Say was an admirer of Adam Smith and was often called the French Adam Smith. On many topics—notably utility and value—his economic analysis was ahead of Smith’s.

Circulating money? / Let’s focus on Louis XIV and the idea that government expenditures are beneficial per se—even if the money is spent on gilded ornaments, or perhaps gilded ballrooms—because they fund economic activity. In the second and later editions of the Traité, Say reported that Madame de Maintenon, Louis’s second wife, urged the king to give more to charity and was answered that “royalty dispenses charity by its profuse expenditures.” Even if the story is apocryphal (Lavallée 1866), this general idea was obviously circulating during and after Louis XIV’s time, prompting Say to write:

There has been long a prevalent notion that the values, paid by the community for the public service, return to it again in some shape or other; in the vulgar phrase, that what government and its agents receive, is refunded again by their expenditure. This is a gross fallacy.

He was dismayed that as esteemed an intellectual as Voltaire echoed this fallacy. The several sumptuous buildings and palaces of Louis XIV, Voltaire wrote, “had served to circulate money in the whole kingdom.” Say took this as “a decisive proof of the utter ignorance of the most celebrated French writers of his day upon these matters.” He acknowledged that a few French intellectuals were skeptical of the idea, but they were unable to argue persuasively against it because, admitted the Marquis de Vauban, they did not understand economics enough.

Two values, one return / Say did understand economics enough, and demonstrated that “the taxes paid to the government by the subject are not refunded by its expenditure.” To understand his argument, consider real goods (and services) under the veil of money. The taxpayer, he explained, had to produce real goods to earn the money to pay the direct or indirect taxes he was subject to. With the collected money, the king hired architects and construction workers and purchased materials to build his palaces, not to mention hiring domestic personnel and purchasing food and wine, etc. So, real resources—labor and materials—were taken from the control of taxpayers and reallocated to the production of goods for the convenience and pleasure of the king, his family, and his court. The same reasoning applies if the king instead spent on his armies to wage wars.

Through his spending, the king was not returning the money he had taken from the taxpayers. His suppliers had to work and use resources to produce what the king wanted, and they were paid for that; the payment did not go to the taxpayers generally. So, the government received two values: one from the taxpayers (revenue) and the other from its suppliers (goods and services), but it returned only one—expenditures—which went to the suppliers. Writes Say, “The government returns but one, where he receives two.”

Some might argue that, by paying the venders, the king ultimately returned the money to the taxpayers by making it circulate in the kingdom. But money is just a means to exchange or redistribute real goods and resources. The king’s expenditure was not a gift that juiced the economy in a sort of Keynesian way. The money had first been taken from taxpayers—most of whom, incidentally, were from the poor classes—who would have made the money circulate, too, had they been allowed to purchase goods and services for themselves. The conventional 17th-century wisdom that Say was refuting had something in common with 20th-century Keynesian economics, which suggests—at least in its less sophisticated versions—that government expenditures can, by circulating money, create more than they destroy.

In many ways, Say was anti-Keynesian before John Maynard Keynes. Say’s Law—“It is production which opens a demand for products” or, more simply, supply creates its own demand—comes from the Traité. This law does not mean, of course, that a producer can produce anything and buyers will show up at his cash register. Rather, it means that one works to be able to consume, so the total value of everything produced is necessarily consumed; there can’t be general over-production, barring short-term adjustments (The Economist 2017). Say was among the classical economists directly criticized by Keynes (1936).

Was Versailles worth it? / Say emphasized that government expenditures are only justified if they produce “for the community” (the French text says “for the nation”) an advantage greater than what taxpayers had to sacrifice. This would be the second return from government. But every instance “where the benefit is not equivalent to the loss” is “an instance of folly, or of criminality, in the government.” Economists of the era were not well equipped to compare what was later called “social costs” and “social benefits,” especially when those who pay the costs are not exactly those who get the benefits. Mind you, today’s economists are not better equipped when they ignore that interpersonal utility comparisons are scientifically impossible, and that if everybody gets benefits from what is called a “public good,” the net benefit must persist after one has paid his tax contribution to finance it (de Jasay 1989).

Public goods are arguably what Say instinctively had in mind for justifiable government interventions. But he observed how, “not content with squandering the substance of the people in folly and absurdity,” governments instead frequently use their revenues to bring “down upon the nation calamities innumerable.” This remark looks more like public choice economics than an early mirage of public goods. Say noted ironically that, for a high cost of construction and “constant repairs,” the Versailles palace did produce the services of “splendid promenade of the gardens”—and centuries’ worth of visits and museum services, we may add. Whether Versailles reaches the level of a public good as defined in today’s mainstream economics (Samuelson 1955) is debatable, though: The property is easily excludable, and it benefits all the French (or all the world?) only in the sense that this part of history is preserved and accessible. But, Say emphasized, whether the cost imposed on the taxpayers who financed it was less than the benefits created would have been the question to ask. That the palace helped circulate money stolen from the poor remains an irrelevant fallacy.

As for Voltaire, he may have entertained a confused notion of positive externality when he added to the circulating-money justification the idea that the king’s buildings also served “to advance all the arts that are used in architecture.” Contrary to a public good, a positive externality doesn’t benefit everyone, and the taxpayers who were forced to pay for the advancement of architecture through Louis XIV’s palace construction would have likely benefited much more from improving their own housing conditions, and perhaps indirectly assisted other architectural arts too.

In short, government spending does not return taxes to taxpayers merely by putting the money back into circulation. It substitutes the state’s command over scarce resources for the taxpayers’ command over them. The justification of government spending must rest on the superior net value (at least ex ante) of the resulting public services for each taxpayer (Buchanan & Tullock 1962).

Readings

• Buchanan, James M., and Gordon Tullock, 1962, The Calculus of Consent: Logical Foundations of Constitutional Democracy, University of Michigan Press (Liberty Fund, 1998).
• De Jasay, Anthony, 1989, Social Contract, Free Ride, Clarendon Press (Liberty Fund, 2008); reviewed in Regulation 47(1): 60–62.
• Keynes, John Maynard, 1936, The General Theory of Employment, Interest and Money, Macmillan.
• Maintenon, Françoise d’Aubigné, marquise de, 1866, Correspondance générale de Madame de Maintenon, vol. 4, edited by Théophile Lavallée, Charpentier.
• Samuelson, Paul A., 1955, “Diagrammatic Exposition of a Theory of Public Expenditure,” Review of Economics and Statistics 37(5): 350–356.
• Say, Jean-Baptiste, 1850, A Treatise on Political Economy; Production, Distribution, and Consumption of Wealth, translated by C.R. Prinsep (based on the 4th French edition with addenda from the 6th), Lippincott, Grambo, & Co. Original first edition: Traité d’économie politique ou simple exposition de la manière dont se forment, se distribuent, et se consomment les richesses, Crapelet pour Deterville, 1803.
• The Economist, 2017, “Say’s Law: Supply Creates Its Own Demand,” August 12.