Thursday, November 13, 2008

Consumption vs. Production, or...The Anatomy of a Stimulus

There is much talk in Washington about another stimulus package.

The idea is to give people the means to purchase goods, so as to create the necessary demand for producers to produce. The underlying assumption is that sufficient demand is lacking. Feed the bottom, then watch the economy grow. Trickle-up economics.

This is the dominant economic view today, developed and promoted in the 1930’s by Lord John Maynard Keynes. In Keynes’ theory, the state plays a central role to maximize production, achieve economic stability and assure full employment. In his view, the free market lacks the requisite compensatory mechanisms to achieve these goals. Instead, the state must intervene through the manipulation of taxes and interest rates, and by “investing” in infrastructure and other public projects.

From this point of view, the fundamental problem of economics is a lack of “aggregate demand,” i.e. not enough ability to consume.

But the need to consume is a fact of nature. We are born hungry, naked and poor. The fundamental problem of economics to be solved is not the creation of more need or desire or ability to consume. We are born with a limitless need for wealth. The fundamental problem to be solved is production. Without production, there is nothing to consume. With production, and free market competition, the interaction of supply and demand results in goods and services at affordable prices. Free market prices are the “requisite compensatory mechanism” which Keynes failed to see.

We can not improve the general standard of living simply by boosting consumption. The apparent chicken-and-egg of production and consumption has an essential fulcrum: the productivity of labor. Progress in prosperity is only made by figuring out and applying ways to do more with less. More goods with less effort and/or less material.

Increasing the productivity of labor makes the real cost of goods go down. As labor is valued by how productive it is, through increasing the productivity of labor, you also increase real wages. Cheaper goods and higher wages are the source of true prosperity and progress.

How do you increase the productivity of labor?

Not by handing consumers more spending money through a stimulus package. That approach fails on two accounts. First, consumer spending is a relative dead end. Items are purchased, enjoyed and consumed. Some businesses benefit, but the effect soon peters out, unless the stimulus keeps coming. Since the money has to come from somewhere, without production, this method is unsustainable. Second, where does the stimulus money come from?

Money is simply, stored wealth. To be stored, wealth first must be produced. So money for a government stimulus (or any type of government redistribution) must come from production, either directly via taxation, or indirectly via debasement of the currency (by increasing the national debt or simply printing more paper dollars) which then erodes away the value of our savings. To “invest” in consumer spending, you first have to subtract from funds which could otherwise be invested in improving production through capital investment. The nature of capital investment is to create the means for even greater production, i.e. more wealth. The nature of consumption is the depletion of wealth.

It is true that increased consumer spending will stimulate some increased production, but without the funds to invest in capital improvements (both human and material) the productivity of labor will not increase, or will increase to a diminished amount. With a stimulus package, some jobs will be created. Some people will be able to purchase more goods. However, the same money put towards capital investment would create even more jobs, and the resulting increased productivity would make even more goods affordable to even more people.

The jobs and goods which never materialize because of government redistribution policy is another case of “What is Seen and What Is Not Seen.” It is easy to see the money we are handed, and the immediate effect on spending. It takes more work to understand the hidden cost on future production and spending, because the goods and jobs that are never created is what we do not see.

This theory is supported by experience. As discussed in a recent article in the Wall Street Journal:

The nearby chart shows the arc of tax policy and economic growth across the Bush years. After the dot-com bust, President Bush compromised with Senate Democrats and delayed his marginal-rate income tax cuts in return for immediate tax rebates. The rebates goosed spending for a while but provided no increase in incentives to invest. Only after 2003, when the marginal-rate cuts took effect immediately, combined with cuts in dividend and capital gains rates, did robust growth return. The expansion was healthy until it was overtaken by the housing bust and even resisted recession into this year. Mr. Bush and Congress returned to the rebate formula in February, but a blip in second-quarter growth has now ended as the economy heads into recession.

Production must precede consumption. This is concretely evident in a primitive economy: the food that is not hunted, gathered or grown can not be eaten. The connection is easier to loose sight of in a complex division-of-labor economy, especially one of paper fiat money. As economist Dr. George Resiman explains in “Production vs. Consumption,”

The use of money makes this point somewhat less obvious but no less true. Where money is employed, producers do not exchange goods and services directly, but indirectly. The buyer exchanges money for the goods of a seller. The seller then exchanges the money for the goods of other sellers, and so on. But every buyer in the series must either himself have offered goods and services for sale equivalent to those he purchases, or have obtained his funds from someone else who has done so.

The fact that in a monetary economy everyone measures his benefit by the amount of money he obtains in exchange for his goods or services is interpreted by the consumptionist to imply that the mere spending of money is a virtue and that economic prosperity is to be found through the creation and spending of new and additional money — i.e., by a policy of inflation.

In rebuttal, the productionist argues that for everyone who spends newly created money and thereby obtains goods and services without having produced equivalent goods and services, there must be others who suffer a corresponding loss. Their loss, says the productionist, takes the form either of a depletion of their capital, a diminution of their consumption, or a lack of reward for the added labor they perform — a loss precisely corresponding to the goods and services obtained by the buyers who do not produce.

The destructive effects of redistributionist policies is not just the loss of wealth that it causes, but the violation of the moral principle that each man is an end in himself and must not be coercively turned into the means for another’s end. Reisman continues:

The only economic benefit which one can give to a producer…consists in the exchange of one's own products or services for his products or services. It is by means of what one produces and offers in exchange that one benefits producers, not by means of what one consumes. To the extent that one consumes the products or services of others without offering products or services in exchange, one consumes at their expense. (emphasis mine)

These two opposite views of economic life have consequences far beyond their effects on GDP, unemployment rates and the affordability of goods. They also define our most fundamental social relationship: free men and voluntary trade, or men controlled by the state in a system based on “from each according to their ability to each according to their need.”


Thinking Man said...

Beth, your explication here of Say's Law is a masterpiece of clarity and concision.

Beth said...

I must admit I had forgoten that is the formal name for this economic principle. Thanks for the reminder. Here's what it says in Wikipedia:

In economics, Say’s Law or Say’s Law of Markets is a principle attributed to French businessman and economist Jean-Baptiste Say (1767-1832) stating that there can be no demand without supply. A central element of Say's Law is that recession does not occur because of failure in demand or lack of money. The more goods (for which there is demand) that are produced, the more those goods (supply) can constitute a demand for other goods. For this reason, prosperity should be increased by stimulating production, not consumption. In Say's view, creation of more money simply results in inflation; more money demanding the same quantity of goods does not represent an increase in real demand.

Thinking Man said...

That's not bad, actually. Wikipedia can be a little hit-or-miss, at times, as you've probably noticed too, but the explanation you reproduce above is pretty good. Although I would like to stress that the thing that makes the logic behind Say's Law so awesome is precisely the thing that you highlight in your post: production is wealth.

Many people take Say's Law -- "production creates its own demand" -- to mean something like: the more goods there are sitting on store shelves across the country, the more people will then want to buy those goods. Obviously that's crazy. Say's Law means that when people produce, people thereby generate more real wealth with which to invest, purchase, and loan. "Production is everything," said Jean-Baptiste Say.

Anonymous said...

Interesting points. I have a few comments and some questions, though. First, note that Say made his observations regarding a primarily agrarian economy; and it was a general observation, not an observation regarding a solution to recession (as far as I know). The latter introduces the necessity of quick effects, or urgency. Applying Say's law in time of crisis may or may not work depending on the velocity of money, which to some extent is dependent on the aggregate psychology: fear, greed, and the aggregate expectations.

The logic of the effect of the stimulus petering out after the goods are purchased and consumed fails to take into consideration that the purchase of goods makes a market which, in turn, requires more jobs to produce the goods, and so on. So, the money is not just spent and that's the end of it. The workers that produce now have money which gets recycled, saved, and so on.

The focus on creation of capital is misplaced when attempting to formulate a solution to recession or depression. Moreover, in this explanation productivity and creation of capital have been jumbled together. New capital is not what is needed; it is decreasing excess capacity that is required (I don't know what aggregate capacity is right now, but I'll bet it is lower than six months ago and heading lower): i.e. approaching full capacity and employment. This is a short-run proposition (what is needed now) as opposed to increasing capital, which is a long-run proposition that produces results in the future. Increasing productivity actually decreases the need for new capital because more goods are produced by each worker, although this effect is somewhat offset by the need for new technology to accomplish this.

As far as the passage regarding spending one's own wealth goes, does it really matter where the money comes from? If your parents give you the down payment for your first house, at the point of sale is it different from a down payment that you save for yourself? I gather that you would consider using your parents money to help you buy your first home to be immoral, unless you were to pay it back with interest. Inheritances, likewise would be immoral, as you did nothing to create the wealth bequeathed to you, eh?

Finally, I gather that use of public money is bad, in your opinion. I infer that it is bad when given to consumers and producers alike. So, absent the $700 billion bailout, or stimulus packages, or bailouts of homeowners, what course would the economy take? Additionally, as the economy was chugging along as recently as a year or two ago, the Wall Street Journal, as well as pundits on TV repeatedly attributed the resilience of the economy to the steadfast activity of the consumer, who was, by the way, getting much of his money by using his house as an ATM machine. So why is the consumer now not effective in moving the economy; or did you disagree about his role when the economy wasn't tanking?

One final question: what else was going on during the period covered by the Wall Street Journal graph or the period prior to it that might account for the change seen in 2003. Keep in mind that the growth attributed to the Reagan tax cuts largely disappears when the measurement appropriately is done from trough to trough or peak to peak of the business cycle instead of trough to peak.

I don't know the answers to all of these questions, not do I have time to find them, but they need to be addressed before one can simply assert that Say's law will solve the problem. No, I don't have a blog; you are seeing the stream of consciousness reaction to your postings. :-)

Beth said...

To anonymous:

To answer the above questions and comments, I'd like to refer you to Resiman's book Capitalism, (found here: ) in particular Chapter 13, Protectionism, Say's Law and Unemployment esp. the subsection "Depressions and Alleged Overproduction" pg 544 and "Monetary Demand and Real Demand" pg 559. Also, Chapter 15 on Aggregate Production, Aggregate Spending and the Role of Saving in Spending” may address some of your other points. An introduction to another take on the role of velocity can be found in "Where the Monetarists go Wrong" by Henry Hazlitt ( )

I hope you will understand my not responding to every point you make. I do appreciate your participating here and will continue to consider your points as I find time. However, I am working hard to not approach these ideas in a “stream of consciousness” manner, but rather to more systematically study these ideas and attempt to formulate them as a carefully thought-out positive construct. It’s not the only way to approach understanding the issues, but it is the one I prefer at the moment. It is also very time consuming, and so I am unable to address as many points as you are able raise.

Thanks again for taking the time to read my posts and to express your point of view.


Anonymous said...

I read p 544 and 559. The important point is on p562. I also read Hazlitt's article. Nothing new there. the problem is that you are applying an equilibrium theory about aggregate demand to explain a non-equilibrium situation involving the actions of firms and industries. To see the problem clearly you need to step back from the aggregate situation and apply 'game theory' to firms, industries, and individuals (game theory: i.e. ask what would I do if I were a widget maker whose channels are stuffed and whose inventories are three or four times normal?). If you do that you will see the flaw in your logic. In the current situation we have over supply of houses, cars, and products of all kinds.

The passages in Reisman's book to which you referred me address changes in quantity demanded; the current situation involves a change in demand, which is not the same thing. The change in demand is due to lack of credit as well as uncertainty, which is causing banks and people to 'hoard' money. Consequently, a stimulus has just as much to do with psychology as to do with economics.

For example, Say's law would lead you to believe that production would solve the current crisis. that is what Henry Paulson was trying to do. He reasoned that if he gave the banks cash, they would loan it to businesses, which would use it to produce, which would create wages, which would generate an increase in demand (not just quantity demanded).

This didn't happen because the velocity of the money Paulson gave the banks was for all intents and purposes zero. He gave the money to the banks, which kept it. They are worried about things getting worse, they have bank examiners to satisfy, who, amazingly enough, were actually telling the banks to hang on to the money. Besides, individual business or industries is going to start producing again until its channels clear and inventory levels go down, and this will happen only when buyers start buying again (see p 562).

The point of this post and the previous one is that you aren't being systematic or comprehensive but are posting whatever seems to support the Ayn Rand notion that self interest is virtue and government need not interfere. The questions you don't have time for are just the questions you need to think critically about to determine, for example, if Say's law is applicable to the present situation (It is not), or if undirected self interest will get us out of this crisis. I don't think it will, which is why despite my aversion to giving my money to big banks and inefficient automobile manufacturers, I think we need some government intervention.

Respectfully yours,
Critically Thinking Man

Beth said...

Dear anonymous,

RE: Say's law would lead you to believe that production would solve the current crisis.

Not necessarily. Focusing on the production aspect does not always mean “make more.” It can also mean “make better” or “make cheaper” through capital investment and improvements.

RE: In the current situation we have over supply of houses, cars, and products of all kinds.

That may be so, but I would ask you why? My answer would include the fact that previous injections of artificial money into the system led to overspending, by which I mean spending beyond what is supported by real wealth and savings. Having overextended ourselves with extreme deficit spending (both in the public and private sectors) what we need now is precisely what you call hoarding and I would call saving: the rebuilding up of depleted reserves.

RE: changes in quantity demanded; the current situation involves a change in demand

I see no significant difference between a change in the quantity demanded and a change in demand. The end result is a change in demand, in our current case a decrease in demand. I think we will have to agree to disagree here. I don’t know how to put it more plainly that you have to begin with production not consumption.

I think that to print money in order to trick people into thinking we have actual wealth (i.e. savings) to invest (the “psychological” aspect of demand) when in fact we as a society are already too highly leveraged, is to disrupt important economic signals from the facts of reality. As painful as it will be, we need to take the actions which will allow the market signals to more accurately reflect the true status of our savings and supply. In this case, that means allowing demand to contract because of earlier overproduction. We agree that there are too many houses, etc. We disagree on why and how to respond.

I think that it is more in tune with the true level of resources to allow prices to fall commensurate with demand….not inject more government-made money to create artificially supported demand. That means the price of labor as well as the price of goods must fall. Recessions are the painful consequences of the earlier artificially created boom….but the best solution is not to continue inflating the money supply. That just gets us farther and farther away from basing our economic decisions on the true state of our resources. What you call “hoarding” is the correct response to the current situation.

RE: your last paragraph

I state once again, I think you bring up points which are important for me to think about and consider. And I really do appreciate that. But, I plan to do it on my timeline, and in the order that makes sense to me as I work to understand economics better, and not on your timeline, which is what I would have to do to address every point you raise as you raise it. I am impressed by the amount of time you are willing to spend on this conversation and your willingness to read the sources I point to, as well as your understanding of standard econommic theories. My goal truly is to try and understand the issues better. Sometimes I have the impression that is your goal. Other times, not.

I do support individuals acting in their self-interest, which means to me that they are able to act in support of their own lives and values. I do resist the use of government coercion to make people act against their own self interest. I believe that laws which protect the rights of all individuals equally is the only path to peace—that forcing people to act against their self interest results in resentment, envy and conflict. I do not support the use of government force to support some at the expense of others (the politics of special interests and unequal treatment before the law.) I believe that this moral stance in support of the sanctity of each individual life as an end in itself is also the most practical path to peace and prosperity.

So yes, those stances will effect how I evaluate proposed solutions to the current mess. For me, to argue for solutions which violate individual rights is not acceptable. I would hope that if someone presented an economic theory grounded on the principle of slavery, you would reject it on that basis alone and look elsewhere for your economic understanding. I hold the rights to life, liberty and property equally. There is no getting around those principles for me. Which may mean that we can discuss economics all we want, but will just keep talking past each other.

Beth said...


I'd like to do a follow-up post on this topic. There is another aspect of Say's Law I would like to address which involves your point of aggregate demand. Can you refer me to a source on the web which presents your point of view in less that 20 pages?
(I am waiting for some books on banking to arrive and have a bit of time while I wait.)


Anonymous said...

Dear Beth,

I had no idea we had such disparate views of things. I was planning on bowing out in hopes of finding a site at which I can have a debate that will improve my understanding of the supply side. Most of your readers offer praise but no debate.

Thank you for addressing the points you have. I'll take each of your points in turn without otherwise identifying them, for the sake of brevity.

(1) In the current situation it doesn't matter what definition is attached to production -- more, better or cheaper -- the crux of the issue is the word 'make'. No individual firm is going to 'make' anything when it is drowning in inventory and its distribution channels are full. The channels, in turn, can only be cleared by buyers. The challenge is to provide enough cash to clear the channels without excessively increasing the money supply and causing inflation--a tricky trade off.

(2) There is a fundamental theoretical and practical difference between "quantity demanded" and "demand." Quantity demanded changes when prices change, which can be achieved by changing supply. A change in demand may be a function of money supply or, more important in our situation, psychology, or a change in technology, which is often called creative destruction. An example of the latter is CD's replacing vinyl, in which case the damand curve shifted all the way to the left until the quantity demanded at all prices was essentially zero.

If you already know this, I apologize.... On the usual supply/demand graph, where x=quantity and y=price, the plot looks like an "X," with demand (D)sloping down to the right and supply (S) sloping up to the right. The equilibrium price (P) is the intersection of the two curves. If the quantity supplied rises above P there will be excess supply. The firm that is in this situation must sell at a lower price than it though it could get to move the inventory. The price falls back to P. Now draw a new demand curve D' to the left of D. Three features of this curve are notable: first, at any given price the quantity demanded is lower than when demand is represented by D. Second, the new equilibrium price P'is lower than before. Third, and most important is that the original price P is not attainable on D' (unless S also shifts) because buyers are not willing to part with their money as before. Possible contributing factors are contraction of money supply (credit crunch; increased interest rates; net selling of treasuries by the Fed; which sucks cash out of the system; or plain old fear and uncertainty). What is needed for firms to be profitable and inventory to sell at or near the old "P" is a change in psychology, a push of D' toward D.

I have no disagreement with your position on how we got where we are, nor do I disagree with where we need to be in the long-run. However, there are two important points to understand. First, hoarding, while seeming to be the correct response will ultimately harm the hoarders as the economy spirals down, out of control. Right now savings can't be used because there is nowhere for the goods to go. Hoarding will exacerbate the problem, which will ultimately affect the hoarders. Second, there is no doubt that our current situation can be likened to a cruel belay. Get back on too soon and your arms are still pumped. Hang too long and you lose so much ground that you are no better off when you do get back on. Pumping money into the economy is not a good thing in the long run, but in the short run it should attenuate the problem and prevent it from deteriorating to the point at which people can't eat.

(3) I look at citizenship as a team sport. Even when we are the star sometimes we have to make a sacrifice for the team--we can't always have it our way. None of us is ever going to perfectly satisfied about all that our government does. Distribution of the costs of infrastructure and government is not akin to slavery. We may not agree totally on the projects we choose to fund, but that is the nature of living in a group or community or even a family. Some force is always necessary. It inhibits crime, for example. Regarding its application to the collection of taxes, it doesn't seem that an individual has the right to choose to avoid paying for the benefits of living in a society. Now, nobody really knows the optimal taxation rate, the inflection point on the Laffer curve, so we can argue ad infinitum. I am reading Laffer's book, "The End of Prosperity" and the authors point out that liberals agree that a 90% marginal tax is confiscatory, then go on to ridicule them because they don't say where the line should be drawn. Of course they say that they want lower taxes, but they can't say where the line for "too low" is. No one can because the Laffer curve is a qualitative graph of a concept, not a quantitative graph of empirical measurements. Suffice it to say that we would probably agree on many uses of our money that are sub optimal, and disagree on many uses of tax money that I believe fall under the empowerment purpose of government. Which is why I have my legislators' email addresses in my address book and the phone numbers on speed dial, and I make frequent use of both.

(4) Sorry, I can't refer you to a specific reference. I made that part up. It is a synthesis of what I know about the behavior of individual firms as is being played out in the news every day (e.g. Citigroup is laying off 52,000--a small city!) and the fact that Say's law addresses aggregate demand, as well as the passage at the beginning of Reisman p562. Regarding Reisman, his book is verbose, and a standard economic text would be more concise, up to date, and would have better pictures. Also, he has an agenda which I worry colors his (mind numbing) explanations.

As far as his agenda goes, I think a moderate balance is possible somewhere between the Ayn Rand extreme of uncoordinated individual decisions and socialism. I have heard Ayn Rand Institute representatives repeatedly advocating for private ownership of roads by the property owners abutting the road, in which case we would all be at the mercy of the diligence of individual property owners for maintenance and paying them by the inch to traverse their section of road. Sorry, too extreme for me.

Beth said...

Dear Anonymous,

Thank you for your last comment. It was quite helpful. I understand your reaction to Dr. Reisman. I like his ideas very much, but he is not easy to follow in many of his explanations (which is why I usually try to paraphrase what he has to say rather than refer people to him directly. I just felt crunched for time) Not many are willing to plod through his work. I appreciate your persistence. Yes he has an agenda, as do we all.

By agenda, I simply mean a set of beliefs and a construct of the world that guides our understanding of what things are and how things work. I don’t see a way around working from some starting point and continually reaching out to broaden and deepen our knowledge and understanding. I am trying very hard to make my “agenda” explicit, and put it out there to be challenged. I learn so much that way.

I’ve come across another article on Say’s Law which I found very helpful. It can be found here:'s%20Law-Elgar.pdf
Horwitz looks at how Say’s Law has been interpreted (he argues misinterpreted) by Keynes as “supply creates its own demand.” This formulation makes the absurd claim that all you have to do is put stuff out there and people will buy it. Instead, Say was bringing attention to the fact that in order to “demand” one must first produce goods of value to exchange. The author states “Say’s Law, at least as Say himself described it, is about an unfolding market discovery process, not an equilibrium condition, as it is often presented.” My request for an article was to try and balance my reading of Horwitz with a defense of the Keynesian interpretation. I’ll just work on finding it on my own.

In regards to demand and quantity demanded, thank you for the explanation. I do need to increase my understanding of some of the rather standard economic terms.

In regards to your point (1), I dislike the “inject more cash” because I think we are already too highly leveraged and simply giving people more money will encourage further deficit spending. I think a contraction is unfortunately exactly what we need to realign consumption with people’s actual resources and ability to create wealth.

Also, increasing the money supply seems to downplay the destructive effects of inflation and the resultant debasement of the currency. Inflation creates the incentives to look only short-term (spend the money now because it is worth more now than it will be in the future). This destroys long-term planning as well as eroding our savings and investment --which is how we create sustainable and increasing productivity, which I see as the only means to raising the standard of living for us all.

In regards to hoarding, whole concept of hoarding seems flawed. What you call hoarding, I think of as regrouping. People have spent beyond their means and need to take a time out to build back reserves. I do plan to spend some more time trying to understand the arguments in favor of this concept because maybe I am missing something here.

As you point out in (2), if the supply exceeds demand, in order to get supply and demand matched up again, you can either increase the demand or drop the price. I think it makes a tremendous difference to the long-term health of the economy how this occurs. Right now, I think the thing to do is to let the prices fall in order to increase the demand. I would have a lot less problem with throwing money at it if I thought the money represented something real. The problem is that when the government increases the money to increase demand, it does so by creating money out of thin air. This destroys the value of money which has serious long-term consequences—the very consequences with which we are living right now.

Interesting analogy to climbing. (I hate cruel belays, but who or what do you see as the belayer here?) Even with a cruel belay, when you are pumped, you are pumped and nothing but resting will let you make any progress, even if it means loosing ground while you build back your reserves. However, if you do rest, you eventually come back in better condition and can climb even higher.

The analogy I see more helpful is that of a heroin addict. The economy has become addicted to the Fed’s money injections. Withdrawal is painful and makes you want another hit, but at some point you are going to have to get off the stuff or it's going to kill you. I would have less problem with some measure of short term relief (methadone?) if I thought the underlying problems were properly understood and we were really moving in a direction of getting away from the addiction. Since the government’s monetary policy caused the current economic dislocation, it makes sense that it should help ease the pain of rectifying it. No need for a cold-turkey “shock doctrine.” But I don't hear government recognizing the real root if the problem. The long-term solution has to be a move away from government manipulation of the value and supply of money. These manipulations lead to extreme volatility in the business cycle. Everybody likes the booms, but the booms are the set up for the busts like now and people's savings have been destroyed and lives are made ever so much more difficult.

Anyway, I can understand your desire to bow out. I've enjoyed the exchange. You have pointed out several areas where I would like to expand my understanding, and that has been much appreciated. It is easy to get caught up in “insular affirmations.” Your different point of view has been helpful. If you come across any good resources, or have any other pressing insights, I’d love to hear about them. You can email me directly at

Thanks again. We live in interesting and challenging times!!

poor boomer said...

Re: The destructive effects of redistributionist policies is not just the loss of wealth that it causes, but the violation of the moral principle that each man is an end in himself and must not be coercively turned into the means for another’s end. Reisman continues:

Aren't the working poor (aka "wage slaves") coercively turned into the means for another's end?

poor boomer said...

Beth said:

In economics, Say’s Law or Say’s Law of Markets is a principle attributed to French businessman and economist Jean-Baptiste Say (1767-1832) stating that there can be no demand without supply

As a poor person, I have first-hand experience with the reality that demand for affordable housing far exceeds the supply.

So on what basis can there be no demand without supply?

Anonymous said...

Haven't had time to read the article you suggested, but I want to make a correction. I used the word "equilibrium" in reference to Say's law. Poor word choice. It's actually steady state growth, which I internalize as a sort of moving equilibrium. Basically, Say's law is an observation about a non-crisis economy, and it works if you start with zero commerce or normal commerce (some semblance of steady state growth), but breaks down when you have too much commodity in the marketplace at the start (see below). This is my view, but if you can show me the fault in my reasoning, I would be obliged.

I was reading an article entitled "the New Frugality" in and October issue of Business Week recently. It reports on the cut backs consumers are implementing,and says that many of them will not go back to rampant consumerism, even when the current economic crisis resolves. The interesting thing is it attributes to Keynes a statement to the effect that good private decisions are not necessarily good aggregate decisions. The rational response for consumer is to not purchase, the rational response for manufacturers is to not manufacture. What is needed is for each group to do what is not rational for individual members of the group, and nobody wants to be the first to blink.

That said, I am encouraged by the most recent press release on business inventories. It appears that business, in general, has been very quick to respond to deteriorating demand. The annual total business inventory/sales ratio has increased from 1.27 to 1.29. The bad news is that increase happened Aug/Sep. Additionally, total business inventories increased 5.5% while sales increased 3.4%, with manufacturers seeing a 2.5% increase in sales and a 7% increase in inventories. So inventories seem to be piling up slightly at the manufacturers' loading docks. That bodes well for a quick recovery when it happens.

It appears that if we apply Say's law to get the economy moving again we will add to the excess in manufacturers' inventories, which will drive prices down, which will lead to decreased profitability and possible bankruptcies. If we get consumer to start buying, prices will tend toward holding steady or at least not go down as much as in the previous case, distribution channels will clear, and when manufacturers start producing again they will have a better chance of doing so profitably.

Beth said...

poor boomer,
I don't see that demand exceeds supply of housing if you use the definition of demand as both the willingness and the ability to purchase. If indeed that occurs, then prices will rise and in response to the rise in price, demand will fall. Not instantaneously, however.

In my reading, I have come across multiple ways of interpreting Say's Law, some of which seems to not be as Say intended. It would help me if you could elaborate on what you think Say's Law states. The article I referenced gets at some of the disparities in interpretation and some of the confusion caused by them. I disagree that Say's Law is applicable only in a non-crisis economy. And what you call rational may or may not be, depending on what you think caused the "oversupply."
I realize this is not a complete response to your comment. I have dug up some articles on Say's Law and "the paradox of thrift" which I would like to spend some time understanding before formulating a more complete response.

And then there is Thanksgiving and all the things to be thankful for.....