While the tone in this debate (like all other debates that imply a possible critique of the “master” (to borrow Skidelsky’s preferred epithet)) makes me quite unwilling to take part, I feel I must correct Barkley Rosser’s several simple errors in his description of the “rightist” Austrian school’s “overinvestment” theory. Surely we can respectfully discuss the pros and cons of any theory as scholars and do our best to correctly state their argument?
So, for the record, the Austrian theory is not an overinvestment theory but a malinvestment theory. The distinction is especially important in a discussion like this, where some assume aggregate demand/supply and others do not. Overinvestment should mean “too much” investment, whereas Austrians use “malinvestment” to emphasize that there is a sectorial mismatch between supply and demand - there is relative overinvestment in some sectors and so relative underinvestment in other sectors. Simply saying “overinvestment” misses the point and completely ignores Austrian capital theory. It is no small mistake.
Furthermore, to Austrians the relative overinvestment (overproduction) in a certain sector is not due to an entrepreneur not being able to immediately sell all that was produced. (It has previously been suggested that even slight inaccuracy by entrepreneur(s) in estimating future demand somehow disproves markets, which is why I note the Austrian meaning here.) It is a structural (“aggregate,” if you will - but for that sector, not the whole market) phenomenon where the class of entrepreneurs are led to believe there is more savings than there really is. So they invest in temporally extensive production processes requiring capital [goods] that do not exist (at least not at prices in the vicinity of those estimated), and therefore cannot [profitably] be completed.
This shift in productive investment from certain sectors to others is not due to a shift (or expected shift) in consumer preference, hence over- and underinvestment at the same time (though in different sectors). (There’s also a shift from investment in relative lower-order to relative higher-order goods, especially in the “overinvested” sectors.)
The structural mismatch between productive investment and anticipated future demand (or consumer preference) is not a market phenomenon in the sense that it is due to interest rates having been pushed down below their natural rate. This is often caused by an increase in money offered through credit, which tends to hit certain sectors first and then, through Cantillon effects, spread through the economy’s sectors and produce extra-market winners and losers.
This does not require a central bank, as Barkley Rosser seems to suggest, but can be the case also in a fractional reserve banking system without a central bank. Austrians certainly don’t claim “everything was fine” (as in “there were no cycles”) before the Federal Reserve was established in 1913; they say it “got worse” with the Fed, as a central bank greatly augments the problem.
None of the problems noted above are even noticeable if we adopt an AD/AS point of view. As far as I know, Austrians don’t see any point in using such highly abstract aggregates, since the details of what is going on in the market are no longer visible. And the devil’s in the details, as we know.
Per Bylund
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Per L. Bylund, Ph.D.
Baylor University
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Before I respond to Steve Kates allow me to thank Tom Humphrey for showing up to clarify Wicksell's position on this matter. You now have a standing invitation to speak at JMU not far from where I think you are.
That said, allow me to reply to Steve, who has just provided low-hanging fruit for his critics. Oh, so you want to invoke Haberler? My remarks following are more seriously discussed in my "The Conceptual History of Economic Dynamics" forthcoming in a Handbook on History of Economic Analysis from OUP and presented last June at the U. of Richmond workshop on HES. So, of the 7 sources of business cycles that Haberler identifies, one is on underconsumption, three are on overinvestment, one is on the monetary theory, one is on the psychological theory, and one is on "harvest theories," drawing on Jevons and his sunspot theory, the only one of these that is unequivocally an exogenous supply side theory. To quote Buz Brock, as I did in the paper and the talk (available on video), "the sun is the only truly exogenous factor in the economy."
So, you sneer at Hobson's underconsumptionism. Let us get analytical: underconsumption is identical to "overinvestment." Sure, the two have very different political profiles, underconsumption being leftist redistributionism, while at least the monetary Austrians rightistly emphasize bad behavior by central banks jerking the interest rate below and above the supposed "natural rate" (see Wicksell), while the Spiethoff school emphazised lags in carrying out large-scale capital investments due to ratex not holding (which it does not empirically in the real world based on repeated experiments and basically every other data available), with the third being the accelerator theory first put forward by Carver in 1903 and then more famously by Aftalion in 1913, with this later being viewed as a "Keynesian" theory, although he never spoke of it, and for those who do not like it involving failures of ratex with "overshooting" of investment involved, all involving situations where capital investment has led to production of goods that demanders are not sufficiently buying, in short, an insufficiency of aggregate demand relative to aggregate supply. A failure of "Say's Law." Got it, Steve?"
So, bottom line? Despite political differences where Austrians blame naughty central bankers for all that awful "overinvestment," while socialist Hobson whines about poor people "underconsuming," they are analyticallly identical. We only know there is "overinvestment" if what is produced by the invested capital stock fails to be purchased due to, oooh, well, "underconsumption" of what that capital stock is supplying. Whatever one thinks is the policy solution to this appearance of "general gluts," a failure of aggregate demand to fully satisfy aggregate supply, whether better central bank policy or a redistribution of income, the basic analytical issue comes down to people not buying all that is produced, even if their ability to buy that is based on previous production, which is what most statements of the supposed "law of markets" really amount to, starting with James Mill himself, a potential aggregate demand to buy the aggregate supply, not a guaranteed actually existing real one there sufficient to actually purchase all of it in real time.
Let us be clear. What you, Steve, claim is a supply side phenomenon looks mostly like a failure of AD, even if Haberler did not specifically label it as that. Real investors overdid it for whatever reason, and we know they did so because AD was insufficient in the next period to buy their output, for whatever reason. AD < AS, "general glut," even if only short run.
I had said previously that I would not respond to J. Akhiapor, but he offered such a doozy of a quote that just slams this point in, even as he as usually delusionally thinks that yet again he has proved Keynes wrong. So, I shall simply quote directly from one of his recent posts. After as firms face an aggregate inability of demand to buy all their stuff and thus stuck with rising inventories, and so either borrowing to hold the inventories over to the next period or adjusting after that or maybe sooner by either reducing prices, "The rise of interest rates would put pressure on the seller to reduce prices or reduce the rate of production." Ah ha! The latter will lead to an increase in unemployment, and maybe these laid off workers will "spend" their nonexistent income to buy cash to hoard, well....
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From: Societies for the History of Economics [[log in to unmask]] on behalf of Steve Kates [[log in to unmask]]
Sent: Tuesday, February 04, 2014 12:43 AM
To: [log in to unmask]
Subject: Re: [SHOE] L'offre crée même la deman de
I certainly appreciate the replies to my previous postings by Daniele Besomi and Barkley Rosser.
Let me begin with a news item reporting on my testimony to the Australian Senate Economic References Committee. They were reviewing the effects of the stimulus and had invited me because of my views on Keynesian theory and policy. This is from the Sydney Morning Herald of 21 September 2009.
“Labor senator Doug Cameron said Prof Kates’ comments had certainly embedded in his mind that you should never let an ‘academic economist run the economy’.
“‘Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?’”
I can now more clearly see Senator Cameron’s point about academic economists, but I draw you attention to the second of his statements.
Since J.-B. Say had put together what is in English called the law of markets, it does not surprise me that the phrase “Say’s Law” may have turned up on various stray occasions. But as someone who had been curious about the origins of this term, which is used by none of the major classical economists, it did finally dawn on me that it had come from Fred Taylor, not least because he specifically states that he is inventing the term. He used the phrase in his 1909 article on teaching economics; it is in his 1911 and six subsequent student editions of his for-students-only principles text distributed at the University of Michigan and buried in a chapter he titles, “Certain Fundamental Principles of Trade”. But by the time his text is released commercially in 1921, Say’s Law is a chapter on its own, titled “Say’s Law” in big letters, and in that chapter Taylor specifically says he is giving a name to what he describes as a yet unnamed principle. That someone used the term in 1920 is not a surprise but the phrase Say’s Law does not enter into economic discourse in a big way until after that. If it pleases you to think that Keynes took the name because of one of these stray mentions picked up by Daniele, be my guest as long as you accept that he took it from somewhere else. It just seems reasonable to me that Keynes used the term because it expressed exactly the point he was trying to make. Whether he was reading Taylor directly, or someone else who had read Taylor who had used the term, we cannot know. But that he was reading the mostly American literature on Say’s Law is as near certain as any such thing can be. And the only reason anyone resists this common sense, indeed obvious point, is that it is damaging to Keynes’s reputation since it suggests that his letter to Harrod, about how he had on his own by himself thought up one idea and then another, is not what actually happened at all.
And perhaps it is Daniel who has not understood my point. His point, he writes, is that “Say's law was not ACCEPTED throughout the 19th century by writers trying to explain crises” (his emphasis). I don’t think that’s right. If you go the Haberler’s 1937 Prosperity and Depression, which is a compendium of all of the theories of recession that were then in existence, virtually all of the theories presented are about structural dislocations. In what was probably the most common theory of recession of the time, people had used their savings all right – hoarding was not the problem – but had produced non-saleable output leading to recession, with the reason for such dislocation often but by no means always related to financial mayhem of one sort or another. To the extent that classical economists had a view about saving as a cause of recession, it was that recessions might occur because the level of saving had been insufficient to complete all of the projects that had been commenced following the previous trough. There wasn’t too much saving, there was too little. Read Haberler discussing Hobson and under-consumption if you are looking for a dismissive view of oversaving as a theory of recession.
What Say’s Law said to economists was this: when trying to explain the causes of recession, “there is no deficiency of demand” (and that is a quote from Ricardo), so you should therefore look somewhere else. I will, for a change, let Keynes be my authority.
“Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. . . . The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature.” (GT: 32)
It may seem a negative conclusion but it is a crucial one. There is no such thing as a general glut. Overproduction never occurs. Demand deficiency does not cause recessions. And so far as policy is concerned, increases in non-value-adding public spending cannot lead to a recovery but will, instead, make them worse. That is what I was trying to say to our Senate. Five years later, who has the runs on the board? Is it the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, or is it our classical predecessors? Is it Keynes or Mill?
So to come back to my original post. There may well be something to what classical economists had been saying, which is the point Francois Hollande has very bravely made. And it is brave since he will be opposed by his political enemies, by his political friends and by economists who refuse to think that just maybe perhaps Keynes was wrong.
Let me finish with a quote from another politician, the former Labour Prime Minister of the UK, James Callahagn, speaking to the Labour Party Conference in 1976 during the Great Inflation, which was also a period of persistently high unemployment:
“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”
It’s not as if our economies, as a result of these high levels of public spending in the period after the GFC, returned to rapid rates of economic growth and low rates of unemployment. We have seen the effects of the stimulus and they are dismal. Hollande, who is a first rate economist, went into government as a Keynesian but a Keynesian he no longer is. Why anyone else still is remains the central question in economic theory today.
On 4 February 2014 08:24, Daniele Besomi <[log in to unmask]<mailto:[log in to unmask]>> wrote:
Thank you very much, Richard, for your illuminating post. The story is now becoming very interesting: not only the story of the origin of Say's law, but also the story of the criticism of the law.
One obvious connection that springs to mind concerns Marx. His interpretation of the gluts debate was framed by means of the reproduction schemes, which he elaborated from Quesnay's Tableaux representing the circular flow. Marx derived dynamic equilibrium conditions, that showed at once how reproduction can take place (against Mathus and Sismondi's view), and how it can go wrong (against Ricardo and Say), to which he added an explanation of why it must periodically go wrong. Note that, similarly to Robinet/Mercier and differently from Ricardo, Marx's argument is framed in terms of equilibrium.
A less known connection concerns another French writer, Aguste Ott. He was a social economist, who could escape the grip on publication outlets firmly held by the French liberals because he was writing in a Catholic encyclopedia. In 1854 he wrote an article on crises where he explicitly rejected Say's law, and did so by means of tableaux of exchanges that bear some similarity to Marx's schemes (I do not think Marx had read Ott's piece). Again, equilibrium and its conditions —that is, the possibility of the circular flow to take place-- were at the centre of the argument.
A third connection concerns the definition of crises that were formulated in the 19th century. Obviously most of them were published in dictionaries. In most dictionaries (in particular in France) crises were defined in terms of disturbances of the normal flow of business, and occasionally in terms of some of the features that characterize them. Other writers, however, defined crises as situations where equilibrium is disrupted. So we have on one side an undertsanding in terms of normal/abnormal, or health/disease (both couples are easily understandable, but ill-defined: health, indeed, was understood simply as the absence of disease, and normality as absence of abnormalities, without any precise and positive characterization), and on the other side an understanding in terms of equilibrium/disequilibrium. Now, all the latter writers were German. This is by no means an accident, since within a tradition where theorists openly questioned Say's law the debate was framed in terms of equilibrium between supply and demand, and on the conditions that guarantee such an equilibrium. Such a question obviously wouldn't make any sense for the upholders of Say's law, and wouldn't arise if the validity of Say's law was never questioned. Obviously the analytical perspectives opened by an analysis in terms of precise notions such as equilibrium and disequilibrium are further reaching than the possibilities opened by a discussion in terms of ill-defined concepts.
Knowing now that at the origin of Say's law there was a conceptualization in terms of the conditions of reproduction of a circular flow helps making sense of what was lost in the process and regained later, and helps placing in a broader context the rescuing of the original problem.
Daniele Besomi
Il giorno 3-feb-2014, alle ore 18.02, Van Den Berg, Richard ha scritto:
> Since we should be concentrating on historical questions in these postings (roughly 'who said, what when and what could they have meant?' rather then 'were they right?'), it should be pointed out what the origin is of Danielle Besomi's (translated and very relevant) passage from Robinet's Dictionnaire. It is a verbatim quotation from Mercier de la Riviere's L'ordre naturel et essentiel des societes politiques of 1767. The most important thing about this is not that the date is quite a bit earlier than 1780, but of course the fact that Mercier's work was one of the great works of physiocracy (unfortunately never translated into English).
>
> Mercier's discussion is intimately related to Quesnay seminal conception of the economy of a circular flow of incomes. One finds passages similar to that of Mercier in other physiocrats. For instance how about this one from Le Trosne's De 'linterest social of 1777 (my translation):
>
> 'Reproduction and consumption are reciprocally the meause of one another. Although everything procedes from reproduction, since this is what decides about consumption and the means to pay for [reproduction], these two causes react upon one another. Reproduction is the measure of consumption, and consumption is the measure of reproduction'
>
> Le Trosne also uses the phrase 'products can only be paid for by products [les productions ne se payant qu'avec des productions]' which is worth noting since Say used identical words in the Traite of 1803 (p.180). Also cf. Mill (1808:83).
>
> Commentators like Marx and Spengler have pointed out that Say owed more to the physiocrats than he let on. Before one can start thinking about the question what interruption to circular flow are possible one first needs a clear conception about what circular flow is and here ideas really go back to the great Quesnay (yes building on authors like Cantillon and Boisguilbert).
>
> Of course, unlike Say, the physiocrats stressed that interruptions are possible and can be persistent. One of them is 'hoarding' (besides landlords spending too small a proportion of their rent income on agricultural products and wrongheaded government policies like indirect taxes and trade restrictions). They did however not, as far as I am aware, write about the possibility of 'general gluts'. Arguably, not even British (pale) imitators like Gray and Spence (to whom Mill's 1808 work was a response) were talking about general gluts.
>
> Richard van den Berg
> ________________________________________
> From: Societies for the History of Economics [[log in to unmask]<mailto:[log in to unmask]>] On Behalf Of Daniele Besomi [[log in to unmask]<mailto:[log in to unmask]>]
> Sent: Saturday, February 01, 2014 7:34 AM
> To: [log in to unmask]<mailto:[log in to unmask]>
> Subject: Re: [SHOE] L'offre crée même la deman de
>
> If we want to set the facts concerning Say's law straight, let's do it properly. Its history begins far earlier than Mill, since it is very precisely stated in a dictionary in 1780:
>
> ‘Nobody can be a buyer unless he is also a seller; since buying implies paying, nobody can buy unless he sells, because only by selling can he procure the money to buy what he buys. From the fact that every buyer must be a seller and that he can buy only if he sells, a second axiom results, namely, that every seller must also be a buyer, and he cannot sell unless he buys. Therefore every vendor must, by way of the purchases he performs in turn, provide everybody else with the money for buying the goods the vendor wants to sell them.’ There may not be perfect matching between individual sales and purchases, but if someone becomes richer by selling more than he buys, someone else is ruined by buying more than he sells, so that ‘by the opposition between these two sorts of disorder, equilibrium is re-established in the general mass of sales and purchases (entry on COMMERCE in Robinet’s Dictionnaire universel des sciences morale, économique, politique et diplomatique, vol. 12, pp. 444–445).
> ......
--
Dr Steven Kates
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