Latest posts by Richard Ebeling (see all)
- Quinn Slobodian and the Academic Attack on Mises and Hayek - October 8, 2018
- The Bad Economics of Short-Run Policies - October 3, 2018
- Interest Rates Need to Tell the Truth - September 13, 2018
You may not have noticed it when out buying things in the marketplace in the context of your personal budget, but according to the Wall Street Journal (April 24, 2015) the world is awash with too much stuff. We seemingly have too much of, well, almost everything: too many raw material commodities, too much capital, and too much labor. The world, claims the Journal, is suffering from global gluts.
If this were true, rather than anguishing over such a “horn-of-plenty” we should be shouting hosanna to the heavens. It would mean that we were in or at the threshold of a “post-scarcity” world, that is, more than enough of everything we would need to produce all of everything that we want. Hallelujah, economic utopia has come!
Global Gluts and Keynesian Panaceas
Instead, the authors of the Wall Street Journal piece lament that there is not enough “aggregate demand” to bring into employment this bounty of riches. Seemingly, we are either not willing or able to buy it all up, even though there are few in both wealthy and poor countries that would say, “Sorry, I already have enough of everything I could want.”
In a lengthy text and a series of charts, the Wall Street Journal authors say that the world has too much oil, too much coal, too much iron, and too much cotton as examples of the global raw material plenitude. Interest rates are low because the supply of savings and capital are excessive in amount. And there is a surplus of workers so large in relation to employers’ demand for labor that wages are being kept depressingly down.
In true standard Keynesian fashion, the writers wish that government deficit spending could serve as the cure-all for the world’s insufficient aggregate demand for the planet’s potential output. But, alas, due to past budget deficit indulgences too many governments have accumulated too much debt to freely borrow and spend more.
This has left the economic fate of the world in the hands of central banks to manipulate interest rates and pump in huge quantities of paper money to get the globe humming at potential output and full employment. But interest rates in many countries are already at historic lows and in spite of a tidal wave of money creation they have not been able to do their magic of generating prosperity through inflation.
There have been few fallacies as fundamentally absurd and so frequently pronounced as the notion of economic “bad times” due to general gluts of too much production in comparison to a presumed limited demand.
Man Runs Toward a Horizon of Desire, and Never Reaches It
One of the most elementary understandings about human nature and in the study of economics is that human wants are infinite. No matter how satisfied we may be, there are always ends, goals, and purposes always still before us. So no matter how successfully we improve and add to the qualities and the quantities of the things we use as means to fulfill out ends, there are always more or new ends or goals that capture out interest and fancy.
Like aiming at a point on the horizon, no matter how long and how fast we try to reach it, it always recedes into the distance before us. We humans are imaginative and creative creatures, always coming up with new purposes and wants to set our hearts to wanting and our actions to attempting to achieve. Even if it’s only trying to “keep up with the Joneses” next door whose successes and material improvements act as a stimulus for ourselves.
Each individual has various goals he would like to achieve. To attain them he must apply various means to bring those desired ends into existence through production. But man finds that, unfortunately, the means at his disposal are often insufficient to satisfy all the uses he has for them.
The Reality of Scarcity and Man’s Pursuit of Gains from Trade
He faces the reality of scarcity. He is confronted with the necessity to choose; he must decide which desired ends he prefers more. And then he must apply the means to achieve the more highly valued ends, while leaving the other, less valued, ends unfulfilled.
In his state of disappointment, man looks to see if there are ways to improve his situation. He discovers that others face the same frustration of unsatisfied ends. Sometimes he finds that those others have things that he values more highly than some of his own possessions, and they in turn value his possessions more highly than their own.
A potential gain from trade arises, in which each party can be better off if they trade away what they respectively have for what the other has. But how much of one thing will be exchanged for another? This will be determined through their bargaining in the market. Finally, they may agree upon terms of trade, and will establish a price at which they exchange one thing for another: so many apples for so many pears; so many bushels of wheat for so many pounds of meat; so many pairs of shoes for a suit of clothes.
Trade becomes a regular event by which men improve their circumstances through the process of buying and selling. Appreciating the value of these trading opportunities, men begin to specialize their productive activities and create a system of division of labor, with each trying to find that niche in the growing arena of exchange in which they have a comparative production advantage over their trading partners.
As the market expands, a growing competition arises between buyers and sellers, with each trying to get the best deal possible as a producer and a consumer. The prices at which goods are traded come more and more to reflect the contributing and competing bids and offers of many buyers and sellers on both sides of the market.
Goods Trade for Goods, Through the Medium of Money
The more complex the network of exchange, the more difficult is the direct barter of goods one for another. Rather than be frustrated and disappointed in not being able to directly find trading partners who want the goods they have for sale, individuals start using some commodity as a medium of exchange. They first trade what they have produced for a particular commodity and then use that commodity to buy from others the things they desire. When that commodity becomes widely accepted and generally used by most, if not all, transactors in the market, it becomes the money-good.
It should be clear that even though all transactions are carried out through the medium of money, it is still, ultimately, goods that trade for goods. The cobbler makes shoes and sells them for money to those who desire footwear. The cobbler then uses the money he has earned from selling shoes to buy the food he wants to eat. But he cannot buy that food unless he has first earned a certain sum of money by selling a particular quantity of shoes on the market. In the end, his supply of shoes has been the means for him to demand a certain amount of food,
This, in essence, is the meaning of Say’s Law. The nineteenth century French economist, Jean-Baptiste Say, called it “the law of markets”: that is, unless we first produce we cannot consume; unless we first supply we cannot demand. But how much others are willing to take of our supply is dependent on the price at which we offer it to them.
Right Prices Move Goods and Balance Markets
The higher we price our commodity, other things held equal, the less of it others will be willing to buy. The less we sell, the smaller the money income we earn; and the smaller the money income we earn, the smaller our financial means to demand and purchase what others offer for sale.
Thus, if we want to sell all that we choose to produce we must price it correctly, that is, at a price sufficiently low that all we offer is cleared off the market by demanders. Pricing our goods or labor services too high, given other people’s demands for them, will leave part of the supply of the good unsold and part of the labor services offered unemployed.
On the other hand, lowering the price at which we are willing to sell our commodity or services will, other things held equal, create a greater willingness on the part of others to buy more of our commodity or hire more of our labor services. By selling more, our money income can increase; and by increasing our money income, through correctly pricing our commodity or labor services, we increase our ability to demand what others have for sale.
Sometimes, admittedly, even lowering our price may not generate a large enough increase in the quantity demanded by others for our income to go up. Lowering the price may, in fact, result in our revenue or income going down. But this, too, is a law of the market: what we choose to supply is worth no more than what consumers are willing to pay for it.
This is the market’s way of telling us that the commodity or particular labor skills we are offering are not in very great demand. It is the market’s way of telling us that consumers value others things more highly. It is the market’s way of telling us that the particular niche we have chosen in the division of labor is one in which our productive abilities or labor services are not worth as much as we had hoped. It is the market’s way of telling us that we need to move our productive activities into other directions, where consumer demand is greater and our productive abilities may be valued more highly.
Money Hoarded Does Not Prevent Market Balance – at Right Prices
Can it happen that consumers may not spend all they have earned? Can it be the case that some of the money earned will be “hoarded,” so there will be no greater demand for other goods, and hence no alternative line of production in which we might find remunerative employment? Would this be a case in which “aggregate demand” for goods in general would not be sufficient to buy all of the “aggregate supply” of goods and labor services offered?
The answers had already been suggested in the middle of the nineteenth century by the English classical economist John Stuart Mill in a restatement and refinement of Say’s law of markets. In an essay titled “Of the Influence of Consumption on Production” (1844), Mill argued that as long as there are ends or wants that have not yet been satisfied, there is more work to be done.
As long as producers adjust their supplies to reflect the actual demand for the particular goods that consumers wish to purchase, and as long as they price their supplies at prices consumers are willing to pay, there need be no unemployment of resources or labor. Thus, there can never be an excess supply of all things – a “glut” relative to the total demand for all things.
But Mill admitted that there may be times when individuals, for various reasons, may choose to “hoard,” or leave unspent in their cash holding, a greater proportion of their money income than is their usual practice. In this case, Mill argued, what is “called a general superabundance” of all goods is in reality “a superabundance of all commodities relative to money.”
In other words, if we accept that money, too, is a commodity like all other goods on the market for which there is a supply and demand, then there can appear a situation in which the demand to hold money increases relative to the demand for all the other things that money could buy. This means that all other goods are now in relative over-supply in comparison to that greater demand to hold money.
To bring those other goods offered on the market into balance with the lower demands for them (i.e., given that increased demand to hold money and the decreased demand for other things), the prices of many of those other goods may have to decrease.
Balanced Markets Require Market-Determined Prices
Prices in general, in other words, must go down, until that point at which all the supplies of goods and labor services people wish to sell find buyers willing to purchase them. Sufficient flexibility and adjustability in prices to the actual demands for things on the market always assure that all those willing to sell and desiring to be employed can find work. And this, also, is a law of the market.
Free market economists, both before and after Keynes and the Keynesian Revolution, have never denied that the market economy can face a situation in which mass unemployment could exist and a sizable portion of the society’s productive capacity could be left idle.
But if such a situation were to arise, they argued that its cause was to be found in a failure of suppliers to price their goods and labor services to reflect what consumers considered them to be worth, given the demand for various other things, including money. Correct prices always assure full employment; correct prices always assure that supplies create a demand for them; correct prices always assure the balancing of the market.
Government-Caused “Gluts” and Imbalances
The apparent “gluts” of commodities, capital and labor that the Wall Street Journal reporters see hanging over the global markets and which they forlornly wish governments could “cure” through more deficit spending are, in fact, the relative imbalances, distortions, and misdirection of capital and labor brought about by years, if not decades, of government fiscal, monetary and interventionist policies that have created many of the problems we now face.
They are the residues of housing booms and investment bubbles caused by earlier interest rate manipulations and money creation that artificially misdirected capital, labor and resources into unsustainable activities, given consumers and savers real preferences to demand various goods and save portions of their incomes as the basis for sustainable investment patterns.
Unemployed labor has far more to do with government interventions that impose labor market rigidities and non-market wage levels that over-price too many wanting work from successfully finding it. Anti-competition regulations and restrictions, and high and distorting tax policies prevent reasonable and profitable uses of capital in the service of actual consumer demands rather than political intrigue.
The low rates of interest in many of the leading economies of the world have nothing to do with mythical market-created “gluts” of savings and capital. They are the result of constant and continuous monetary expansion that has undermined the virtual existence of market-based rates of interest to know the reality of actual savings preferences of income earners and the profit-guided investment choices of borrowers based on the actual availability of scarce investable resources for the undertaking of capital projects.
A Changing World Means Changing Market Relationships
Overlaying the spider’s web of government intervention, and fiscal and monetary misdirection is a real change through which the world is passing: a transformation of the global economy.
The poverty-stricken “third world” of the Cold War era has become the “developing nations” of the last thirty years. Poor countries are becoming richer; agricultural and resource-dependent countries are industrializing and modernizing. National economies are increasingly interdependent participants in the international global marketplace of production, commerce and trade.
Significant changes in the patterns and forms of the international division of labor are and will continue to go on for decades to come. New niches of specialization for the older industrial and commercial countries will be an inescapable part of this increasingly world economy and global society, as the developing countries find new places for themselves at the global table of supply and demand.
This will partly manifest itself as discovery of relative “surpluses” of capital, labor and resources in some parts of the world, as other places are seen to have relative “shortages” of them, given the current patterns of supply and demand, and the relative structure of prices and wages for consumers goods and the workers and capital goods that are to serve and reflect the shape and direction of changing world-wide consumer demands.
What makes this global transformation “messy” and imbalanced in various ways is precisely the fact that governments in both the older industrial countries and in the younger modernizing nations are imposing their political power in different ways to shelter “threatened” industries and jobs in one part of the world, while using interventionist tools to give anti-free market benefits and advantages to privileged interests in other parts of the world.
But regardless of the “dirty market” aspects of this globalizing process, it has nothing to do with presumed market-caused, worldwide gluts. It is nothing more than the inevitable short-run imbalances of different supply and demands in a changing world that would sort themselves out soon enough, if not for the dead hand of government intervention, fiscal distortion and monetary manipulation that creates many such imbalances and prevents their normal readjustment precisely by hindering the competitive market and the price system from setting it right.
[Originally published at Epic Times]