The great breakthrough that Say’s work on political economy achieved was an anticipation of the marginal revolution that would not be accomplished until the simultaneous theorization of marginal utility in the 1870s by Jevons, Walras, and Menger. Although Say’s work is certainly not an early instance of the theory of marginal utility, his revision of Adam Smith’s theory of value is important as an anticipation of it.
Supply and Demand
Say’s great achievement was to combine Condillac’s utility theory of demand with Smith’s cost theory of supply in order to arrive at a general description of value or wealth for a political economy. That the ideologues (Condillac's school) emphasis on demand as the only factor in value is erroneous is all too obvious. The Condillacian theory of utility would figure key in Say’s description of value, but would also be supplemented by a theory of supply, which was itself an improvement on Smith's equally inadequate theorization.
The Cost Theory of Supply
Say’s revision to Smith’s cost theory of supply was, essentially, to realize that wealth was not constituted only by labor. Marx would later point out that Smith’s great achievement in the theory of political economy was to dissociate the economic concept of value from any particular determination of labor, rather determining value as an effect of labor in general. Say would in fact realize the shortcoming of the labor theory of value common to both Smith and Marx by asserting that, “all values are derived from the operation of labour (which Say will later call ‘the industry of man’) combined with the operation of those agents which nature and capital furnish him” (Say's Treatise on Political Economy, xl). This is because “mere unassisted industry is insufficient to invest things with value” (11, I.iii). Additional operations and capital described as “productive capital” (12, I.iii) are also required. Say includes in this category the tools of industry, the sustenance of workers, and the raw materials used to supply manufacture and later commerce. Thus Say would be able to explain the value of immaterial things, a problem which Smithian political economy never worked out. Smith asserted that the products of the labor of doctors or musicians were unproductive because he identifies value with labor, as consisting in “things bearing a value capable of being preserved”, rather than “all things bearing exchangeable value” (63, I.xiii). Whereas Smith’s great breakthrough, according to Marx, was reterritorializing value by human labor in general, Say’s even greater breakthrough was to reterritorialize value by exchange-value or utility. Capital is in Say's political economy finally released as a pure semiotic, or a body without organs (in the language of Deleuze and Guattari), insofar as it is not determined according to any particular substance or metaphysic, but rather entirely by rhetorical or catallactical means. Capital in Say is free of any particular determination except for those exchanges of which it is the medium. We can summarize this briefly by saying that: For Say economics theorizes a logic of exchange; for Smith and Marx economics theorizes a logic of production.
The important effect of this theorization of value as value-in-exchange would be the recognition of the other side of the value equation that Smith had neglected. For Say, “capital consists not in this or that commodity or substance, but in its value” (49, I.x), which value in turn is determined by combining the utility of a commodity (demand) with the capital or value required to product it (supply). Say asserts that value is modulated by utility, which is an intersubjective (cf. 12, I.iii) notion of demand. For Say, “the utility of things is the ground-work of their value” (2, I.i). Thus, “to create objects which have any kind of utility, is to create wealth” (2, I.i). How, then, is the creation of objects that are useful achieved?
According to Say, surplus value can be either: consumed/destroyed, converted into other capitals (such as durable goods), or it can be saved (i.e., re-invested) (cf. 52-3, I.xi). It is only this latter function of surplus value, as savings or re-investment, that can augment the productive capital of individuals. For Say, then, just as for Smith, the road to wealth is paved by the exercise of frugality or economy. However, whereas Smith reads frugality as operating according to a natural mechanism called the invisible hand such that self-interested individuals are frugal by nature, Say thinks that “consumption and frugality have increased both together” (58, I.xi). For Say, increased production (rather than mere frugality) is the surest cause of wealth. Now this differs little from Smith insofar as both advocate that we regulate or lessen consumption: this would be a strict definition of frugality. The difference is that Say, unlike Smith, emphasizes the importance of not being frugal in regards to production. Smith’s program of frugality is economy-wide. Say advocates only consumptive frugality as a means to productive increase. We should be frugal in consumption so as to direct surplus value towards re-investment. All of this is perhaps best explained by Say’s Law.
We already saw that, for Say, demand is the basis of the utility of supply (cf. 76, I.xv). Say’s innovation was the assertion that demand consists not simply in money or pure desire dissociated from means of accomplishment, but rather in, “other values, other products, likewise the fruit of industry, capital, and land” (76, I.xv). Production, not consumption, is the real ground-work of wealth or value. This is in deep contrast to Smith’s earlier assertion that, “consumption is the sole end and purpose of all production” (Smith 715, IV.viii).
Say states his law of supply and demand in a few different forms in his Treatise:
It is production which opens a demand for products (76, I.xv)
The mere circumstance of the creation of one product immediately opens a vent for other products (78, I.xv)
How great, then, must be the mistake of those, who, on observing the obvious fact, that the production always equals the consumption, as it must necessarily do, since a thing can not be consumed before it is produced, have confounded the cause with the effect, and laid it down as a maxim, that consumption originates production (368, III.v)
According to Say, then, the good production of useful objects is the way to wealth. One obvious reply would be that such a theory cannot solve the problem of gluts, or the production of windfalls for which there is no vent. But Say asserts that gluts will naturally resolve themselves so long as a natural economy is allowed to take its course, and political interference is kept to a minimum: “No sooner is the cause of this political disease removed, than the means of production feel a natural impulse towards the vacant channels… One kind of production would seldom outstrip the rest, and its products be disproportionately cheapened, were production left entirely to itself” (79, I.xv). Thus Say asserts that, “It is the aim of good government to stimulate production, of bad government to encourage consumption” (83, I.xv).
But how does the natural system of production actually work? How do economies function naturally such as to prevent gluts? Say himself argues that, “I would not be understood to maintain in this chapter, that one product can not be raised in too great abundance, in relation to all others; but merely that nothing is more favorable to the demand of one product, than the supply of another” (79n, I.xv). That is, it is not that gluts will not exist, only that a naturally-functioning economy will tend to resolve problems of glut.
Say's Law functions in the following very basic manner (the reader should also compare Cletus' writeup in the node Say's Law, which I found very convincing, but perhaps a bit too imaginative in its reading into the text): A producer of utility always wants to quickly exchange his product for another: “When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should vanish in his hands” (78, I.xv). Thus the production of product B always already opens a vent for another product, C, that was already in supply. Thus, B generates the added utility of C.
What Say does not account for is the generation of the utility of B (note also that the explanation given in the writeup Say's Law has the same defect). Why is it that any other producer would come to desire or demand B, rather than some other product that was already in existence? We might presume that as C is bought, those capital resources are diverted to other areas of production and consumption that will eventually lead back to B. Still, this does not explain why anybody would want B in the first place, unless we are to presume that they want it merely because it exists. What Say requires, in fact, is a theorization of the production of utility, or desire. Why is it that product B is desired in the first place, or at all? Say’s arguments rely on the classical logic of desire which style desire as purely acquisitive (rather than purely productive). Desire is, thus, a lack. Desire always lacks its object: it never fulfills it. This is also the theory of desire employed by both Smith and his teacher, David Hume.
This logic of desire as a lack is contrasted, by Deleuze and Guattari in their Capitalism and Schizophrenia, to a productive theory of desire in which a parallelism between the production of desire and the production of the social is described. Thus, desire for commodities is far from natural, it is rather a moment of a broader logic of power that invests the social and desire with certain determinate tendencies, which in turn produce individuals as effects of these social institutions and logics of desire.
We can, now, at least see the reason for Say’s emphasis on frugality or economy. The production that stimulates consumption must always be set in motion by productive capital (cf. 343, II.xi), which capital can be accumulated first of all only by the frugal consumption of surplus value, thus allowing some of that surplus to be directed toward re-invested surplus capital.
For Say, consumption is always destructive of value, whereas production is the creation of value (347, III.i). Consumption is total and it is unique. A value cannot be consumed twice. On the other hand, a value can certainly be reproduced many times. The same capital can be used multiple times in the production of a commodity. (Say describes a hypothetical shoemaker who uses a capital of 200 fr. to purchase leather that will be used to make a pair of shoes; our shoemaker repeats this operation 12 times in a year, each time selling the shoes and re-using the same amount of capital to purchase more leather to produce more shoes: “there will have been an annual consumption of 2400 fr. upon a capital of 200 fr.” (350, III.ii).) Consumption is thus dangerously destructive: “A product consumed is a value lost to all the world and to all eternity” (352, III.ii). Of course, Say recognizes that some consumption is necessary if production at all is to take place. We must eat in order to labor. Thus, of course consumption can be translated into production in the form of biological processes. “Consumption may be regarded as an act of barter” because the owner of a value destroys that value in exchange for either personal satisfaction (of desire, which lacked its object before) or for another value, such as that of labor to be performed throughout the day (352, II.iii). In some cases, consumption can be productive, but in many cases it is unproductive.
Consumption, since it can be so destructive of wealth or capital, must be judicious. Say describes the “most judicious kinds of consumption” as: 1) conducive to the satisfaction of real wants, 2) gradual consumption of quality products (particularly in the case of durable goods, e.g., furniture), 3) collective (because of the advantages of multiplication of production), and 4) morally justified consumption (cf. 358-61, III.iv). Judicious consumption is economical. It tends toward the re-investment of surplus value that is requisite for the production of additional value, which is the source of wealth. This economy or frugality is, Say recognizes, a highly contextualized and pragmatic skill: “Economy is nothing more than the direction of human consumption with judgment and discretion—the knowledge of our means, and of the best mode of employing them. There is no fixed rule of economy” (364, III.v). This economy of consumption must regulate not only individual consumption (cf. III.v), but also public consumption (III.vi), because “a product consumed must always be a product lost, be the consumer who he may” (375, III.vi).
This, again, is the importance of Say’s departure from Smith’s political economy. Whereas Smith asserts the basis of production in consumption (cf. Smith, 715), Say argues against, “those, who, on observing the obvious fact, that the production always equals the consumption… laid it down as a maxim, that consumption originates production” (368, III.v). This maxim expresses the idea that the most useful citizen is he who spends the most (cf. on this matter George W. Bush's post World Trade Center injunction to consume). From the point of view of Smith’s political economy, which asserts that the basis of value is purely in production, this maxim makes sense, because consumption is not a function that determines the production of wealth, rather it accomplishes that wealth, only opening up the vent for further production of further wealth to be consumed. On Smith’s model, consumption is an endless supply which credits the productive mechanisms with the creation of wealth, and the surplus values that get stored in produce that is consumed over longer periods of time. On Say’s model, on the other hand, consumption does not open a demand for wealth, rather it destroys wealth, thus decreasing vent, because it is only wealth in one form that can facilitate the demand for wealth in another form. So, for Say, luxury is the “worst enemy of human happiness” (368, III.v) whereas for Smith and Hume it would only be the natural desire of human beings who have no reason not to consume such luxuries since the problem of creating their utility or value has already been accomplished by the work of labor.
In short, Say’s revolution is the introduction of utility, or demand, as a figure in the determination of value at the same time as cost, or supply. If there is no demand for a product (or if this demand cannot be brought to market, for a pauper may have demands but these have little bearing on the market), the product will have no value. Since Smith reads value as purely a function of produce, the satisfaction of demand by consumption cannot be read as dangerous, even if Smith and Hume emphasize the importance of frugality, contrary to their doctrine that consumption is the basis of production.