The following article reckons Says Law is zombie economics. Much of the criticism is based on the idea that according to Say's Law there is a trade-off between consumption and investment, but that in reality the distinction is not a clear one.
http://www.macrobusiness.com.au/2013/03/will-says-law-stay-dead/
...in reality the distinction is not a clear one.
Not clear to the author of the article, but very clear to students of AE. The commenter named Capitalist explains it in the comments.
Just for fun, I'll explain, too. How do we get richer? By making more stuff than we had before. How do we do that? By investing, meaning spending money in such a way that what we buy will help us make more stuff.
Now what if I buy a tractor, that can be used to clear unused land for farming. Is that an act of investment? Will my buying that tractor result in more food? Just by the mere act of my buying the tractor? Of course not. I have to use the tractor in the right way. If I buy the tractor and zoom around my back yard on it for fun, no new food will grow. Meaning that buying the tractor cannot be called an investment.
But if I buy it and use it to clear ground, and then plant seeds etc., then the tractor has helped me grow more food. In that case, buying the tractor was an investment.
Thus, buying the exact same tractor can be an act of consumption [=zooming around on it for fun until it dies] or an act of investment [=using it to grow food], depending on my plans for it.
When households get money from the govt, they do not use it to buy things that will make them more productive. It's absurd to say that new curtains and a coffee machine in my private house constitute investment.
The article has many more flaws, too.
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It's easy to refute an argument if you first misrepresent it. William Keizer
In reality the distinction between having your pie and eating it is not a clear one. Oh, wait...
I think the author is attacking a strawman of Say's law, which is really more that supply of X constitutes demand for Y, then 'supply creates demand'.
... just as the State has no money of its own, so it has no power of its own - Albert Jay Nock
But the willingness of those entrenched in the economic profession to continue to mislead for their paymasters means that this is not likely to happen soon.
Also this is just hilarious coming from an establishment economist.
I was recently in a discussion on a forum about this and this is how i tried to explain it to people who are not interested in economics. Did i get it wrong? Is this a bad way to explain it?
The microwave has to exist before someone can purchase it. Investment comes before consumer spending. In the context of a discussion of how investment and spending are related, demand is always present because without demand there would be no incentive to invest and create the microwave in the first place. Any spending is a boost to the economy but the point is long term prosperity which comes from investment, savings and a stable currency etc.
I think the misunderstanding is the way in which demand is "falsely" associated with consumer spending. When demand is actually a trigger for investment and by the time the consumer is spending, the demand is being met. The other misunderstanding is the idea that consumer spending is a type of investment.
I think the real error is to think in terms of aggregates at all. For what purpose? The task of economics is to examine individual human action. In what manner does spending 'boost' the economy? It's not really the task of economics to pass judgement on how individuals spend their money, or to question the ends at which individuals are attempt to achieve but in so far as we are to consider the economy as a whole, wouldn't it be better for an individual to save their money, so that it can be invested, so that more capital can be created and thus more wealth produced? That is to say if the end in question is a greater production of wealth in general, then isn't the means of increased consumer spending self defeating? And how much worse is increasing government spending, which represents not even the satisfying of consumer demands but is instead directed by the consumptive decisions of bureaucrats. I think the assumption inherent in the Keynesian paradigm is that from time to time, for whatever miserly reason, people stop spending money and this is bad for the economy. This is a dissatisfactory explanation of business cycles. Instead of being caused by a lack of consumer spending the problem is inflation. The state expands the money supply, lowering interest rates and fooling entrepreneurs into malinvestments. Far from government spending solving the problem of the business cycle, to the extent that this spending is financed by deficits, it will be inflationary and further aggravate the problem. You might alleviate unemployment, if wages are prevented from falling because of a minimum wage or the activities of unemployment, but surely a less destructive method of accomplishing this would be to abolish the price floor on wages or free employers to deal with unionists by eliminating pro labour legislation.
Also, to revert to the original article linked, I find the author's assertion that consumer goods are in fact capital goods to be a little ridiculous.
I find the author's assertion that consumer goods are in fact capital goods to be a little ridiculous.
Using a bit of reductio ad absurdum, we could expand his argument and say that just as a coffee machine is a coffee machine is a capital investment no matter what it is used for, because all coffee machines are created equal, so too all people are the same.
In other words, whether or not a person actually has a job, he is part of the labor force and should be considered employed. Just as the coffee machine in someones home is capital accumulation, so too the fellow drinking the coffee as he plays his video game is using that accumulated capital, in other words, has a job.Our unemployment rate is actually 0%.
Well, there is some bit of truth but in a different sense. The cost of the capital goods (initial purchase, maintenance, etc.) is built into the ultimate cost of the retail good. All these layers of product cost are built into the final price of the retail good. On the aggregate, it would make sense that "more" is spent on retail goods than capital goods.
Please, I'm being extremely general here with respect to the use of capital goods, etc.
shack,
What you say is true, of course. But the question is, when the govt gives people money to buy coffee machines for their homes, does the fact that they have those machines, which they use as they watch tv and eat doughnuts and get fat, increase the nation's productivity? If they do nothing, can they be considered productive anyway because the cost of the capital goods (initial purchase, maintenance, etc.) is built into the ultimate cost of the retail good? Can we say they become magically productive because all these layers of product cost are built into the final price of the retail good?
Of course not. So it is absurd to call it capital accumulation when someone gets a coffee machine and curtains for his home.
Of course, I'm not calling that capital accumulation. I'm just thinking of the argument pushed by Keynesians that consumer spending is 80% (or whatever) of spending therefore we need to spend more, .i.e. consumption, not capital spending is what grows the economy.