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.