24 Sep 2010

Wait a Second, a “General Glut” Is Conceivable

Economics 45 Comments

Recently PhD-minted Gene Callahan has been reading Thomas Sowell on the classical economists. Following Sowell’s lead, Gene thinks that modern free-market economists misrepresent the argument that Malthus (and Sismondi, with whom I’m unfamiliar) had with J.B. Say.

In particular, the dispute has to do with the possibility of a “general glut.” In other words, is it possible for the economy to have produced too much of everything? To the layperson, it might seem as if this is what happens during a depression. Oops, businesses got too aggressive during the boom, and then ended up making so much stuff that the inventory can only be cleared at a loss. So all the businesses lay people off, blah blah blah. If only the government would pick up the slack in demand…

Now most modern, free-market economists would dispose of this “silly” claim by referring to Say’s “law of markets.” In a neat section of his treatise, Say explained that ultimately, the way the baker (e.g.) “demands” shoes from the cobbler isn’t by spending money, but rather by supplying bread to the market. This is the germ of truth leading to the (fallacious) rendition of Say’s Law as “supply creates its own demand.”

Say went on to point out that the reason the people of his time were far wealthier than the people of an earlier century, is that production per capita was much higher. (I’m of course paraphrasing into modern terminology. Plus, Say wrote in French.) So far from being the mark of a depression, an increase in production in all lines was a mark of progress.

So what happens during a depression? Well–the typical free-market economist would say–it’s not that every firm produced too much. Rather, it’s that some firms produced too much, but others produced too little. So resources weren’t properly allocated across industries, and that’s why the resulting mix of output is “wrong.”

The way to fix things is for prices to move. If businesses consistently hold too much inventory, and can’t hire workers, the problem is that the price of the inventory is too high, and wages need to fall.

But Gene Callahan has blown all this up, and worse yet, I think he’s right. (I hate when that happens.) Worse still, I disagreed with him at first, but upon reflection I think he was right and I was wrong. (I really hate when that happens–fortunately it’s rare.)

Gene gives a good analogy here. But let me generalize it:

The free-market economists who argue that “a general glut is impossible” are overlooking the fact that the economy might not exploit every resource to its fullest potential in a given period. For example, laborers don’t usually work an entire year at their maximum physically sustainable level. Instead, they typically choose to consume large amounts of leisure.

By the same token, industries never extract all the oil, natural gas, and other minerals from our stockpiles in a given year. Instead, far less is devoted to current production, and the vast majority of it is carried forward into the next year.

Once we take these elementary facts into account, we see the weakness in the claim that “a general overproduction is impossible.” The only way to salvage the claim would be in a tautologous sense in which a worker always uses every hour of labor to “produce” the maximum amount of output, but where often times many hours a day are devoted to the production of “leisure.” And likewise, we could formally say that every last known barrel of oil is always “used up” in this year’s production process, but that typically 99% of the barrels don’t go into “refined gasoline” but instead go into “production of a barrel of crude oil next year.”

It should go without saying that none of the above is meant to endorse Keynesian prescriptions for depressions. But the point is, “a general glut” actually has a very sensible meaning, once you take leisure and depletable resources into account.

45 Responses to “Wait a Second, a “General Glut” Is Conceivable”

  1. Jonathan M. F. Catalán says:

    For some reason your logic isn’t coming across clearly (at least, for me). To start, I’m not sure how you are defining the “under-utilization” of resources. You write,

    The free-market economists who argue that “a general glut is impossible” are overlooking the fact that the economy might not exploit every resource to its fullest potential in a given period. For example, laborers don’t usually work an entire year at their maximum physically sustainable level. Instead, they typically choose to consume large amounts of leisure.

    This particular example seems to me as sufficient evidence to prove that a “general glut” is, in fact, impossible. Let’s start from two premises, which alone suggest that overproduction is impossible,

    1. There is a limitless demand for wealth (a limitless demand for wealth in general).
    2. There is a scarcity of labor (there are so many hours one can physically work in a day [24], and then we factor in leisure, et cetera).

    Now, knowing that there a limitless demand for wealth, yet a scarcity of labor, we can deduce that therefore there is a scarcity of economic goods. There is no physical method by which an individual can satiate all his demands, because if he did it would imply that labor is limitless or irrelevant. How can one, therefore, overproduce?

    By extension, natural resources are not utilized to their furthest possible extent because of this scarcity of labor. Even with machinery, there are just so many man-hours which can be applied towards a certain method of production. So, even if man was to work every single hour towards productive activity there would still exist scarcity, and there still would not be overproduction.

    Furthermore, I think your example of the underutilized worker is erroneous. That is,

    For example, laborers don’t usually work an entire year at their maximum physically sustainable level. Instead, they typically choose to consume large amounts of leisure.

    All human activity, except that guided by instinct or biology, is meant to accomplish certain ends. Therefore, relative to the individual, all human action is productive towards some end. “Leisure” may be chosen over “work” (and work here takes on a strict definition and not its praxeological or physical definition) only because the utility garnered from that time period of leisure is greater than the utility garnered from that time period of “work”. In other words, relative to that individual, an extra hour of work would be less productive than that hour of leisure (this factors in diminishing marginal returns, subjective utility, et cetera).

    Once we take these elementary facts into account, we see the weakness in the claim that “a general overproduction is impossible.”

    The above written aside (which may be off-topic; I just don’t follow your logic, so I’m not sure how to address your argument), I just don’t see how this follows from your premise that there exists general scarcity (this “under-utilization” of resources).

    Your criticism of Callahan’s point, I feel, was on target. You write,

    Strictly speaking, from one point of view that’s not a general glut; the problem is that we overproduced fish and underproduced leisure.

    More accurately, you malinvested your labor into the production of fish. It just seems to me that Callahan’s definition of production is very narrow. All action is meant to acquire satisfaction of different needs, so in that sense how is the production of fish different from the production of theory of teleology?

    Or, maybe I am missing the connection.

  2. Greg Ransom says:

    Is it April Fools Day?

  3. Avram says:

    What on earth is wrong with your original objection?

    The way Gene responded was “oh man _producing_ leisure? what a silly thing to say! why have the word production as distinct from consumption at all if we can go around saying we produce leisure”

    Ok sure, but then go back to Gene’s original example and instead imagine that the choice was between picking coconuts and fishing for fish. In the end you guys say “man, sure wish we spent time picking coconuts instead of fishing fish” and Gene would say “yeah there’s no general glut here. We did not over produce everything, just fish”

    But if you view economic agents as people constantly valuing actions over other actions and ranking means and ends (as a good Austrian should) then there shouldn’t be any difference between “discussing teleology” and “eating coconuts” even if it is silly to say you produce discussion but not silly to say you produce coconuts.

    The fact that we don’t “produce” discussion doesn’t suddenly get rid of any opportunity cost involved in it, neither does the fact that it is consumed as it is acted out.

    Lastly, fine, if you want to say production is production, leisure is leisure then sure there can be an overproduction of everything. But this is still the result of a _malinvestment_ ! Mainly too much of the resource known as time into production and not enough into leisure. It does nothing to disprove Say’s law, just create an argument for its further explanation and qualification in the English language.

  4. Teqzilla says:

    For a case of general overproduction to occur the production already has to have happened. The stuff is already there, you don’t have to sacrifice any extra leisure time in order to produce something with which to trade for it, if you did you wouldn’t have a case of general overproduction would you?

    I can see how a lowered level of aggregate production over time brought about, for example, by an increased leisure preference could cause problems. I dont think it would be accurate to describe those problems as a general glut though.

  5. Yogi says:

    Krugman has finally provided some evidence for the Keynesian multiplier. Looking forward to your response…..

    http://krugman.blogs.nytimes.com/2010/09/25/arsenal-of-recovery/

  6. Gene Callahan says:

    Jonathan:

    “. There is a limitless demand for wealth (a limitless demand for wealth in general).
    2. There is a scarcity of labor (there are so many hours one can physically work in a day [24], and then we factor in leisure, et cetera).
    Now, knowing that there a limitless demand for wealth, yet a scarcity of labor, we can deduce that therefore there is a scarcity of economic goods. There is no physical method by which an individual can satiate all his demands, because if he did it would imply that labor is limitless or irrelevant. How can one, therefore, overproduce?”

    A) Look at my example; and
    B) The general idea is you did not make the correct production / leisure trade-off — for a particular level of technology, one can work too hard, so the resulting product is not “profitable.”

    • Jonathan M. F. Catalán says:

      Gene,

      B) The general idea is you did not make the correct production / leisure trade-off — for a particular level of technology, one can work too hard, so the resulting product is not “profitable.”

      One can certainly “work too hard”, or overproduce, in the sense that he may produce too much of a given good. However, this overproduction of good A does not translate into “general overproduction”, because the overproduction of good A (fish in your example) came at the cost of production of “good” B (in this case, intellectual satisfaction).

      Just like the overproduction of fish will not only cause less production in intellectual stimulation, but also less production of capital-goods (such as a fishing net, or a spear).

      Knowing that the demand for wealth is essentially limitless, we can also deduce that demand for wealth cannot be completely satiated. This is why the division of labor continues to extend, despite rampant technological growth, and this is why today we own things that one hundred years ago nobody even thought of.

      In order for general overproduction to be possible you have to re-define “general overproduction”, and then the debate becomes pointless.

  7. Gene Callahan says:

    Avram:

    “What on earth is wrong with your original objection?”

    It defines away rather than addresses the possibility Malthus and Sismondi saw.

    “Ok sure, but then go back to Gene’s original example and instead imagine that the choice was between picking coconuts and fishing for fish.”

    So, you can devise a different example with a different meaning. How in the world does that address the original example. Would you like an example in which both coconuts AND fish are overproduced?

    • Avram says:

      No, there is no need for another example, I can think of it myself and it changes nothing.

      Furthermore judging from your further posts this seems to be some sort of historical quibble about which past historic figure said what and so on, in which I have little to no knowledge.

      I respect your pursuit of the truth, keep it up.

      As for defining the problem away, sure ok that’s what I did. But by the same token you are defining into existence. I’d rather say a broader definition lets us see the opportunity costs of all action and solves the problem, where as a narrow definition just creates one by limiting the scope of analysis to the opportunity costs of producing technological units of things that may or may not be goods.

      Whether this has any significance in the historical context I don’t know, but it seems to in understanding economic problems in general.

  8. Gene Callahan says:

    Teqzilla:

    “For a case of general overproduction to occur the production already has to have happened.”

    Yes, for Malthus and Sismondi “over-production” is an ex post evaluation. “We ought not too have worked so hard last year — it wasn’t worth it.”

    Here’s a nice method to define your way around their conclusion: define “regret” as a negative product manufactured in the production process. Then, whatever extra product you have is exactly cancelled by the negative regret! No over-production!

  9. Gene Callahan says:

    And, if anyone still isn’t convinced that Malthus and Sismondi were saying something sensible, read Sowell’s book — he spends most of two chapters on this issue, showing, for instance, how the view that Malthus and Sismondi were merely naive misinterpreters of Say’s Law is due to JS Mill, who didn’t bother to read them.

    Excellently written discussion.

  10. Gene Callahan says:

    Just to clarify: the point I was making wasn’t that we can define our terms so that “general glut” is impossible; we certainly can if we wish to do so. My point was, rather, that a “general glut,” as Malthus and Sismondi used the term, is possible — I am clarifying a point in the history of economic thought. If you want to dispute this point, it won’t do to state a tautological definition of Say’s Law. You have to grapple with the actual arguments given at the time and since.

  11. Gene Callahan says:

    ‘the point I was making wasn’t that we can define our terms so that “general glut” is impossible’

    That was supposed to be “can’t define”!

  12. Martin OB says:

    So, the demand for wealth is limtiless, and labor is limited, but there’s no guarantee that you can turn all the labor you want into the wealth you want until you come up with a suitable production plan. In the mean time, the market will tend to turn higher productivity into more leisure for everyone instead of more wealth , not persistent unemployment. Alternatively, you can say that leisure time is also weath, but you don’t “produce” leisure, you consume some of your time as leisure instead of labor, and you don’t have to produce time.

    This all seems pretty obvious. I don’t know why anyone would think this is any proof that the government can do better than the market. If the structure of production does not allow to turn more labor into wealth per day, then the government can only make people waste time, effort and resources for no good reason. I think the main mistake is to confuse more leisure with more unemployment.

  13. Gene Callahan says:

    Martin qb, neither Bob nor I have claimed any policy implications of what we have discussed.

  14. Bob Murphy says:

    It’s funny that everyone (before Gene) said I was wrong–Greg thinks I am so wrong that I must be joking–and then Martin OB says “this is pretty obvious.” :)

    OK everyone, we can do this real quick-like: We all agree that it is sensible to say, “The market economy in the US produced too many houses in the year 2005.” Right? Sure, we can quibble about the cause of the mistake–Fed policy, etc. But the point is, it makes sense to say that the market produced too many houses in the year 2005.

    Now, if you had asked me a month ago whether this tied in to the possibility of a “general glut,” I would have said no. I would have said, “Sure, the market produced too many houses, but it produced too few goods in other industries. There were a finite amount of resources to go around, and so too many houses being built in 2005, meant there weren’t enough drill presses or hours spent training surgeons or whatever.”

    However, as Gene’s blog post made me realize, I am overlooking the fact that the production of goods and services in 2005 didn’t merely use totally replenishable resources like human labor and the fertile powers of the soil. Output in 2005 also drew down our stocks of oil, natural gas, etc.

    Once you take that into account, you realize it is possible that output in every line of production was higher than it was supposed to have been. So we had too many houses, too many laptops, too many drill presses, etc. etc.

    Now it’s true, if we want to rule that out, we can say a guy sitting on his butt is producing just as surely as a guy sweating in a factory, and we can say a virgin forest represents us putting wood into the production function of “virgin forest” as opposed to “wood pulp.”

    But before Gene’s post, I didn’t realize you would have to go to those lengths to salvage the idea. I thought a “glut” of houses must have corresponded to an underproduction in something tangible, like drill presses.

    • BrianW says:

      Bob, it seems to me that you’re merely applying the standard reasoning, but over time. The problem remains, in your example, one of too many houses vs. too few drills; the only difference is that the drills being sacrificed are in the future, while the houses are in the present. I’m not sure this presents any fundamental challenge to the normal position, as, though there may be a general glut at any given moment, it must create a future corresponding dearth.

      • bobmurphy says:

        Ah OK, I like that move, Brian. Still, the way I was thinking about this last week was wrong. I hadn’t been considering a dynamic economy, where things change over time (like the amount of natural gas in the ground).

      • bobmurphy says:

        Actually Brian I don’t think this really “saves” the standard free-market view.

        If someone comes along and says, “The economy produced too much of everything in 2005,” it hardly seems fair for me to say, “No it didn’t. It produced too much of goods-available-in-2005, I grant you that. But at the same time it produced too few of goods-available-in-the-future. So please stop saying the economy produced too much in 2005.”

        Yeah, there’s a certain way of thinking about the problem that makes this work, but that seems to me like Eugene Fama defining stock market bubbles out of existence.

        • BrianW says:

          Well, the standard view is that there cannot be too much production, only resources allocated incorrectly between alternatives. That’s exactly what is happening here, except the alternatives exist at different points in time. While this does allow you to say that a general glut existed, it strikes me as mere technicality. The essential point in the free-market case remains.

    • Jonathan M. F. Catalán says:

      Once you take that into account, you realize it is possible that output in every line of production was higher than it was supposed to have been. So we had too many houses, too many laptops, too many drill presses, etc. etc.

      And too little of everything foregone to produce those things. The division of labor is constantly extending to meet consumer demand, and demand for wealth is limitless. It is impossible to overproduce everything, because that would assume that all of humankind’s demand for wealth has been satiated.

      I thought a “glut” of houses must have corresponded to an underproduction in something tangible, like drill presses.

      It did and it does. What Callahan disregards is that there is always room for economic growth and improvement, and that actions are subject to diminishing marginal returns (how much teleology can one man stand?). So, spending 24 hours a day fishing and talking about teleology means that those individuals underproduced in other possible avenues, including the production of capital-goods.

      • Gene Callahan says:

        “What Callahan disregards is that there is always room for economic growth and improvement…”

        Jonathan, believe me, I did not “disregard” that point! Perhaps you should look at my example again and try to show how I disregarded that.

        • Silas Barta says:

          You ignored the possibility that salt (for preserving the fish) was underproduced, thereby disregarding the possibility that some good other than leisure was forgone, and thereby did not fully appreciate the role of economic growth and development.

          • Gene Callahan says:

            Yes, Silas, and they also did not produce nuclear reactors.

            Man, oh man.

  15. senyoreconomist says:

    I tried to post the following entry yesterday, but I kept getting a message that said, “incorrect data, please try again.” I tried again and the same thing. I was at an internet cafe yesterday, today I am at a different computer. Maybe that had something to do with why my post wouldn’t get accepted yesterday.

    Yesterday’s post:
    Hello,
    Of all of Mises’ students it seems that one of the best read regarding the classical economists is George Reisman. Not only that, but he regarded Smith and Ricardo along with Mises and Bohm-Bawerk to be the four greatest economists of all time. Dr. Murphy, do you know if Reisman has anything to say regarding Callahan’s caveat or are you not very familiar with his work? (Of course, Reisman’s magnum opus was published in 1996, so he won’t be addressing Gene directly there…) Thank you.

    Since the previous post was written I informed Dr. Reiisman by e-mail of the present discussion. He kindly replied with a very friendly note that said that he regrettably did not have the time to get involved in this discussion. However, he also said that since I had some familiarity with his writings that I might inform the group that his ideas on the sublect of Say’s law and the impossiblility of a general overproduction can be found in chapter 13 of Capitalism, pages 559-580.

  16. Current says:

    I’ve had some discussions about this problem with Keynesians over on the Mises blog. It’s quite complicated.

    The problem that Gene and Bob bring up here is that “goods and services” are not the same as “things with opportunity cost”. This is quite right. In Hayek and Garrison’s business cycle theory there exists the idea of going “beyond the PPF frontier”, this is another way of phrasing the same general-glut issue.

    There is a good discussion of this towards the end of Richard Ebeling’s review of “Time and Money”.
    http://mises.org/daily/657

    We don’t need the idea of the general glut to get ABCT. But, a general glut may come into existence in an ABCT scenario.

    There are many other definitional problems that lurk here. In some types of economics an equilibrium is some situation that’s persisted for a long time. For example, myself and my friend Fred are on a desert island. For a long time Fred has cut my hair in exchange for a couple of pints of home-brew beer, apart from that we are self-sufficient. But, if my hair all falls out then I no longer need that service, so that trade stops and the island goes into depression. In a Marshallian sense this is a failure of Say’s law because I have stopped demanding goods. But, to Mises it isn’t, Fred should have had the entrepreneurial skill to notice the change in demand. He would say supply failed because Fred didn’t fulfill the needs of the consumer. The Misean view is fine on a local scale, but I don’t think that it really helps us understand economy-wide recessions.

  17. Martin OB says:

    Gene, I didn’t mean that any of you guys were drawing interventionist policy conclusions from that. It just puzzles me that so often the point is argued so passionately by free-marketeers, as if Keynessians would have a point otherwise. Now I’ve re-read Reisman, as suggested by senyoreconomist, and I think I get some of the controversy. More below.

    Bob, I didn’t want to sound condescendent. You guys are the experts; I just mean that it seems pretty intuitive and uncontroversial. I’m a big fan of your Mises articles.

    So, after reading Reisman again, as senyoreconomist suggested, my impressions are as follows.

    According to Say’s law, indeed, increased productivity in a particular industry with inelastic demand(say, potato growing) may lead to decreased purchasing power of potato growers in terms of other goods, until enough potato growers turn to other industries; but an increase of productivity in each and every industry can never result in a decreased purchasing power for everyone, in real terms. So, an increase in productivity (whether general or in a particular industry ) is never a bad thing for everyone, not even temporarily. It may only be a bad thing for some producers for some time (and a good thing for everyone else, in the same quantity), until they switch to other occupations.

    So, if a modern economy experiences a sudden general increase of productivity, and the structure of production is not ready to adapt by focusing on luxury goods or new kinds of goods, at worse what we would see is that goods wasted, high-quality food used as organic fertilizer, things like that. What we wouldn’t see is most people having a lower linving standard than before because everyone produced too much, which is what Keynessians mean by a “general glut” of production. So, this is NOT likely to be the current situation.

    Back to the island example, if everyone produces more fish and coconuts than anyone can eat, then they may have to throw some of them away and they would regret having wasted so much time producing them, but they would never starve or even have less to eat because of “too much production”, which a Keynessian would deem possible.

    I don’t think we need to take into account the depletion of resources such as oil, for the moment, because the central Keynessian “general glut” argument is not based on that, and neither is the island example.

    • bobmurphy says:

      Martin, just to clarify, I wasn’t complaining that you were being condescending. I was just saying it was funny that you were saying my (Gene’s) point was obvious, whereas others are saying it’s wrong. :)

      For example, you and Jonathan do not hold the same position, except the position of “we both think this insight is less significant than Bob and Gene do.”

  18. Martin OB says:

    Bob, Oh I see :)

    So, what do you think? My view is that you were right in defending Say’s law, because it stands. But Say’s law only says you can’t make everyone poorer by increasing productivity too much (either in one industry or in all of them). Someone may get poorer, but then someone will get wealthier at the same time in more than the same proportion , and everyone will be wealthier in the long run. In this sense, a “general glut” is indeed impossible. On the other hand, it is clearly possible, in theory, that everyone works more than it’s worth, given a particular technological framework. In practice, in a modern economy it’s not very likely, because people always find useful things to do with their time.

    I don’t know whether Malthus was talking about the first or the second kind of “general glut”.

    During the housing boom, we can assume average productivity stayed the same, but unemployment went down, so the global output was higher than before, but also misalocated (too much in housing as oppposed to other industries). Again, according to Say, a higher production level in some industry can never cause a net global impoverishment in real terms.

  19. senyoreconomist says:

    If I recall correctly, Thomas Sowell said in his book, Marxism, that Bohm-Bawerk never understood what he was refuting, or something to that affect. Since it was Sowell who ulitmately kicked up this hornets nest, does anyone have an opinon on Sowell’s interpretation of Bohm-Bawerk?

  20. senyoreconomist says:

    David Gordon has reviewed Thomas Sowell’s book, “On Classical Economics,” and he deals directly with the general glut issue in that review. I strongly suggest that anybody who is seriously interested in this issue take a look at that review. Have you seen this review Dr. Murphy? (He also deals with Sowell’s criticsms of Marx in that review.) The link from Google is here:

    PDF] Review of On Classical Economics by Thomas SowellFile Format: PDF/Adobe Acrobat – Quick View
    by T Sowell – 2006 – Related articles
    Sowell begins with a definition of classical economics: …. DAVID GORDON. Los Angeles. REFERENCES. Böhm-Bawerk, Eugen von.

  21. senyoreconomist says:

    The link I gave does not appear to work, but just Google: David Gordon On Classical Economics Thomas Sowell and you should be able to see the review.

  22. RG says:

    The crux of the savings vs. spending disjointment is being twisted during this language debate.

  23. Current says:

    After reading David Gordon’s review I think that part of the problem here is confusing Say’s Law with the General glut controversy. Certainly the two are connected, but it requires quite a lot of logic to get from Say’s essentially local law to the macroeconomic general glut controversy.

  24. Martin OB says:

    I’ve read Gordon’s review, and I’m still more convinced that a general glut is impossible, that Say proved it against Malthus and that Reisman’s explanation is relevant here. Malthus said that prices would go too low to cover costs of production, so everyone goes broke. So, he’s not talking about excess food, he’s talking about general bankrupcy. Exactly the kind of argument Say’s law denies. Malthus is shown wrong.

    Current, what do you mean by “essentially local”? Say’s law is about the aggregate.

    • bobmurphy says:

      I am not necessarily endorsing Malthus and Simondi; that’s Gene’s gig. All I’m saying is that my elegant arguments against a general overproduction were dashed to pieces by Gene’s simple example (which I generalized beyond labor).

      • Martin OB says:

        Bob, the main problem here is that there are two different concepts of general “overproduction” or “glut”. The first one is that everyone produces more than it’s worth the effort (as they realize later); the second one is that everyone becomes poorer because everyone produces too much. The first one is obviously possible (but rare in a modern economy); the second one is much more relevant, it’s the one that Malthus was talking about, the one that Keynessians talk about, and it’s false.

        If you keep those two concepts separate, you don’t need to talk about “production of leisure” or anything like that.

        I’m not sure which were your arguments that Gene dashed to pieces. Do you mean the one about producing leisure?

        Yes, the general output can be higher during a boom, but there MUST have been malinvestments, otherwise, during the bust, most people would still feel wealthier than they would have been without the boom, not poorer.

        • Current says:

          Martin, what you have to understand is that Keynesians think in Marshallian ways.

          To a Keynesian sticky-prices mean that in a recession wages don’t fall fast enough and output drops. Of-course that does happen, but it’s not really a refutation of Say’s law.

          When we say: “Says’s law is true” we don’t mean that it’s immediately true in terms of aggregates like GDP. We mean that it is a longer-term tendency which faces other countervailing tendencies.

          • Martin OB says:

            Current, even if prices don’t fall, I think Say’s law still stands. A decline in living standards due to excessive productivity in all the economy is still impossible.

            For instance, let’s suppose that everyone in the economy doubles their production, and for some reason prices stay the same. As a result, each producer would have to throw away the surplus production, but he would get to consume just as much as before.

            On the other hand, during a monetary deflation, if prices don’t fall, consumption will be restricted for everyone.

            An increase in productivity and a monetary deflation both cause a decrease in prices, but they are different phenomena with different effects. Reisman also points this out in his book.

          • Current says:

            Martin,

            Nobody denies that an increase in productivity and a monetary deflation are separate phenomena. That’s in Mises and many other economists.

            My point here is about what Keynesians think. After debating the topic with Keynesians I came to the conclusion that their point of view is quite reasonable given their starting axioms. The real problem is that their starting axioms aren’t the same as ours. When a Keynesian says “Say’s law is false” he means a very similar thing to what Roger Garrison means when he says that the economy’s point on the macroeconomic PPF can be beyond or below the equilibrium point.

            We aren’t talking here about an expansion of productivity. we’re talking about a recession. Let’s suppose that due to a rise in the demand for money prices fall for all goods and services. In this case sticky prices will cause output to fall.

          • Martin OB says:

            Current,

            Yes, I’ve also heard the Keynessian arguments about sticky prices (especially sticky wages) and how inflation may solve the problem. I think their claim is wrong and preposterous, because workers are not so stupid as to cling to the same wages when prices are rising, so they demand constant pay rises as well, especially when economists are telling them about the trick. It’s all so “in your face”!

            But that’s another topic. An increase in the demand for money has a similar effect as deflation, but different from an increase in productivity. I don’t know whether the two Keynessian claims are related, or how, but I’ve often heard that a general increase in productivity may damage the economy. My point here is that, even with sticky wages, a increased demand for money may damage the economy, but an increase in productivity would not.

            Anyway, it shouldn’t be surprising that their claims sound reasonable when you assume all their axioms. I could also defend Marxism this way. For instance, I could say that when workers realise they live under a true communist system, a hidden mental switch will be turned on, which will increase their intelligence and productivity a tbousandfold, more than compensating for any limitations of the system. When you point out real-life failure examples, I can say they were not “true” communist systems, they didn’t get it quite right.

            The thing is, what does the “socialist man” hypothesis help to explain, that cannot be explained without it?

            Analogously, Austrian axioms are just common sense, while Keynessian axioms are at least very hard to swallow. What aspect of recessions do Keynessian assumptions help to explain, that cannot be explained in the Austrian framework?

          • Current says:

            Martin, I agree with the criticisms of Keynesian economics that you give.

            You write:
            “My point here is that, even with sticky wages, a increased demand for money may damage the economy, but an increase in productivity would not.”

            I agree with you there, I’m not defending the view held by some Keynesians that productivity driven deflation is damaging.

            My point is that to economists that took their starting points from Marshall Say’s law looks very different. Keynesians think of everything in terms of the movement of aggregates. They think of Say’s law as a statement about aggregates. So, to them if an increase in the demand for money can damage the economy then Say’s law is false. This point of view isn’t stupid once you understand the thinking behind it. To them we are denying recessions can happen.

            The problem with the whole Say’s debate is that it narrows the problem down too much. Casting a theoretical problem as being about whether Say’s law is true or not is troublesome because it means so many different things to different people.

    • Current says:

      The term “Say’s Law” is confusing at the best of times. Say wrote a whole chapter of his book about his law. In that chapter he moves from a microeconomic explanation into a macroeconomic one.

      In his paper on Say’s Law Steve Horwitz quotes W.H.Hutt: “The demand for any commodity is a function of the supply of non-competing commodities.” Though I don’t like term “function” here, I think it’s a good summary of the law.

      Now, the idea of a general glut presented here by Gene is quite possible even if Hutt’s expression of Say’s law is completely true.

    • Gene Callahan says:

      Martin do you realize THAT SAY GAVE IN and agreed that a general glut is possible? Why don’t you try reading Sowell, instead of a review of Sowell?

  25. Andreas Hoffmann says:

    Hi,

    interesting posts. I have one question:

    According to the assumptions, there is limitless demand for wealth. However, wealth in our little economy seems to only consist of fish. So, why is the accumulation of fish then not wealth enhancing but limited as people are fed up by the fish? Or have I misunderstood an argument here?

    Is this leisure an analogy for liquidity preference???

    Consider an economy that produces an amount of goods X. We have investors and worker. All consume the same products X. First consumption uses all products. Then production is increased in all sectors due to a fall in interest rates (e.g.). Labor is paid in money, so that it could buy whatever is produced. Let us assume they do not want all of the produced goods because they all have a house, a washing machine and a computer. This is what Gene assumed. Then this makes the case for liquidity preference due to the production of wrong products, no? The investor will not have an increase in income as demand does not increase and they lose from the overinvestment. One could also argue it is mal-investment as the resources should have been used to produce a new product that people would have consumed.

    Anyways like in the Austrian theory, savings are used to produce useless things and therefore the capital stock is eaten up by the over/mal-investment.