Many Keynesians argue that in order to stimulate the economy you must increase consumption. There methods of doing so result in a decrease in investment. They argue that without an increase in consumption, investment will naturally not take place because people will not demand goods. One of the biggest fears for buisness in this currect economic climate is lack of sales and this has led to the calling of more government intervention (e.g stimulus, government work progects, ect.). They argue that when profit from consumption resumes then investment will enter the economy. How would an Austrian respond to " If entrepreneurs are not recieving profit let alone enough revenue to maintain their business; why would the private sector make the risky but necessary investments to help the economy recover?!!!!!!?!!!!!!"
Not sure about some things in your model.
1. What happens first, hoarding or recession [and how do you define recession]?
2. If recession is first, why did it happen?
3. If people really want stuff to the same degree [as when?], why don't they use their hoarded money to buy it? In fact why did they hoard at all, instead of going out there and buying?
Now a question not about your model, but about reality.
4. Is there empirical evidence for existence of sticky wages? What about in the absence of unions? Would it be correct to say that unions are the cause of recessions, because they keep wages from falling when they have to?
5. Do you think only Keynesians see that wages are sticky downwards when there are unions in the mix, and that they will hinder recovery? It's a commonplace:
http://mises.org/daily/3764
http://mises.org/daily/3138
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Why do we keep using the term recession if GDP is not any sound indicator of "economic growth"?
1. It could be either. As I said this fits in perfectly with de Soto's (who you cite) idea of a "secondary recession" that is initially caused by ABCT. In this way Austrian and Keynesian business cycles are not exclusive. As I have expressed elsewhere I think that a truly free market recession is possible, but by no means probable, nor do I believe it would be that extreme.
2. It could have been ABCT or one of the other reasons outlined above
3. Well I suppose that you could think of this as a collective goods problem. If everyone is afraid that they will lose their job then they will hoard for the future. Because no one individual can noticeably influence the economy, it is rational for each person to do this. However, if everyone does this then the recession will just get worse and more people will get laid off. So it might make sense for every individual to hoard while it makes sense for the group to spend.
So if we assume (yea another dumb simplifying assumption to get across a point) that everyone in the whole economy thinks like I do then I would cut my income in half into
A. Things I really need and am willing to buy even if I am worried about losing my job
B. Things I don't feel I really need and which I will abstain from buying because my money is better saved if I feel I might lose my job
Now my preferences have not changed, but new data has arisen which I have to plan for.
4. Off the top of my head I don't know of any. I have to say that I would be amazed if there wasn't, because that's the core of modern macro. If there really is no evidence for it then most economists are literally insane. With this said I don't know how much of this evidence is really viable in the free market vs. state action debate since almost all collected data would have to come from samples where actors were expecting a government which actively acts to increase prices in general and increase aggregate demand. This would mean that actors wouldn't expect, nor have any reason to think that prices would fall. As I have stated: government action in this recession increases or keeps constant the need in government action in the next recession.
Finally I would be amazed if prices weren't somewhat inflexible naturally. It makes sense. As Keynes remarks unions and labor will always object to some degree to a decrease in the nominal wage, just as they will always happily accept increases in the nominal wage. I have also recently heard a line of argument that basically says that workers in general are less likely to object if a small number are fired instead of pay cuts across the board.
Unions, in the way they have traditionally acted, certainly exacerbate recessions under most circumstances. They are by no means the sole cause, however. This is why it astounds the hell out me that people like f***ing Krugman would lament and cry over the death of good ol' American unions while shouting about how we need the government to intervene in the macroeconomy because of sticky wages ><
Krugman's intellectual grandfather would give him a good thrashing with the... Keynes... If he heard him talk like that! (Ooooooh that one's gold....)
Also it's important to note that whatever Keynes thought, modern Keynesians do not agree that wages will adjust in the absence of unions. They are far to negligable a part of the economy for that to explain modern conditions.
5. I think that Keynesians really emphasize it, although de Soto (as I mentioned previously) in particular really emphasizes the issue out of the Austrians. Rothbard also brings up classic point against government fiscal policy, most of which I agree with, even though I remember feeling that some of the relationships he outlined seemed poorly phrased/awkwardly outlined. AGD was one of his first works, although it was nontheless brilliant for it. In some cases I think that Austrian economists underemphasize or just ignore price inflexibility, yet this is by no means a universal tenant of the school, particularly not classically
Also, whatever happened to Say's Law? I still don't understand why increasing demand cannot increase supply.
@shackleford,
Because the basic concept behind a recession (a decrease in productive activity and employment caused by economic errors) is still perfectly valid. We need not link our definition strictly to NBER definition of the term.
1. About Say's Law, and increasing demand increasing supply: where did that increased demand come from?
If from increased production, meaning someone got a productive job and earned money he could spend, then clearly the increased production is what created the ability ot demand. if we talk about a self employed person, it's more obvious. Jones is a carpenter, he makes a table [increased supply], and can now sell it and get money [= increase his ability to demand] and buy stuff [=demand]. So clearly increased deamnd is a consequence of, and has to be preceded by, increased production. That's the essence of Say's Law.
If the increased demand came not from increased production, but from printing money, then that increased demand for the person who got the money will cause a decreased demand [=purchasing power] for someone else, since all money printing is ultimately a redistribution. Thus there is no net increased demand.
2. You are saying people can be unemployed even if their being hired makes money for the employer?
1. I feel like we're going in circles here. I feel that I have adequately explained that this statement:
"If the increased demand came not from increased production, but from printing money, then that increased demand for the person who got the money will cause a decreased demand [=purchasing power] for someone else, since all money printing is ultimately a redistribution. Thus there is no net increased demand."
Isn't necessarily true. If a quadrilateral figure's sides meet at 90 degree angles then we know that each side will be equal to the opposite side, yet if the 90 degree proposition isn't true then this need not be the case.
I have shown how an increase in the money supply can do more than to just redistribute income and how it can increase real output, indeed we seemed to be in accordance that this could happen in the previous couple of posts (indeed, in order for the passage by Mises to be true inflation must increase real demand and output). As soon as a drop in AD, accompanied by sticky wages occurs, then the proposition would seem to be somewhat (not entirely) false.
I don't want to believe that you are question-dodging, Dave.
2. Under almost all circumstances no. The only circumstances that this would be true under would be ones where hiring this individual would cause indirect adverse side effects. For instance the way that unions are able to increase their member's wages on the free market is by making the cost of dealing with the strike and finding an adequate number of replacement workers higher than just dealing with the union.
Neo,
Once we grant 2, that if there is money to be made hiring someone, he will be hired, then if we assume unemployment that means there is no money to be made hiring the unemployed. Meaning hiring them will result in a loss of, say, a dollar per unit of output. So when wages have not changed, and proices charged for the product have not changed, how can you say [in point 3b in an earlier post] hiring people will suddenly make more money just because they make more things? On the contrary, that will increase losses.
In other words, I'm saying your hypothetical point 3b where increased demand will increase production contains a contradictory assumption. First you tacitly assume wages are too high to make a profit [that's why there is unemployment. If a profit can be made at those wages, the workers will be hired, we just agreed], then you say they are not too high. So there is no such case in the real world.
That being so, every case of printing money is a redistribution.
Short version. I was not conceding your case 3b and thus admitting demand can create supply. I was in the middle of a Socratic dialogue to show you 3b cannot be.
"So when wages have not changed, and proices charged for the product have not changed, how can you say [in point 3b in an earlier post] hiring people will suddenly make more money just because they make more things? On the contrary, that will increase losses"
Because demand increases. If we consider the case of a perfectly horizontal supply curve then the price is fixed but demand can change the quantity of output. As people are willing to pay more for a certain larger quantity of the good then more will correspondingly be produced. Once again, remember that revenue is P*Q, not just P. Therefore revenue can increase while price is constant. If wages are sticky downwards and unemployment is high, then by consumers attempting to by a greater quantity of goods, if demand increases, then this will increase the derived demand for labor and more labor will be employed, and more will be produced.
What is wrong with this?
"First you tacitly assume wages are too high to make a profit [that's why there is unemployment. If a profit can be made at those wages, the workers will be hired, we just agreed], then you say they are not too high. So there is no such case in the real world."
What happened to the assumption of sticky wages? As soon as you acknowledge that wage stickiness relative to demand has something to do with recession recovery then you have admitted that demand has an influence upon supply.
Prices can only be too high relative to degrees of demand. This principle is something of the cousin of the quantity theory of money. A million dollars for an egg is not a high a price if the normal income is hundreds of trillions of dollars. Meanwhile wages are not too high relative to certain levels of demand. If demand is higher, then the wage is no longer too high.
Put another way, what will motivate someone to increase his production just because more people want it? He has to turn a profit from those people wanting it. And if wages are sticky, and were too high, meaning there is no money to be made hiring, when does that change?
Now if you are saying that inflating the money supply will lower real wages, and thus the employer can turn a profit hiring people, what has that to do with increased demand? The increased nominal [but not real] demand, as well as the drop in wages, are two seperate byproducts of inflating the money supply. You can have one without the other. For example if the govt declares a fine of a million dollars for hiring, then there will be increased nominal demand [=more paper money to spend], but no one will get hired. In asense, wages have not dropped for the employer, because hiring someone costs him a million dollars, a very high "wage" [=cost of employing].
So that one might argue that under certain conditions inflating the money supply may lower real wages, thus allowing a profit from hiring [until other costs of production rise from the inflation, and until demand has to drop because higher prices for everything else don't allow to buy what this guy is making, and ignoring the malinvestments eating away at the economy, and assuming the stickiness of wages is for nominal wages, but workers aren't picky about getting lower real wages], thus unfreezing the economy, but it's a huge stretch to call that demand creating supply.
It's kind of like saying disease creates supply, because if there is an epidemic people are weaker and easier to enslave, thus increasing production. Bu the relation is not organic and intrinsic, like increased production creating increased demand as explained by Say. It's more of a Rube Goldberg connection.
If workers are stupid, and etc etc then production will increase.
I see my fingers are losing control of the keyboard, loads of typos. So that's it for tonight. Looking forward to continuing if you wish.
Well, look at this. Neo's and my back and forth has been anticipated by Murray Rothbard.
Hume goes on, in proto-Keynesian fashion, to claim that the invigorating effect of increasing the supply of money occurs because employment of labor and other resources increases long before prices begin to rise. But Hume stops (as Keynes did) just as the problem becomes interesting: for then, it must be asked, why were resources underemployed before, and what is there about an increase in the money supply that might add to their employment?
As W.H. Hutt was to point out in the 1930s, deeper reflection would show that the only possible reason for unwanted unemployment of resources is if the resource owner demands too high a price (or wage) for its use. And more money could only reduce such unemployment when selling prices rise before wages or the price of resources, so that workers or other resource owners are fooled into working for a lower real, though not lower, money wage.
Furthermore, why should idle resources, as Hume implicitly postulates, reappear after the effects of new money have been fully digested in the economy in the form of higher prices? The answer can only be that after the price increases are accomplished and a new equilibrium attained, wages and other resource prices have caught up and the "money illusion" has evaporated. Real resource prices return to being excessively high for the full employment of resources.
Clayton -
"Put another way, what will motivate someone to increase his production just because more people want it? He has to turn a profit from those people wanting it. And if wages are sticky, and were too high, meaning there is no money to be made hiring, when does that change?"
It's not about people wanting it, it's about ability to pay. It is a real increase in demand. If you are a business you won't (and can't) turn customers away just because their wielding newly created money. No business can differentiate between how much of an increase in demand they face is natural and how much of this is caused by the increase in the money supply. Therefore real profit results from the increase in the money supply. This induces firms to produce more. If inputs are generally unemployed then firms will be able to pay for them. Wanting has nothing to do with it, rather it's about willingness to pay and ability to pay, it is legitimate demand within the money economy.
In the situation we are talking about supply and demand in general look like this:
Firms aren't running at a loss if they increase production, they are just responding to demand. The wages or only "too high" at a certain level of demand, just as the price of a million dollars for an egg is only "too high" at a certain level of demand.
In what way does this make firms run at a loss?
The article about Hume is interesting, but I think that Rothbard's comments don't apply quite so much because in our case people are responding to the money wage, not to the real wage. All prices are tending to fall to meet the new lower level of demand. Now either this can happen or demand can rise to permit current levels of wages and prices at full employment.
OK, I see what you are saying, I think.
Say there are only 1,000 people who want steak dinners now. Hiring more waiters will lose money because they will have no one to serve. But when more people come round, hiring waiters will make more money.
What has this to do with sticky wages? Because before the increase in the money supply, the workers are willing to work at the current wage, but the employer doesn't want to hire them, because he will lose money. If he paid the waiters a dollar per service less, and dropped the price of his steaks by a dollar, then he would get more custom and will profit by hiring them.
I think I've summarized your position correctly, right?
There is still one thing I don't grasp in your picture, which is:
Initially, we have Group A, who has no money for steaks, Group B, who does and has been buying steaks until now, and Group C, the unemployed, who have not been eating steaks.
Before any money was printed, why didn't the employer hire all of Group C? You are positing that the only thing missing was people who could afford to buy steaks at the current price. But when he hires Group C, they themselves will then have money to buy steaks, because they now have jobs, and they will buy them, and he will profit. So why didn't he hire them all right off?
Neodoxy:real profit results from the increase in the money supply
But this is never true ceteris paribus - real profits can only increase as a result of real losses elsewhere in the economy. Imagine the government runs a restaurant chain. Imagine this chain has been losing money for years (sound familiar? *cough USPS *cough)... so the government decides to "fix" the problem by simply printing up the amount of losses in new money and putting this on the restaurant's ledger. Has the restaurant become more really profitable? Of course not... but the money has been devalued and this devaluation is what will ripple through the economy. The real effect is that the money-printing has permitted the situation of diverting more valuable resources to less valuable lines of production to continue.
Of course, this isn't precisely what you were talking about... you're talking about the customers receiving inflationary cash and thus spending more. Yet, here we have simply moved the chain of causation back one step - the money is devalued, the restaurant's profits are falsified and the process of diverting more valuable resources to less valuable lines of production continues unabated. Even if we filter the inflationary cash first through employers, then into the hands of consumers, then to businesses, it makes no more difference than a money-laundering scheme does on who really owns the laundered money... this just obfuscates the actual effects. As Hoppe asks, how can little slips of paper make us richer?? If this is true, and the central banks of the world all have an unlimited capacity to create slips of paper, there should be no poverty in the world at all, we should all be absolutely filthy rich.
@Dave
"What has this to do with sticky wages? Because before the increase in the money supply, the workers are willing to work at the current wage, but the employer doesn't want to hire them, because he will lose money. If he paid the waiters a dollar per service less, and dropped the price of his steaks by a dollar, then he would get more custom and will profit by hiring them"
While I think (hope) you have the idea I don't think that you have conveyed it very well here. If we reduce it down to a tale of two supply and demand curves, the first in the market for stakes, the second in the market for waiters:
What happens during a business cycle is that the demand for steaks (and all goods in the economy) shifts to the left. Corruspondingly the the demand for labor shifts to the left. The sticky wages hypothesis is ultimately that equilibrium in the labor market occurs slowly when the demand for labor decreases. In order for the labor market to return to equilibrium the wage must decrease. However, because prices in general have decreased the real wage has risen. This in turn means that the real wage at any nominal wage has decreased and so the supply of labor shifts rightward exactly at that point where the real wage and the quantity of labor is the same. This is what must happen to return in equilibrium.
What inflation in this instance does is that it prevents demand from shifting in the first place. If in one year Aggregate demand shifted to the left and spending was half what it once was, then ceteris paribus wages and prices must fall by half, but let's say that prices are extremely sticky and no prices fall. Well then if, in the next year spending doubles, then we find that we are right back at equilibrium because prices don't have to adjust from their previous equilibrium conditions.
What inflation does in this case is it returns us to that equilibrium position without ever leaving it. If people suddenly save half their money, and then they are given as many dollars as would make up that loss of spending and they spend all that money, then we do not leave that equilibrium point. Now there will be increases in inflation after dissaving occurs because the money in circulation will increase, but this inflation in and of itself will not do this because approximately as much money in circulation as was taken out will be put back into the system. The real money supply doesn't matter. If the FED prints of 10 trillion no one knows about and doesn't spend it then this will not affect prices one iota. If as much new money is put into circulation as was taken out in savings, then no adjustment must occur, as opposed to the long and painful process that must occur if prices are sticky.
"Before any money was printed, why didn't the employer hire all of Group C? You are positing that the only thing missing was people who could afford to buy steaks at the current price. But when he hires Group C, they themselves will then have money to buy steaks, because they now have jobs, and they will buy them, and he will profit. So why didn't he hire them all right off?"
It all has to do with the the marginal value of labor. In real wages Group C is asking for too much in wages relative to what they produce with the spending increase. With the increase in the money supply returning spending up to their old levels he will once more be able to hire.
@Clayton
Your argument doesn't deal with a decrease in demand in general. For any specific industry you are perfectly right, but not for the economy as a whole. If people would prefer to save a larger portion of their income then demand for USPS, as well as all other industries, will fall whether these industries are valuable or not. This has already been discussed.
"As Hoppe asks, how can little slips of paper make us richer?? If this is true, and the central banks of the world all have an unlimited capacity to create slips of paper, there should be no poverty in the world at all, we should all be absolutely filthy rich."
A huge purpose of central banks is supposedly to combat cyclical trends in the economy. It's impossible to deny that if the recession (or the conditions which caused it) did not arise then we would be richer. Most economists would (wrongly in my view) argue that we are indeed much richer because central banks have lessened/ended recessions in the past. Central banks can only do so much to increase wealth, just as a single productive innovation can only do to make us richer, and it can only do this under specific conditions.
You just posted a video showing how an increase in slips of paper can make us poorer, perhaps intrinsically the idea that they could make us richer isn't that absurd. Analysis is required to determine this one way or the other.
Ok. So it's not an increase in demand that's needed. It's a lowering of wages. You're saying that if the wages were lowered without printing money then unemployment would end. And that all we need are wages to be lowered by money printing to set the ball rolloing.
So how is this related at all to demand creating supply? How is this a refutation of Say? Lower wages by trickery ends sticky wages, that's what we have here. Nothing to do with Say's Law.
To give an idea of how this has nothing to do with demand creating supply, let's say we are in ancient Rome, where the money is gold coins. Workers insist on a wage of a cold coin per month, say. But that's overpriced, the employer makes no money hiring them at that price. So the Emperor, without creating any demand at all, just dilutes the coinage, tricking the stupid workers to accept diluted coins. Is that a refutation of Say's Law? Of course not. Nor is the case you constructed.
Another story, to show how absurd this is. Say some religious leader makes a speech, imploring the workers to take a the lower wage, and they agree. Would that prove that speeches creates supply? Poor Say, he thought supply created demand, when it's impassioned speeches and appeal to religion that creates supply. Of course that's nonsense. An impassioned speech can convince people to accept lower wages. But it is beyond ridiculous to it creates supply, right? Same thing with the money printing scenario.
Which segues nicely into a second weakness in this whole scenario, Austrians have long ago pointed out that we can imagine all kinds of unreal Bizzaro world assumptions and say that proves something when it really doesn't. Which is exactly what's going on here. We are imagining some Bizzaro world assumption, that workers can be tricked, but where is any real world evidence this is so? Keynes just made it up.
Bottom line, I'm stunned. This was all that was hidden beneath the mountains of verbiage till now? Demand creates supply because tricking a worker to accept realistic wages creates realistic wages?