Hi
in high school and college I always learned that more consumption = more jobs, thanks to my super-keynesian-marxist-teachers...
And I don't understand why this is not true. If people buy more stuff, doesn't that mean more goods need to be produced ? And if more goods need to be produced, more people need to be hired to produce these stuffs ?
I ask this because I watched 2 lectures from misesmedia on youtube about Keynesianism, and in both they said that more consumption (thanks to the welfare state) equal more jobs is a fallacy...
Help me ! :)
@OP: As stated, your intuition is correct. If people are buying more things, more work needs to be done to produce those things, and so on. But the (vulgar*) Keynesian position assumes two preconditions that are unstated in your post: collapse in aggregate demand and below capacity production. The Keynesian idea is that people stop consuming when the "animal spirits" happen to vanish, that is, people "get depressed" and just stop buying stuff because they all share the same gloomy expectation of the future. This results in a collapse of aggregate demand which is the "root cause" of depressions and recessions. The result of a collapse in aggregate demand is that employers must begin laying off workers and shutting down machinery. All this unused machinery represents additional production capacity that could be utilized if only someone could "stimulate" the economy and get the animal spirits out of their current state of depression.
The Austrian view contrasts with this very strongly and asserts that "depressions", or deflations, busts, are market corrections of poor investments (mal-investments). The productive capacity which was created during an inflationary boom was not linked to the market discipline of consumer demand but represented the mistaken belief of investors that consumer demand for their products was increasing when, in fact, it was only inflation that was rising. Since inflation cannot continue indefinitely at a rapid pace (Weimar, Zimbabwe, etc.), any period of rapid monetary expansion must end and, when it does, the collapse ensues. This collapse is not of "animal spirits" or "aggregate demand", but of overly-easy credit which implied that consumers were both saving and simultaneously increasing demand for products requiring more roundabout production methods. To understand the problem here, you need to understand the pure rate of interest.
The Keynesian formula "more inflation = less unemployment" is ultimately an observation that if the central bank could continue its monetary expansion indefinitely, the mal-investments would never have to be exposed, that is, we could have an indefinite boom with no bust afterward. Austrian business-cycle theory diagnoses not the bust but the boom as the problem because it is during the boom that savings and consumption become uncoordinated by the inflationary interest rate. The bust is just the result of the impossibility of sustaining such uncoordinated savings and consumption indefinitely.
Clayton -
*By "vulgar", I mean this is "Democrat Keynesianism", it's not a faithful portrayal of the economic arguments that Keynes himself put forward but only because they dispense with the sophistry and jump to his conclusions
Where are consumers receiving the funds to go on these wild consumption binges? Is the money coming from the government printing press? Is it being taken out as debt? In both situations we can see that this consumption "boom" is an illusion, because the wealth required to spend was either artificially created or borrowed.
Apply every day common sense to this situation: if you were in debt/broke and wanted to purchase goods would you say stealing money or taking out debt is a solution to your problem? If not, then why is it okay/successful for the government do to this?
Layano: "If people buy more stuff, doesn't that mean more goods need to be produced ? And if more goods need to be produced, more people need to be hired to produce these stuffs ?"
Think about the logic here. People buy more => more jobs => more wealth => people buy more => more jobs => more wealth, etc, etc.
Why doesn't this go on infinitely? Right away you can see something isn't right. In a way, it reminds me of the "broken window fallacy."
Frederic Bastiat: http://mises.org/resources/2735
Henry Hazlitt: http://mises.org/daily/3000
The only way I have ever come across to create wealth is through increases in productivity such that you have resources left over to acquire things which previously were not available to you due to a lack of resources. It's the larger picture that you have to look at.
"If people buy more stuff, doesn't that mean more goods need to be produced ? And if more goods need to be produced, more people need to be hired to produce these stuffs ?"
The answer to both q's is, yes they do. But who says the resources are there to produce them? What will happen is the price will go up intil people don't want more than there is. Then people will stop buying again.
But the real problem with the Keysnian analysis is this: Say you have an island full of primitive savages. Someone lands on the island from a shipwreck and shows them a laptop. Everyone wants one. Everyone. Really badly. They will give anyhting to have one. BUT how are they going to have one if there are no laptops on the island? Obviously, before demand can be satisfied, we have to worry about making the laptops, i.e. increasing production.
Another problem is, why has demand dropped for things in the first place? Why does demand have to be artificially increased all of a sudden? Keynes has no answer to this, just that people are stupid and sometimes don't even want what their superiors feel they should want. This is where Austrian economics steps in and explains why there was a drop in demand. You can read about it on this site.
Yet another problem is what the other posters have pointed out.How does one increase demand according to Keynes? Not by lowering prices, not by advertising, but by Govt spending [or inflation, which amounts to the same thing, as explained on this site]. And from where does the govt have money to spend? By taking it away from someone. So that for every dollar the govt spends, someone else is spending a dollar less.
Final problem, Good old reality. All the Keynsian tricks have been tried over and over, and they never work. This site has the info.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
"in high school and college I always learned that more consumption = more jobs, thanks to my super-keynesian-marxist-teachers...
"And I don't understand why this is not true. If people buy more stuff, doesn't that mean more goods need to be produced ? And if more goods need to be produced, more people need to be hired to produce these stuffs ?"
How are these people going to produce 'more stuff'? As the other posters pointed out but perhaps not in a way easily understood, the capacity for production doesn't come from no where. The production of the economy as a whole can only increase by becoming more productive per head of labor. Now when this happens in sector A, it allows resources to be left over to be used in sector B, and vice versa, either for consumption or for saving and investment. People don't hold jobs just for the sake of working out of some Calvinist desire to suffer for God. People hold jobs because they produce something of value that someone else wants. So simply working for the sake of working, the old Keynesian example is paying people to bury money and then dig it up again, doesn't mean you're actually adding value to the economy as a whole. All 'make work' projects do is keep money flowing through the system. The key to short and long term survival and prosperity within that system isn't endless transfers of green paper back and forth, though that would likely help swell GDP, but increased production of things people actually want in the allocation they want them in per head of labor. So when the government pours money into one sector it's only enhancing the production in that sector at the expense of resources which could have been used elsewhere. And the fact that it's doing this redirection using forcible extractions - taxations - guarantees a net loss because even if they do spend some it 'correctly' as it were, the bottom line is it had to be taken from most people because most people would have rather used it some other way. Which means you're guaranteed that it's being focussed not on what the marginal judgements of the people within the market would have productively used it for, but what some special interest wants it used for at the expense of everyone else's desires.
If working for work's sake were the answer then simply producing something, anything, should guarantee a pay check. It doesn't because thekey point is people have to want what you produce, both in the quantities you produce it and at the time you deliver it. So, say the government drops a few billion into the production of rubber dog shit, we'll likely see an increase in production of the stuff and an increase in consumption, but is that really how people wanted that money spent? You won't see all the production lost in other sectors of the economy because it simply will never come into being. And you can substitute any industry in the place of rubber dog shit and get the same problem, even something as highly desired as health care.
Its simple: the hayekian triangle. In order to get higher productivity, the triangle needs to get longer(more capital goods levels). But to do that at a given aggregate income, the income needs to move from consumer goods to higher order capital goods(=triangle becoming narrower).
From the recent Mises blog article: http://mises.org/daily/4284
True enough, this Humean metaphor is deceiving: money is, as Hayek coined, a "loose joint," meaning that the structure of prices takes time to adapt itself to changes in the supply of money. But this, in turn, means that there can never, never, never be any shortage of aggregate demand (level of spending, supply of money) in the economy and that the best thing a government can do when consumption and/or investment are decreasing is to laisser faire. Pumping money into the economy for fear of a shortage of aggregate demand would only distort a structure of prices that is already adapting to new spending patterns. Sadly, this is exactly what Obama's leading economic adviser is prescribing as a cure for abnormal unemployment levels.
Pumping money into the economy for fear of a shortage of aggregate demand would only distort a structure of prices that is already adapting to new spending patterns. Sadly, this is exactly what Obama's leading economic adviser is prescribing as a cure for abnormal unemployment levels.
Read more: It Is Not the Aggregate Demand, Stupid! - Jeremie T.A. Rostan - Mises Institute http://mises.org/daily/4284#ixzz0my2HLJPB
ClaytonB:
That post should be stickied if the capability exists in these new forums. Very nicely written.
Layano:If people buy more stuff, doesn't that mean more goods need to be produced ? And if more goods need to be produced, more people need to be hired to produce these stuffs ?
I get a loan and pay/employ you to do push-ups as I enjoy watching people do them. With your salary, you pay/employ me to provide water for you (as push-ups are hard and sweaty). This increase in both of our consumptions (mine for leasure, yours for water service) provided jobs for both of us whereas before we were both unemployed. But how do we pay back the loan?
Z.