Someone Please Explain DeLong’s Intro
I am not being a wise aleck, I really want to know what DeLong is talking about in the opening of this post when he writes: “If the problem were on the supply side–that we had an excess supply of construction workers–then we would see excess demand for something else. But we don’t.”
Presumably he is riffing on Walras’ Law, but it’s not clear how he’s applying it in this context.
Furthermore, let’s suppose that DeLong is right, and that it is a problem for Arnold Kling and the Austrians, that we don’t see “excess demand” for stuff right now. But then by the same token, why can’t I write this?
If the problem were on the demand side–that we had a deficiency in demand for bridges and roads–then we would see a deficiency in supply for something else. But we don’t. We see overcapacity all over the place.
I think I have a resolution that works–the difference between an excess supply/demand in one particular industry versus all goods except money–but then, I don’t see why DeLong is characterizing his opponents as talking about “the supply side.” It seems instead he should have said, “If this is about sectoral imbalances, then…”
So help me out, you Keynesian fellow travelers.
While you’re at it, try to figure out his last “fact” about reallocation occurring “not in depressions but in booms.” It seems like he has just redefined reallocation to fit this “fact.”
Aren’t you both saying the same thing?
The conclusion from DeLong’s line of reasoning is that there is excess demand for money.
The conclusion from your line of reasoning is that there is a deficiency in the supply of money.
Turn on the printing presses!
Say’s Law. He is simply dismissing Say’s Law, which Keynesians hate very much, and monetarists like Scott Sumner love. He is claiming that according to Say’s law, there should be *full employment*, but there’s not, so it should be dismissed in favor of the animal spirits.
Keynesians hate the straw man version of Say’s Law, the caricaturization of which can be summed up as:
“Say’s Law tells us that supply creates its own demand, therefore, if I produce this pile of poo, then Say’s Law argues that there must be a demand for it. If there isn’t, then Say’s Law is bunk.”
They would rather not understand Say’s Law as it really is, for then their entire intellectual foundation would crumble.
It’s kind of like altruists hating the philosophy of self-interest. Instead of facing it head on, they would rather turn it into a straw man, and attacking that, thus giving them an excuse to not consider it as it truly is, so that they can continue believing in their moral delusion.
Keynes’ criticism of Say’s Law is a bit more complicated than that. It’s best to understand Keynes’ criticism within the context of Hayek’s contribution. Hayek studied how an increase in savings changed the price mechanism as to push entrepreneurs to borrow and invest in the capital-goods market. This was what he sought to explain in Prices and Production. Keynes argued that this particular explanation erred, because it failed to consider how an increase in savings necessarily causes a fall in the price of consumer goods, which means that entrepreneurs are no longer willing to bid up prices in second order goods, which then sets off entrepreneurs to invest in the third order.
Keynes’ judgment is still wrong, but it’s a bit more complicated than ‘supply does not make it’s own demand’.
I don’t think Keynes’ criticism of Say’s Law is *best* understood through Keynes’ criticism of Hayek’s structure of production analysis. I think this particular criticism is more related to his paradox of thrift doctrine, and his claims regarding the “nexus” between decisions to abstain from consumption and decisions to invest, and what saving allegedly does to the economy.
However, you are right to imply it is integrally related.
Hayek’s work on capital structure is at best only peripherally related to the central issue of the defense of the core of Say’s Law, which is the assumption that an equilibrium of scales of wants is satisfied by the current productive structure and output.
Keynes’ misunderstood Say’s Law by characterizing it as a positive working theory that allegedly gave foundation to the entire platform of classical economics, when in reality it was just a refutation of a prevailing fallacy of the time, which was the notion that depressions are caused by a *general* over-production. Say (actually it was James Mill) showed this to be impossible.
Keynes, in the General Theory, characterizes Say’s argument as follows:
“From the time of Say and Ricardo the classical economists have taught that supply creates its own demand; – meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product.”
and further on:
“The classical doctrine, on the other hand, which used to be expressed categorically in the statement that ‘Supply creates its own Demand’ and continues to underlie all orthodox economic theory, involves a special assumption as to the relationship between these two functions.”
and finally this statement:
“Thus Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment.”
I don’t think K Sralla is so off the mark when he claimed that according to Keynesians, Say’s Law implies no widespread unemployment.
Granted, many of Keynes’ arguments are contradictory, as well conceptually vacuous and non-integrated, which is why there tends to be disagreement over what Keynes really meant, so you are “right” and K Sralla is also “right”.
Right, and for Keynes the reason that aggregate demand does not always equal aggregate supply is monetary. He saw money as a tool of economic discoordination. This goes directly into his concept of the paradox of thrift.
>He saw money as a tool of economic discoordination. This goes directly into his concept of the paradox of thrift.
Maybe I seriously misunderstood what you said, but I was under the impression that Keynes’ paradox of thrift was a completely separate beast that is independent from any monetary disequilibrium, and more to do with his mistake in assuming that consumption spending is the only spending as such and is the only spending that generates company revenues and profits, i.e. that a fall in consumption spending and rise in saving/investment will allegedly put business into the awkward position of having increased costs (on account of more investment) and falling revenues at the same time (on account of falling consumption spending).
I am not so sure of the connection between (alleged) monetary discoordination and the paradox of thrift.
Keynes’ did not have an explicit monetary disequilibrium theory (see Garrison 2001). By saying that Keynes thought money was disequilibrating I wasn’t trying to imply a MET framework.
But Keynes’ criticism of Say’s Law was mostly monetary. Keynes believed that economic systems of money were fundamentally different from those of barter, for the very nature that money was involved.
>Keynes’ did not have an explicit monetary disequilibrium theory (see Garrison 2001). By saying that Keynes thought money was disequilibrating I wasn’t trying to imply a MET framework.
>But Keynes’ criticism of Say’s Law was mostly monetary. Keynes believed that economic systems of money were fundamentally different from those of barter, for the very nature that money was involved.
Keynes’ criticism of Say’s Law was not *primarily* monetary, as if Say’s Law was more relevant to barter economies and not so relevant to monetary economies. It is actually the “Keynesians”, those who followed him, who tend make that argument.
I consider Keynes’ criticism to be more general. He held that classical economists treated the whole economy of many individuals like it was a single person, a single non-exchange (barter or money economy is not important here) Robinson Crusoe economy whereby any income that was consumed or retained must necessarily be the output “in specie” of that activity, and that any costs incurred must always be covered by the later proceeds.
He neither implicitly or explicitly made money a new, central problem that classical economists allegedly failed to comprehend or take into account. After all, those economists who are called classical economists were living in a monetary economy, integrated money into their analysis, and knew very well the consequences of the introduction of money into an economy. They had already made money a central, primary aspect of their writings. Keynes did not contribute anything, wrong or right, to the problems of money in relation to classical theory.
Keynes’ own criticism centered on an ignorance of the concept of balance and proportion in the PHYSICAL sense, which is at the heart of Say’s Law. He saw massive unemployment around his time, and he took this to mean Say’s Law is invalid, because according to Keynes, Say’s Law allegedly states that whatever is produced, it will have a ready and waiting demand for it, thus making widespread unemployment impossible.
DeLong is talking about price mismatches between the price of inputs and the price of outputs. An aggregate demand problem is one of nominal aggregate demand; I just don’t know what an aggregate supply problem is. It seems to me that all recessions ultimately face aggregate demand problems, because that’s what happens when nominal expenditure falls (as a result of credit contraction). The idea, in any case, is not foreign to Austrians. An Austrian would argue that prices of both inputs and outputs would need to fall. Keynesians and Monetarists might argue that that would lead to a deflationary spiral.
You could even counter DeLong’s argument on his own terms. He claims that there is not an “excess demand for something else” along with the “excess supply” of construction workers and/or houses.
Is it not the case that there are local shortages for physical silver? In Europe, as well as in the US, some folks who are willing and able to buy physical silver are being told to find it elsewhere. I am not sure what the extent of this shortage is, but it is there.
If that is not convincing, then why not consider the “excess demand” for money? Money is a good. There is more cash “hoarding” now compared to the bubble-induced past. Why can’t it be the case that all the “excess supply” contained in the particular bubble-induced malinvested areas of the economy be counter-balanced, at least in part, by an “excess demand” for money? After all, since production takes time, and we find out that a credit expansion induced bubble has burst, revealing all the past malinvestments, thus giving an appearance of “excess supply” thereafter, there is almost always an increased demand for money, as people scramble for cash where none can be obtained. Bankruptcies, foreclosures, etc are real world testaments to a shortage of money…at the individual level of course, and given the prevailing prices for factors of production and debt.
There are two fundamental ways that this “excess demand” for money can be alleviated, the violence based approach and the peace based approach. The statist approach and the libertarian approach. The logically contradictory approach and the logically consistent approach. The Keynesian/Monetarist approach and the Austrian approach. The…you get the picture.
Keynesians and Monetarists want the government to increase the production of money in order to satisfy the market’s “excess demand” for money. The former want the Treasury to spend, and the latter want the Federal Reserve to inflate. This solution of course creates the same problem it is trying to alleviate, which is why it cannot be said to be a valid long term solution.
Austrians say that the solution is to allow the free market to reduce the prices for factor inputs (and outputs). This will alleviate the “excess demand” for money by making existing money more valuable. This solution is the optimal one, for it does not create the same problems it is intended to solve. It is quick, efficient, although it is the more acute and “painful”…in the short term.
As with most problems based on the initiation of physical power, the solution is usually more power (continued control of money production monopoly, continued enforcement of legal tender laws, continued inflation, continued minimum wage enforcement, continued government borrowing, spending and taxation, etc).