Thursday, December 1, 2011

Jean Baptiste Say on Failures of Aggregate Demand

In modern formulations of Say’s law (or the “law of markets”), there are two main variants of it, as follows:
(1) Say’s Identity
According to Baumol (1977: 146), this
“is the assertion that no one ever wants to hold money for any significant amount of time, so that, as a result, every offer (supply) of a quantity of goods automatically constitutes a demand for a bundle of some other items of equal market value.”
(2) Say’s Equality
Again, according to Baumol (1977: 146), Say’s Equality
“admits the possibility of (brief) periods of disequilibrium during which the total demand for goods may fall short of the total supply, but maintains that there exist reliable equilibrating forces that must soon bring the two together.
Say’s Identity requires that no failures of aggregate demand can occur, as money is not held for significant periods of time and factor payments from aggregate supply are spent in aggregate demand (either in consumption or investment). Thus in particular commodity markets there might be excess supply, but overall there is “zero value of the sum of excess demands” (Kates 2003: 45). It appears that James Mill and John Ramsay McCulloch both used Say’s Identity and Say’s Equality in their writings (Blaug 1996: 150).

There is a question here about whether Jean Baptiste Say ever expressed his “law of markets” as Say’s Identity. This is complicated by the fact that there was more than one edition of his Treatise on Political Economy. The second edition of the Treatise on Political Economy was published in 1814 and has a revised version of Say’s law (Baumol 1977: 147), while in the first edition the law of markets is not nearly so complete. It was only in the second edition of the Treatise on Political Economy (1814) that Say’s discussion is identifiable as a “form of a type of Say’s equality, i.e., supply and demand are always equated by a rapid and powerful equilibration mechanism” (Baumol 1977: 159). Indeed, Jean Baptiste Say even criticised Ricardo for using a version of the law of markets we would recognise as Say’s Identity (Blaug 1996: 150). The second version of the law of markets – Say’s Equality – is obviously a far weaker version of it, for it admits the possibility of short term failures of aggregate demand, even if a long run inequality between aggregate supply and demand is denied.

A relevant passage by Jean Baptiste Say on this issue occurs in one of his letters to Malthus:
“Mr. Ricardo insists that, notwithstanding taxes and other charges, there is always as much industry as capital employed; and that all capital saved is always employed, because the interest is not suffered to be lost. On the contrary, many savings are not invested, when it is difficult to find employment for them, and many which are employed are dissipated in ill-calculated undertakings. Besides, Mr. Ricardo is completely refuted not only by what happened to us in 1813, when the errors of Government ruined all commerce, and when the interest of money fell very low, for want of good opportunities of employing it; but by our present circumstances, when capitals are quietly sleeping in the coffers of their proprietors. The bank of France alone possesses 223 millions of specie in its chests, more than double the amount of its notes in circulation, and six times what it would be prudent to reserve for the ordinary course of its payments.” (Say 1821: 49; it was also published in The New Monthly Magazine, Volume 14 [1820, October 1], p. 368ff).
What we have here is:
(1) a recognition that money savings will not necessarily be invested in capital goods and that an aggregate demand failure has occurred;

(2) “many savings are not invested,” a rudimentary insight not far removed from Keynes’s theory of liquidity preference.
All that needed to be added was an analysis of the role of demand for money used in speculation on secondary financial asset markets for liquid assets as a store of value and subjective expectations in the investment decision.

BIBLIOGRAPHY

Baumol, W. J. 1977. “Say’s (at Least) Eight Laws, or What Say and James Mill May Really Have Meant,” Economica n.s. 44.174: 145–161.

Blaug, M. 1996. Economic Theory in Retrospect (5th edn), Cambridge University Press, Cambridge.

Kates, S. (ed.), 2003. Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle, Edward Elgar Pub, Cheltenham ; Northampton, Mass.

Say, J. B. 1821. Letters to Mr. Malthus: On Several Subjects of Political Economy, and on the Cause of the General Stagnation of Commerce. To Which is added A Catechism of Political Economy, Sherwood, Neely, and Jones, London.

35 comments:

  1. Say also wrote:

    "a glut can take place only when there are too many means of production applied to one kind of product and not enough to another"

    and

    "products are paid for with products."

    These are the backbones of Say's law, not the passage you cited.

    Keynes "refutation" of this consisted in ignoring the context of goods being produced in proportion. You ought to read Hazlitt's criticism of Keynes.

    One person cannot hoard money unless another person or persons dishoard (spend) money. If everyone tries to hoard, then just like the individual does so, what they are all doing is trying to increase purchasing power. They won't all succeed in doing so, because purchasing power is determined by real supply, not how many dollars are in existence. THAT is the main intuition behind Say's law.

    Not everyone can hoard more money, because in order for one person to hoard, another must spend, and so the result of a general desire to increase cash balances will be a fall in demand and hence prices, which accomplishes the desire to increase purchasing power, which then ends the increasing hoarding, and the economy will stabilize with less nominal spending, higher purchasing power, and no necessary long run change to employment.

    The second version of the law of markets – Say’s Equality – is obviously a far weaker version of it, for it admits the possibility of short term failures of aggregate demand, even if a long run inequality between aggregate supply and demand is denied.

    There is no such thing as "failure of aggregate demand."

    Failures are only relevant for individual pursuits and goals, and no individual sells into, economizes, or controls, "aggregate demand."

    Aggregate demand does not drive employment. If I stole everyone's money, and then printed a little more, and then gave all the money to dog food sellers, then aggregate demand would have increased, but employment would have collapsed to near zero.

    Aggregate demand is a RESULT of individual spending decisions. It is individual spending decisions in the labor market that determines unemployment. There will always be a demand for consumer goods, and so there will always be profitable investment opportunities. The key is matching investors with consumers. Forcing aggregate demand to rise can't hire a single person, because aggregate demand is not limited to demand for labor. Aggregate demand can rise AT THE EXPENSE of demand for labor. The former can go up by a reduction in the latter.

    Investors do not sell or produce into aggregate demand. They go into specific markets, and find where there is a difference in demands, for input and output. If expected demand falls, then current nominal demand for input factors falls. If expected demand increases, then current nominal demand for input factors increases. These changes in nominal demands do not imply that real supply and employment falls. If prices are free to adjust, and not made more inflexible through government hampering such as inflation, minimum wage laws, unemployment benefits at taxpayer's expense, food stamps, etc, etc, then those desiring work will find that their asking price has to fall. And their asking price will fall if they want to earn an income, the same way capitalists have to reduce their prices if they want to find more buyers.

    Both Baumol and Blaug do not understand rationalist economics.

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  2. "products are paid for with products."

    A statement already absurd, since even in Say's time fractional reserve banking allows payment to be made by fiduciary media/credit money, unbacked by commodity money.

    A Say's law world in this sense is now nothing but a fantasy, nonexistent utopia with only commodity money and no fractional reserve banking.

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  3. "One person cannot hoard money unless another person or persons dishoard (spend) money."

    That is a nonsense statement: the amount of money spent on producible commodities or capital goods invetsment could fall for long periods of time, without equal dishoarding. There is no necessary reason why x amount of money saved by person a would suddenly be spent by person b.

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  4. There is no such thing as "failure of aggregate demand."

    Failure of aggregate demand = short run or long run inequality between aggregate supply and demand.

    If equality between aggregate supply and demand never happens, Say's law is nonexistent.

    You already have the Classical economists and Say admitting short run inequality between aggregate supply and demand.

    Unless you think Say's law doesn't assert some equality between aggregate supply and demand, then any time it doesn't happen you have an aggregate demand shortfall.

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  5. "Both Baumol and Blaug do not understand rationalist economics. "

    No, they reject blatantly stupid a priori economic drivel called praxeology.

    "If prices are free to adjust, and not made more inflexible through government hampering such as inflation, minimum wage laws, unemployment benefits at taxpayer's expense, food stamps, etc, etc, then those desiring work will find that their asking price has to fall"

    Even with perfect price and wage adjustments, the process you imagine won't work: subjective expectations affect the investment decision, and business may not invest; and money can continue to be withheld from purchasing commodities or lent for capital goods investment owing to liquidity preference.

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  6. "products are paid for with products."

    A statement already absurd, since even in Say's time fractional reserve banking allows payment to be made by fiduciary media/credit money, unbacked by commodity money.

    Irrelevant. The value of the new credit still depends on the production of goods. Products are still paid for with products, even if there is an increase in the supply of money. Prices just rise. The medium of exchange is just devalued. People will trade their products ultimately for other products. The introduction of money doesn't change this.

    A Say's law world in this sense is now nothing but a fantasy, nonexistent utopia with only commodity money and no fractional reserve banking.

    Say's law is not a policy. It's not a world. It's not an advocacy. It's a logical necessity that cannot be refuted, without contradicting economic logic.

    "There is no such thing as "failure of aggregate demand."

    Failure of aggregate demand = short run or long run inequality between aggregate supply and demand.

    Supply and demand are incommensurable units. There is no equality or inequality between goods and money.

    If equality between aggregate supply and demand never happens, Say's law is nonexistent.

    False. Say's law is not contradicted, or refuted, by understanding, or assuming, that there is no equality between supply and demand. Supply and demand are never in equality or inequality, because they are different concepts with no common quality in the economic sense.

    Money trades against goods because of different, indeed opposite, valuations from exchange parties.

    The notion that "the supply of t-shirts can be in excess of a pile of money" is absurd.

    You already have the Classical economists and Say admitting short run inequality between aggregate supply and demand.

    No, we have Classical economists and Say clarifying the fact that sometimes, partial relative overproduction of goods and a partial relative underproduction of goods can exist, but no general overproduction of goods. That is impossible. That would require people to have no desire for additional goods, which is not possible for acting man.

    Unless you think Say's law doesn't assert some equality between aggregate supply and demand, then any time it doesn't happen you have an aggregate demand shortfall.

    There is no such thing as an aggregate demand "shortfall." There is only production of wealth that earns profits and production of wealth that does not earn profits.

    No investor or seller sells into aggregate demand. No individual economizes aggregate demand. It is an abstract concept that you Keynesians are hypostatizing to no end.

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  7. "Both Baumol and Blaug do not understand rationalist economics."

    No, they reject blatantly stupid a priori economic drivel called praxeology.

    You haven't shown how it is "stupid drivel."

    Moreover, you are verifying it's truth every single time you even try to reject it.

    Both Blaug and Baumol failed to refute praxeology. Blaug for his part doesn't even understand it. He's totally ignorant. He has not written any critique of praxeology that shows he understands it. His only attempt was a short glib dismissal.

    "If prices are free to adjust, and not made more inflexible through government hampering such as inflation, minimum wage laws, unemployment benefits at taxpayer's expense, food stamps, etc, etc, then those desiring work will find that their asking price has to fall"

    Even with perfect price and wage adjustments, the process you imagine won't work: subjective expectations affect the investment decision, and business may not invest; and money can continue to be withheld from purchasing commodities or lent for capital goods investment owing to liquidity preference.

    False. The existence of subjective expectations cannot make someone refuse to work for a lower price forever. The existence of subjective expectations cannot make someone have zero expectations of future demand, and thus zero current demand for labor.

    Subjective expectations is not an argument against the reality of how the price system works. You're speaking nonsense. You keep mentioning "subjective expectations and fundamental uncertainty" like a mantra as if they are even remotely a challenge to the price system.

    If a business does not invest, then they will spend their way to bankruptcy, and other people will gain their money, and they will increase their purchasing power.

    No depression, not the worst depression in history, has there been zero investments, zero demand, and zero labor.

    As long as consumption exists, there is a need for production and employment.

    Increased liquidity preference just ACCELERATES the downward price movements, which means prices fall to where investment is worthwhile EVEN FASTER. It HELPS economies distorted by past credit expansion heal!

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  8. "Supply and demand are incommensurable units. There is no equality or inequality between goods and money."

    That goods and money are physically different things is irrelevant, idiotic, red herring malarky. Yes, I know.

    Aggregate supply is an aggregated monetary value of total factor payments from production.

    If the trivial fact that money and goods physically different things rules out such aggregation, then no business could ever calculate the total value of its sales in a given period.

    David/Major_freedom, your ramblings are pathetic and laughable.

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  9. "Supply and demand are never in equality or inequality, because they are different concepts with no common quality in the economic sense."

    Really!

    So Say's law in both the sense of Say’s Identity and Say’s Equality are invalid, meaningless concepts?

    That is the logical consequence of this latest assertion.

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  10. "No investor or seller sells into aggregate demand. No individual economizes aggregate demand"

    What does this garbage even mean?

    ReplyDelete
  11. "Supply and demand are incommensurable units. There is no equality or inequality between goods and money."

    That goods and money are physically different things is irrelevant, idiotic, red herring malarky. Yes, I know.

    No, it's not that they are physically different. We're not talking about labor theory of value. I am saying that they are VALUED differently. They are, in the economic sense, DIFFERENT CONCEPTS. They are incommensurable concepts. There is no common quality between money and t-shirts in the economic sense.

    Aggregate supply is an aggregated monetary value of total factor payments from production.

    LOL! No, that's aggregate demand you monkey. Aggregate money value is the aggregate money that is spent via exchanges for the aggregate supply. You cannot make any other claim to monetary value other than the market values, and market values are only able to be learned through exchanges, for money, which means you just defined aggregate supply as aggregate demand.

    That's the dumbest thing I ever heard. No LK, aggregate supply is not aggregate monetary value. Aggregate money value is a function of aggregate demand.

    Aggregate supply is the totality of all t-shirts, shoes, cars, televisions, in and of themselves. That big pile of stuff over there is aggregate supply. That big pile of money over there is aggregate demand.

    The way these two piles of stuff are related is by being traded AGAINST each other.

    Good grief. I don't think I have ever seen someone define aggregate supply AS aggregate demand. I mean, that takes incredible confusion.

    You're trying to find a common quality between money and goods by saying "let's compare money with money".

    You're speaking utter nonsense. Total rubbish.

    If the trivial fact that money and goods physically different things rules out such aggregation, then no business could ever calculate the total value of its sales in a given period.

    It's not mere physicality you silly boy. It's the differences in valuation. If tomorrow apples became money, then the differences in valuation would be between apples on the one side, and everything else on the other.

    Try to define aggregate supply again. That last attempt was hilarious.

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  12. "Supply and demand are never in equality or inequality, because they are different concepts with no common quality in the economic sense."

    So Say's law in both the sense of Say’s Identity and Say’s Equality are invalid, meaningless concepts?

    No. Say's law isn't an attempt, nor does it require, goods and money to be equalized in any sense.

    That is the logical consequence of this latest assertion.

    False. The only logical consequence of that ARGUMENT is that is it illogical to speak of goods and money being in equalization with each other, or one being in excess of the other.

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  13. "The existence of subjective expectations cannot make someone refuse to work for a lower price forever. "

    Red herring. No one said it needs to go on forever: a period of 2, 3 or 4 years will devastate an economy causing deflationary depression. Yes, it will hit a bottom.

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  14. I can't believe how many people still think of the economy in such equilibrium ideas. Money may represent real goods, or may not. There's not direct and efficient link between them. So "aggregate demand for money" will cause a shortage of "aggregate demand" (except for money, that is). It's not that difficult to understand. Will the free market forces correct this out? They may, they may not. But it all revolves around subjective expectations.

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  15. "Aggregate supply is the totality of all t-shirts, shoes, cars, televisions, in and of themselves"

    That is of course a legitimate but different sense of aggregate supply.

    "Aggregate supply is an aggregated monetary value of total factor payments from production.

    LOL! No, that's aggregate demand"


    No, it isn't. And the statement just lacks the words "the value of aggregate supply is an aggregated monetary value of total factor payments from production".

    I repeat:

    The value of aggregate supply is an aggregated monetary value of total factor payments from production.

    If the trivial fact that money and goods physically different things rules out such aggregation, then no business could ever calculate the total value of its sales in a given period

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  16. It's the differences in valuation. If tomorrow apples became money, then the differences in valuation would be between apples on the one side, and everything else on the other.

    More incoherent rambling.

    I repeat:

    If the trivial fact that money and goods physically different things rules out such aggregation, then no business could ever calculate the total value of its sales in a given period.

    You've not answered that, because it reduces your comments to the drivel it is.

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  17. 1/2

    "No investor or seller sells into aggregate demand. No individual economizes aggregate demand"

    What does this garbage even mean?

    I'm glad you asked.

    Economics is about acting man. If something cannot be an object of economic action, then it is irrelevant to economics. For example, humans don't act by economizing the open air, or the sun. These are "free goods". Nobody takes the costs of air, or the costs of the sun, in their economic plans.

    The same thing is true for aggregate demand. No individual takes into account the costs of higher or lower aggregate demand in their plans. They only take into account the specific demands of their specific economic goals and projects. If aggregate demand is expected to fall, but a seller of computers expects his sales to rise, then he is going to plan according to his expected sales, not the expected aggregate demand changes.

    Nobody sells their labor or their products into the demand that is the demand for everything. The logical order is the other way around. Each individual has a specific monetary demand, and each individual has an expectation of the demand concerning their own affairs, and the collection of individual demands, and the collection of individual expectations of demand, are what determine aggregate demand and aggregate demand expectations. The aggregate demand is an EFFECT of the cause of individual demands.

    Individuals do not sell anything to everyone else collectively. They only sell to other individuals. You need to break up the singularity in your mind that is preventing you from understanding the market and the human race. The market should be viewed like a collection of individual sized bubbles, not one giant bubble that needs to be pumped up when it gets "too small."

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  18. "I am saying that they are VALUED differently. They are, in the economic sense, DIFFERENT CONCEPTS. They are incommensurable concepts"

    (1) yes, money and goods can be valued differently. Money has a store of value function and can provide liquidity and security as in Keynes' precautionary motive.

    (2) yes, they different economic concepts. No one ever said they were the same concept. This is stupidity.

    (3) They are incommensurable concepts

    That is manifestly false.

    incommensurable
    adj.
    (1) Impossible to measure or compare.
    (2) Lacking a common quality on which to make a comparison.

    You can measure the worth/value to you of a good in money terms. If you couldn't, there would not be any such thing as a price.

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  19. 1/2

    "The existence of subjective expectations cannot make someone refuse to work for a lower price forever."

    No one said it needs to go on forever: a period of 2, 3 or 4 years will devastate an economy causing deflationary depression. Yes, it will hit a bottom.

    Red herring. Nobody said it goes on for 2, 3, or 4 years. The typical wage earner cannot go two or three years without working. He can only go a few months. Only the very wealthy can go 2 or 3 years, or else they have to live off at other's expense who are working.

    In a free market, corrections will certainly not last two to three years. It doesn't take that long for investors to learn of consumer desires and demands and plan accordingly. Consumers have to consume, and what they consume, will send signals to investors.

    The only way that depressions can last more than a year, assuming the prior credit expansion was at historical levels, would be if some extraneous to the market institution was preventing it, through violence.

    ivanfoofoo

    I can't believe how many people still think of the economy in such equilibrium ideas. Money may represent real goods, or may not. There's not direct and efficient link between them. So "aggregate demand for money" will cause a shortage of "aggregate demand" (except for money, that is).

    There is no such thing as a shortage of money or of aggregate demand. There is only a shortage of money in specific lines of business, which means the businesses are not selling goods for the prices they expected to receive, which means they need to reallocate resources and labor.

    LK:

    "Aggregate supply is the totality of all t-shirts, shoes, cars, televisions, in and of themselves"

    That is of course a legitimate but different sense of aggregate supply.

    It is the sense of aggregate supply that separates from aggregate demand, such that you can even claim you have two different concepts on your hands such that you give them different names.

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  20. 2/2


    "Aggregate supply is an aggregated monetary value of total factor payments from production.

    LOL! No, that's aggregate demand"

    No, it isn't.

    Yes, it is. You can't know what the aggregate "monetary value" of all goods even if without observing the prices, and hence demands paid for those goods. Monetary value is only discoverable through exchanges using money. That's what monetary value is. Any other monetary value is a figment of someone's imagination.

    And the statement just lacks the words "the value of aggregate supply is an aggregated monetary value of total factor payments from production".

    That's aggregate demand, not aggregate supply. The total monetary value of goods is the total amount of money being spent on goods, and the total amount of money spent is aggregate demand. So when you say aggregate supply, you're not saying anything different from aggregate demand.

    Try again.

    I repeat:

    No, you should not repeat. You should reconsider, because you're wrong.

    If the trivial fact that money and goods physically different things rules out such aggregation, then no business could ever calculate the total value of its sales in a given period

    It's not the mere physical differences. It's the differences in values.

    It's the differences in valuation. If tomorrow apples became money, then the differences in valuation would be between apples on the one side, and everything else on the other.

    More incoherent rambling.

    It's not incoherent to argue that if some other commodity besides Fed notes were to become money in the future, then people will start to adopt valuations for that commodity in relation to the goods they exchange them against, and the valuations between that new commodity and real goods will also be different, the way fed notes and real goods are valued differently today.

    I repeat:

    You should not repeat, you should reconsider, because you're wrong.

    It's not the fact that they are physically different that concerns us economically. It is the fact that money and real goods are valued differently that is important. People trade money for goods because they value money and goods differently from each other. This is what creates exchange relations, or what most people call "prices."

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  21. "No LK, aggregate supply is not aggregate monetary value."

    You really are an idiot:

    "In macroeconomics, aggregate demand is defined as the summed value of the demands for all final goods and services; similarly, aggregate supply is defined as the summed value of supplies of all final goods and services."
    Robert W. Clower, Donald A. Walker, Money and Markets: Essays by Robert W. Clower, p. 158.

    "In macroeconomics, aggregate demand is defined as the summed value of the demands for all final goods and services; similarly, aggregate supply is defined as the summed value of supplies of all final goods and services'"

    Say's Law and the Keynesian revolution, p. 200.

    It can of course also be defined as "the quantity of total output" or "the volume or total output of physical and intangible products", and so on.

    It looks like complex ideas, such as a term can have 2 or more accepted meanings is too difficult for you.

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  22. "So when you say aggregate supply, you're not saying anything different from aggregate demand."

    Yes, of course it can be considered as 2 sides of the same coin, which logically requires that the definition I gave is sound.

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  23. "The typical wage earner cannot go two or three years without working.

    I see! The existence of long term unemployed is just a figment of the imagination, no doubt.

    People can beg, steal, take private charity and so on. You are wrong.

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  24. "In a free market, corrections will certainly not last two to three years. It doesn't take that long for investors to learn of consumer desires and demands and plan accordingly"

    how do you know that under a free market, 'corrections [would] certainly not last two to three years?' even as a fellow advocate of a free market, I still have trouble understanding how you know this for certain

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  25. I suspect a lot of basic Keynesian concepts are incomprehensible to these Rothbardian types, probably because acknowledging them leads by relatively simple logic to imperfections in their vision of a Libertarian utopia. Let's see.

    1) Businesses don't produce what they cannot hope to sell.
    2) Businesses hire workers to produce things.
    3) Businesses sell output for money.
    4) Businesses pay workers in money.

    5) Workers without jobs don't have money. (4)
    6) Workers without jobs don't buy things (3, 5)
    7) ??? (6, 1)
    8) PROFIT!!!? (7, 2)

    I leave 7 blank as a challenge to the Rothbardian reader. Using only the self-evident axioms above, derive 8. Alternatively, you may use the logic hints to derive an entirely different conclusion.

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  26. If I might jump in here. P1/2


    LK:
    People can beg, but that presumes someone employed to give them money. Not everyone can beg. A society of thieves brings us back to the era of the Vikings and the Middle Ages. private charity is not infinite eventually people will get tired of giving.


    Its clear that Say's Law in its strongest form is ridiculous. People do engage in precautionary saving and that liquidity preference for money is important.

    the weak version of Say's Law, say's equality, is much stronger. Do you deny that depressions used to heal themselves in the nineteenth century through a process of relentless deflation? Debt would eventually get destroyed through default. (Why do you think shoot the banker Jacksonian Democrats were so popular in America?) Workers, while hating pay cuts, would eventually come to accept that taking a low paying job is better than starving to death, and entrepreneurs, faced with workers with less money in their pockets, would sell their wares at lower prices. They could afford to due this in the long term because their costs would go down as well. would that Let me be clear, with sticky wages and fixed nominal contracts. deflation's pain is horrendous. I GET THAT! (Although in the nineteenth century, I think the price inflexibility of the gold standard, the bimetallic system, and fixed exchange rates, fixed debt, amplified pain unnecessarily and horrendously) I'm not endorsing pain, for pains sake. My question is solely about the LONG RUN. Its one thing to claim that there is a market mechanism to resolve failures of aggregate demand, but they are far too painful under price stickiness. Its quite another to insinuate, (as you have done repeatedly throughout this blog) that no market mechanism exists at all, and to deny basic accounting. For that is what Say's Equality at its core is basic accounting. MV=PQ MV, total nominal spending, aggregate demand, is equal to total nominal income aggregate supply. Go ahead LK, try and deny the equation of exchange, which reveals Say's Equality.

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  27. Part 2/2


    You might think Say;s Equality is trivial accounting principles, in one sense you are right, because Says equality doesn't imply anything about full employment. Total Saving can be equal to total investment even as both are going down. But Says Equality is still useful to study type of shock the economy faces and the appropriate policy response. If there is a general glut of goods and services but money and safe assets getting more expensive, than the appropriate response is to crank up the printing press or expand deficit spending. If there are rising prices combined with unemployment, (Stagflation) then a different response is warranted.

    In the end, your attempt against Say's Law the strong version succeeds in a trivial way because all but the craziest Austrians and New Classicals admit there can be failures of demand. But your crusade against Says Equality fails miserably. because:
    Subjective Expectations... (I presume you mean unstable price expectations?) doesn't invalidate market forces, because under an indexing wage or debt regime, we can take monthly short term price changes, (momentum) and adjust wages prices and debts accordingly.
    Liquidity preference: That same regime can do the work when a demand for cash rises by 10% throughout the economy. if prices adjusted quickly then they would fall 10% relative to prices in the future, generating future expectations of rising prices, and thus get consumers and businesses to start spending again.
    But of course we don't live under a price indexing or flexibility regime. In such circumstances the only option is to print money, and or expand deficits. Now, I am agnostic with regards to price flexibility, versus printing more money under a regime of sticky prices. As long as the second option restores us to full employment But you, (and Keynes) have some bizarre fetishistic objection to price flexibility... even if it would restore full employment. you haven't really thought it through.
    Finally to bring up an example, the 1920-1921 recession. It doesn't do what the Austrians say it does, namely invalidate Keynesiansism, but what it does do is demonstrate that seem degree of price flexibility works. Wages were more flexible back then and there was very little debt, so the problems of debt deflation didn't apply. (Debt deflation would not apply even with a lot of debt if debt were indexed to a falling price level, or preferably, falling nominal incomes)

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  28. "Do you deny that depressions used to heal themselves in the nineteenth century through a process of relentless deflation?"

    Heal what sense? You mean did depressions end and positive GNP growth return after some time, even though return to full employment was rare? Yes.

    Involuntary unemployment was a curse of the 19th century, as you would expect in a free makret system.

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  29. "Heal what sense? You mean did depressions end and positive GNP growth return after some time, even though return to full employment was rare? Yes."

    That's exactly what I mean. In your model, without deficit spending, a return to even positive GNP growth seems unlikely because "subjective expectations" and "liquidity preference, somehow through some mystical way, interferes even when price flexibility occurs in the long run. (Although I'm skeptical about long term- unemployment figures in the 19th century, I think its overstated. Because if unemployment were so enormous, why didn't the reforms of the New Deal occur earlier?) prices were still sticky in the 19th century, and therein lies the source of the problem(not to FRB in America, but instead due to n. debt contracts fixed, fixed exchange rates, and bimetallic price fixing) but they were relatively more flexible than they are now, and so depressions did heal themselves eventually in the medium term (2-4 years.0 Also might I add that RGDP growth potential, even with all the shocks to the system, with all the unemployment, was higher in the post civil war period than in the post World War II period. The key is to add the "good deflation years" a concept that you wrongly associate with bad deflation. Incidently the difference being that bad deflation involves a contraction of nominal speding, whereas good deflation occurs when the real economy grows much faster than the supply of money in circulation So you can have Output growing at 10% but nominal spending only at 5%. , and because NGDP is growing, no debt problems occur, even as prices fall for consumers by 5% Debt deflation only occurs when NGDP growth per capita begins to stall, not when inflation IN GENERAL falls below zero

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  30. "Also might I add that RGDP growth potential, even with all the shocks to the system, with all the unemployment, was higher in the post civil war period than in the post World War II period"

    Cite me your source for this.

    Because average OECD real GDP/GNP growth estimates don't support you:

    1700-1820 - 0.2%
    1820-1913 - 1.2%
    1919-1940 - 1.9%
    1950-1973 - 4.9%
    1973-1990 - 2.5%

    http://books.google.com.au/books?id=_MbRxCTlgp4C&pg=PA22&dq=bretton+woods+golden+age+unemployment+real+gdp&hl=en&ei=XVQMTumVJdHqmAXixsS2Dg&sa=X&oi=book_result&ct=result&resnum=3&ved=0CDUQ6AEwAg#v=onepage&q=bretton%20woods%20golden%20age%20unemployment%20real%20gdp&f=false

    The period 1950-1973 is the hands down winner.

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  31. "The key is to add the "good deflation years" a concept that you wrongly associate with bad deflation. Incidently the difference being that bad deflation involves a contraction of nominal speding, whereas good deflation occurs when the real economy grows much faster than the supply of money in circulation"

    I am perfectly well aware of the difference, thank you.

    http://socialdemocracy21stcentury.blogspot.com/2009/08/deflation-and-business-cycle-is-their.html

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  32. "In your model, without deficit spending, a return to even positive GNP growth seems unlikely because "subjective expectations" and "liquidity preference"

    False. In the Post Keyneisan model it impedes a reliable and automatic return to full employment.

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  33. Because if unemployment were so enormous, why didn't the reforms of the New Deal occur earlier?

    Because of a deeply deluded elite and economics profession. There was a great deal of state violence directed at mass popular objection to economic conditions, especially in America.

    Have you never heard of the depression of the 1890s? It was essentially a global phenomenon.
    The popular agitation and disorder in America was very serious indeed.

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  34. "For that is what Say's Equality at its core is basic accounting. MV=PQ MV, total nominal spending, aggregate demand, is equal to total nominal income aggregate supply. Go ahead LK, try and deny the equation of exchange, which reveals Say's Equality. "

    I dispute that this "reveals" Say's Equality at all.

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  35. Lord Keynes: An excellent blog for students of Keynesian Macroeconomics. Keep enlightening us from this Gospel of 'free-market fundamentalism'.

    Reading your blog gives a better & a far more unbiased understanding about Keynesian Economics. It would be great if you could post an article on the blog that "puts a list of books to grasp Keynesian ideas efficiently". If you recommend list of books in a new post, please do so from a beginner's perspective slowly advancing to advanced levels.

    There are plenty of books out there, but most of them are biased & irrelevant. Sincerely hope you'll take out some time for this.

    Regards.

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