Let's say widgets have been selling like gangbusters and it is a trillion dollar industy. People spend 1 trillion per year on widgets. Let's say 10,000,000 people are employed in the industry. All of a sudden, something happens and no one wants widgets anymore, they decide to save their money instead. In fact, they decide to hoard it--stuff it under their matresses. Needless to say, now 10 million folks are suddenly out of a job, and there is 1 trillion dollars less money flowing into the economy.
Will the economy now spiral into depression?
It seems that the amount of wealth in society, as measured by the total amount of goods, has not changed, except that we could subtract the value of the widgets (or more properly, the value of the resources that went into them, since people no longer value the widgets themselves). Let's say we have lost 100 billion worth of resources.
Now, there is 1 trillion less money flowing in society, which will raise the value of the dollar, though this will be moderated somewhat since the money is standing against less goods. There are also 10 million more people looking for work. This will lower wages, since there is more competition for jobs. So the dollar is worth more, but wages are less.
It seems to me that the only damage that has been done is the loss of resources tied up in the widgets and widget factories.
I grant that the adjustment period will be difficult for many, due to temporary high unemployment, and a possible lag between wage reduction and deflation. It seems that the argument that the economy "loses" the spending of the people that lost their jobs is fallacious because their "spending" was accounted for in the initial 1 trillion dollars that were flowing through the widget industry. I think the real issue is how much goods are available. I don't see why the hoarding of money should result in spiraling unemployment. It seems those people will simply cause a decrease in wages, the effect of which will be offset by deflation. Am I missing something?
It seems that the argument that the economy "loses" the spending of
the people that lost their jobs is fallacious because their "spending"
was accounted for in the initial 1 trillion dollars that were flowing
through the widget industry.
would they not also stop buying other things besides widgets?
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It's easy to refute an argument if you first misrepresent it. William Keizer
Yes you are correct as the Austrians are concerned and there have been similar event the biggest being he mass layoffs of telephone operators in the 1970s and 1980s. But you do not get the entire good side of a free market. That is that in a truely free market there is always 100% employment as individuals are free to contract with employers on their own terms. So the folks who were let go would find other work simply by offering employers better terms than their current workforce.
Think how superior this is to the current system where there are huge bureaucracies giving out case in the form of "Unemployment Insurance" and a host of other things. These things suck the excess resources from employers that they would use to hire more folks. Think about how handcuffed employers are in their pursuit of happiness. Think how many more folks they would employ without the volumes of regulations.
The real issue with your argument is that the current Congress and both major political parties and much of the academic community view these layoffs as idle resources. So they attempt to keep using these resources by providing the employers more economic resources than they would earned from consumers. Of course this just makes other employers poorer and less able to hire these layed off folks. And if the scale of the layoffs is large enough then they get crazy and start creating inflation to "stimulate" the economy through government spending. This of course does not stimulate anything and further restricts the amount of real capital
Uh you seem to have answered your own question. But the widget market is just attempting to adjust to new market conditions. If the governmet spends money bailing out the widget industry then the debt is spread around to everyone and the resources poured into the widget industry wil be missalocated and the company is doomed except that this time more and more capital will have been poured into it. The released labor will be put into more productive activities and industries, there will be a downfall in wages but once again these are new market conditions and the market should probably react by tightening its belt.
I think you don't fully understand the idea of a free market economy. In the current system we have now these people would go on welfare. They would be given unemployment insurance. In a real free market economy while yes their wealth would be lost they would go to other industries... so with the car companies going under... in a real free market their wealth would be transferred to other industries as the people who would be working in that company would be working for other companies.
Loss is a part of the system yes... but usually wealth like this is just transferred to other areas of the economy. When no one wants item X anymore they go on to spend more money on item Y. Sure item X was a profitable industry at one point in time. Now it's not anymore. So the market has to adjust to that. You can't force consumers to want item X again unless it becomes better and more wanted over time.
You cannot spend your way out of a depression. The fact of the matter is that the government has to acquire the money it spends either through taxing, borrowing, or printing. If the government taxes, then it is taking money directly out of the economy; if the government borrows, then it is taking money that could have been more productively invested in businesses; if the government prints, then it simply devalues the money everyone else has.
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You have to think of welfare as being indicated only by total physical goods in existence plus services in process. Basically, what you said.
Thanks for your help, folks.