liberty, in which each interest is left to take care of itself. The only useful protection authority can afford them is that against fraud or violence.

In such a wide-ranging work as the Treatise, one is bound to hit the problem of normative values. In order to do science, as Say intends to, one must distinguish facts from values, what is from what ought to be. Say realizes this, as one passing remark reveals just after he mentioned “usurpation and tyranny”: “With the most earnest wish to confine myself within my subject it is impossible to avoid sometimes touching upon the confines of policy and morality, were it only for the purpose of marking out their points of contact.”

Say believes that economics is an induction-based science that establishes causal relations between “general facts.” General facts are “the general laws that facts follow”; in other words, they are “general principles.” Here is not the place to discuss the complex articulation of facts and theory in science, or to criticize Say’s crude empiricism. But we cannot avoid noticing that Say goes deeper into moral values than merely “marking out . . . points of contacts.” To a non-sympathetic reader, the Treatise could look like a mere moral panegyric for free markets.

Like the typical 18th century theorist, Say believed in “natural rights,” which Smith would have called “natural liberty.” Many illustrations are found in the Treatise. For example, restrictions on the freedom to work “are more than merely useless as a warranty of quality; inasmuch as they are the engine of the most odious injustice and extortion.” Say’s economic discourse is punctuated with such moral interruptions.

Moral assumptions or convictions may have prevented Say from taking seriously enough the subjectivity of preferences, which generally implies the economist’s refusal to bear judgment on individual tastes. De gustibus non est disputandum. Say, on the contrary, argues in favor of frugality and against sumptuary, “injudicious,” or “frivolous” consumption. It is the moralist, not the economist, speaking.

Writing at a time when economics was conceived as a moral science, Say may be forgiven for diverging from the scientific rigor he claimed to favor. And note that he explicitly argued against imposing by law the moral values he proposed. He still missed the opportunity to better distinguish the normative and the positive. But we cannot always expect him to be always ahead of his times.

The Treatise suffers from other weaknesses, if only because Say lacked many of the analytical tools available to today’s economist. He did not develop his concept of utility as much as he could have. His notion of national production seems marred by double counting. He falls for the infant-industry argument, which advocates temporary protection for new industries facing international competition – thereby vitiating his argument for free trade and his Public Choice insights. He is too much influenced by Malthusianism, according to which the population necessarily ends up growing faster than (or at least as fast as) production. He argues for progressive income taxation.

Say may be right that there are always exceptions. Sometimes, however, his exceptions come head to head with the core of a general principle he has established – like when he eulogizes Colbert, the dirigiste minister of Louis XIV, who provided assistance to domestic manufactures.

Say was not opposed to all government interventions. He favored public infrastructure – roads, canals, harbors, parks. He agreed with the existence of “public benevolent institutions.” He accepted a limited government role in science and education, even if he recognized the attendant dangers. He thought that the government should build its own warships and perhaps manufacture its own gunpowder. He remained too trustful of the state. In certain cases, he admitted expropriation for public utility purposes. He was against private coinage. In short, he was a typical classical liberal, not a radical libertarian.

In the tradition of methodological individualism, Say correctly states that the nation “is but an aggregate of many individuals.” But he does not follow all the implications of this statement, and sometimes struggles to untangle individuals from the nation. He also seems to attach a higher moral value to the preferences of a fellow citizen than to those of a foreigner, contrary the standard value judgment of economists.

Say’s Treatise, then, is not perfect. Of course. Today’s student of economics will find many errors and blind alleys in the book. Yet, its author remains one of the great classical economists and a surprising precursor of current economists. The Treatise on Political Economy is well worth reading, and not only for his value in the history of economic thought and his rich collection of historical facts. It is also a good economics book.

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