My problem is that they equivocate between both meanings. They don’t stop using it to refer to corporate profits.
Who is “they”?
Couldn’t it be possible that the suppliers of inputs cut back production when faced with lower demand as well?
Interesting point, I will think about it.
Hmm, so Austrian Economists really don’t realize that their opponents are using a different definition than they are? Profit says nothing about your expenses?
I am not an economist, that may be the reason for my unclear message. Certainly I didn’t mean profit is unaffected by any expenses, I meant it is not neccessarily affected by all expenses. Specifically, it is affected by expenses incurred by the transaction, which lead to profit. To provide a non-trivial example:
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A borrows 100 coins to be returned as 105.
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A contracts B to work for 10 coins payed at once, buys supplies for 90 coins, makes sure B produces what’s intended, and totally liquidates the stock of product and everything for 120 coins.
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After that, he pays his debt - 105 coins, and also buys something for 10 coins and keeps 5 coins.
I say, that A’s profit for the complex transaction 1-2 was 120 - 105 = 15, but profit was unaffected by the unrelated spending of 10 coins in step 3. A could have spent all his profit at this point (for consumption or production, irrelevant) - he still had his positive profit.
But he said that investment was using a resource to increase production.
On a second thought, I think any production can be seen as investment, as any production has duration, and keeps either inputs or outputs from being alternatively used for that duration. Further, in Crusoe economy, the only kind of investment is production. In multi-person economy this issue is complicated by titles, especially titles to future goods - I will need to think about it more. My current thinking is to boil all these investment, consumption and saving ontology down to interaction of exchange (which preserves physical goods and their services) and production (which emphatically transforms them).
[edit: UNaffected]
For one, I’m having a hard time conceiving of what wages would be paid in. The product that the wage workers produce? A bunch of random products?
Is a wage necessarily a consideration in a barter economy? Take a look at this article, for example, and tell me whether the concept of wages necessarily means anything in those examples of barter (granted that those are not exactly representative of the typical hypothetical barter economy).
In any case, there would never be a “random” group of good and services in a barter economy.
- ¨When a seller of commodities has unsold goods, this means he has likely made excessive “profits” (I understand this in a different way I normally use the word).¨
When a seller of commodities has unsold goods, this means he has likely erred in his estimate of what people want to buy. If he is stuck with all that unsold stuff, that is not a profit. Itś a loss.
- ¨When someone pays a person a wage to create a product to sell on the market, does this act of payment constitute a purchase of a product?¨
The easiest way to understand wages is to consider the employer and the employee as PARTNERS. The employee is in fact a privileged partner, in that he gets his cut of the profits in advance, even before the item he helped produce is sold to anyone. Not only that, he gets his cut even if there are no profits. These are two incredible privileges given to this partner, and indeed he pays for these privileges by getting a bit less of the estimated profits. than would be the case if he were self employed.
Contrast this with the employer, or someone self employed, who gets to trade his wares for something else [cash in an economy that uses it, potatoes or whatever in a barter economy] only after he makes them, and only after he finds someone willing to trade.
So that payment of wages is not purchase of a product, but a division of the spoils between two partners.
Of course, this is not a very leftist view of things, but we are now at the stage of summarizing Sayś position, not of refuting it.
- ¨But he said that investment was using a resource to increase production. If his definition of production is anything like mine, then I can’t see how you could produce something without a resource.¨
Yes, producing something requires a resource.
So that indeed, buying a resource to produce something from it is investing. Afetr all, you could have not bought the resource, and spent the money instead on beer.
Not sure what the problem is with this definition.
(I’ve seen 3 different rebuttals of the above.
- First is Rothbard’s, in the book mentioned earlier, that any such hoarding will result in an increase in the purchasing power of the unhoarded money. This is a simple application of the laws of supply and demand applied to cash. Thus the means is there to buy everything on the shelves, even with hoarding.
…as Turgot had hinted, hoarded cash balances that reduce spending will have the
same effect as ‘overproduction’ at too high a price: the lower demand will
reduce prices all round, real cash balances will rise, and all markets will
again be cleared.)
This argument is wrong and doesn’t apply in modern monetary system where all money is debt. If deflation occurs then this means everything will cost less in nominal terms including labor. People’s incomes will fall in nominal terms, their debts are nominal . So your mortgage goes up in real terms relative what you earn and you start spending more?
(2. Second is Hazlitt, in economics in One Lesson, who points out that historically, very few people ever actually hid their money under a mattress in modern times. Instead they put it in a bank, [which then spends the money], of course:
“Saving,” in short, in the modern world, is only another form of spending. The
usual difference is that the money is turned over to someone else to
spend on means to increase production.)
This argument suffers almost the same fallacy. Saving in the modern world is not spending your monetary income. It is totally passive, not active. Having your money in a bank account is funcionally the same as putting It under your mattress. Banks don’t lend out deposits. They don’t need your deposit to make a loan. Assuming that during recession when incomes and prices are falling, you have extra money to give to your friend and relatives to invest is dreaming in fantasy land.
(3. Third is J. S. Mill, who admitted to the possibility of a general glut due to hoarding, but insisted it must perforce be of short duration.
Here is Mill describing the hoarding problem:
[T]hose who have… affirmed that there was an excess of all commodities, never pretended that money was one of these commodities… [P]ersons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute. In extreme cases, money is collected in masses, and hoarded; in the milder cases, people merely defer parting with their money, or coming under any new engagements to part with it. But the result is, that all commodities fall in price, or become unsaleable…)
Money is not commodity and this argument is ridiculous because of that. Money is financial asset created out of nothing. There is always debt/obligation that comes with It.
Who is “they”?
Posters on this site. I’d have to dig up the posts. But I was only using this as an example–I don’t want to debate this in this thread.
… Ya sure?
I am not an economist, that may be the reason for my unclear message. Certainly I didn’t mean profit is unaffected by any expenses, I meant it is not neccessarily affected by all expenses. Specifically, it is affected by expenses incurred by the transaction, which lead to profit. To provide a non-trivial example:
A borrows 100 coins to be returned as 105.
A contracts B to work for 10 coins payed at once, buys supplies for 90 coins, makes sure B produces what’s intended, and totally liquidates the stock of product and everything for 120 coins.
After that, he pays his debt - 105 coins, and also buys something for 10 coins and keeps 5 coins.
I say, that A’s profit for the complex transaction 1-2 was 120 - 105 = 15, but profit was unaffected by the unrelated spending of 10 coins in step 3. A could have spent all his profit at this point (for consumption or production, irrelevant) - he still had his positive profit.
I’m tempted to say that that is the same thing I mean by profit. I can’t think of a way in which everyone can profit in that way, though.
My current thinking is to boil all these investment, consumption and saving ontology down to interaction of exchange (which preserves physical goods and their services) and production (which emphatically transforms them).
I think that is a good distinction, and one I will elaborate on in a bit.
Is a wage necessarily a consideration in a barter economy? Take a look at this article, for example, and tell me whether the concept of wages necessarily means anything in those examples of barter (granted that those are not exactly representative of the typical hypothetical barter economy).
In any case, there would never be a “random” group of good and services in a barter economy.
I think its necessarily a consideration in a barter economy with profit–unless we are counting rent and interest as profit, but then I would have the same question regarding what it is paid in.
This argument is wrong and doesn’t apply in modern monetary system where all money is debt.
So the more money I have, the poorer I am?
…everything will cost less in nominal terms…your mortgage goes up in real terms…
And what percent of the paycheck goes to mortgage payments? over 50%? Even in todayś mad world, all debt payments should be not more than a third of your income, according to the conventional wisdom. So two thirds of the things you pay for go down in price, one third goes up. You do the math.
Money is not commodity and this argument is ridiculous because of that.
Somebodyś copy and paste skills need improving, because you copied the part where Mill summarizes the hoarding PROBLEM, and call it ridiculous.
Is it so hard to envision? The hypothetical isn’t entirely useful because the absence of a money in an exchange economy is necessarily a temporary phenomenon. Markets eventually choose salable goods as stores of value and hedges against uncertainty. A barter economy is a market economy that hasn’t been around long enough for a money to emerge. See Misesian regression theorem. If gold money specifically did not exist then worker’s wages would be paid in the next most salable, durable, convenient commodity.
When a seller of commodities has unsold goods, this means he has likely erred in his estimate of what people want to buy. If he is stuck with all that unsold stuff, that is not a profit. Itś a loss.
You’re right. Let me put it better: When a seller of commodities has unsold goods, this means that previously sellers of the same commodity have likely made excessive profits. These excessive profits are what led the seller to invest in these goods. But these excessive profits were artificial and no longer apply to the present circumstances, which have readjusted to the natural rate. Thus, the seller can’t sell the goods. Here (once again) is the part I’m getting this from:
It is observable, moreover, that precisely at the same time that one commodity makes a loss, another commodity is making excessive profit.*38 And, since such profits must operate as a powerful stimulus to the cultivation of that particular kind of products, there must needs be some violent means, or some extraordinary cause, a political or natural convulsion, or the avarice or ignorance of authority, to perpetuate this scarcity on the one hand, and consequent glut on the other. No sooner is the cause of this political disease removed, than the means of production feel a natural impulse towards the vacant channels, the replenishment of which restores activity to all the others. One kind of production would seldom outstrip every other, and its products be disproportionately cheapened, were production left entirely free.
The easiest way to understand wages is to consider the employer and the employee as PARTNERS. The employee is in fact a privileged partner, in that he gets his cut of the profits in advance, even before the item he helped produce is sold to anyone. Not only that, he gets his cut even if there are no profits. These are two incredible privileges given to this partner, and indeed he pays for these privileges by getting a bit less of the estimated profits. than would be the case if he were self employed.
But here’s the thing, when the worker receives his wages, he can spend them right away. Say claims that products are bought with products. It seems to me then that the wage the worker receives represents a product that either he or the employer has already produced. But the product which the employer and employee have partnered to produce clearly has not been produced yet. This leads me to believe that the employer is paying the worker in a product that has already been created either previously by the same employee, by a former employee, or by the employer himself. This seems more like an exchange, a purchase, rather than a promise to split the future earnings. Say asserts: the only way of getting rid of money is in the purchase of some product or other. When an employer advances this money to his partner–the employee–is he not getting rid of his money? If this doesn’t constitute a purchase, I have to wonder why Say left out this possibility of getting rid of money.
Note that Jargon considers this a purchase of a product. So it is not only us leftists that disagree on this matter.
FOTH,
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First, a tip of the hat to you for accepting the challenge and digging into what Say actually said, as well as making what I am guessing is an honest effort to understand it from an Austrian point of view. I am very encouraged and feel good about this.
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About the excessive profits thing. I don´t think you grasped what he was saying in that paragraph. Whether what you write is true or untrue, it is not deducible from what Say wrote. He was describing a different situation altogether. Dig deep, reread it slowly twenty times or so, and you will be enlightened.
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You wrote: Say claims that products are bought with products. It seems to me then that the wage the worker receives represents a product that either he or the employer has already produced.
Products are indeed bought with products. I doubt anyone really thinks that is wrong. Where else does the money come from to buy something, unless the buyer produced something earlier and got money for it?
But we live in a complex world. I have very often seen workers coming hat in hand to their boss and asking for an advance on wages. Meaning they want money now, and will work it off later. Does that contradict the assertion that products are bought with products? In that situation, does it seem to you that the advance represents a product that either he or the the employer has already produced?
Now in a sense, it does. After all, the employer only has the money to advance to the worker because the employer has earned that money in the past by being productive. But even though that is true, the employee gets that money not because he has been productive, because it may be his very first day on the job and the kindly employer advanced him the money anyway. Does that situation tell us anything earth shaking about Sayś assertion, or force us to rethink what wages are? No.
Normal wages are no different in principal than the case of asking for an advance just described. One cannot deduce anything special from it. The partner explanation still holds true.
- Say asserts: the only way of getting rid of money is in the purchase of some product or other.
Can you please remind me where he says such a thing? Has he never heard of loans, gifts, or this:
- I think you are getting sidetracked from the main thrust of Sayś Law by going into this detail of what wages are. Who cares?
OK, now I’d like to make a few remarks about the Keynesians, not to criticize Say’s Law but to clarify some of the definitional differences and possible misinterpretations.
I’ve come to realize that Dave and Say are using a completely different definition of consumption than the Keynesians. For Dave, consumption means making a resource cease to exist and deriving pleasure from it. For the Keynesians, on the other hand, consumption means the purchase of consumer goods. For evidence of this, consider this sentence from the Wikipedia article of consumption: “According to mainstream economists, only the final purchase of goods and services by individuals constitutes consumption.” Or this sentence from the article on the consumption function: “In economics, the consumption function is a single mathematical function used to express consumer spending.”
Keynesian economists are not in fact advocating the AE meaning of consumption at all. They are not telling people to make things cease to exist faster; they are telling people to buy things faster, perhaps advocating ways to allow these people more means to buy things faster. By the AE definition, TV’s are not consumed any faster if they are bought than if they go unsold and sit in the store. They’ll deteriorate just as quickly in either location. What the Keynesians are concerned with are whether the TV’s are sold or not. It doesn’t matter to them whether the buyers, “the consumers,” put them in a protective storage case or whether they throw them in the incinerator. If Say is arguing that the destruction of consumer goods does not aid in production, then the Keynesian probably wouldn’t disagree.
Buying and selling is one thing. Keynesians consider the buying of consumer goods (goods that transfer no value to another product other than the laborer*) to be consumption. They consider the purchase of producer goods (including labor-power) to be investment. Every instance of buying is also an instance of selling.
Another thing entirely is the actual process of material transformation. This, I gather, is what the Austrian is referring to when she talks about consumption and production. Every act in this regard involves simultaneously the act of making something cease to exist and making something begin to exist. For example, coal ceases to exist when it is burned to create energy for a factory. Fertilizer ceases to exist when it is used on soil to grow crops. Even the eating of a sandwich destroys it only to reproduce the consumer’s body. What makes the eating of a sandwich consumption and not “production” like the burning of coal is due to the fact that the former is done for “sheer pleasure.”
Considering all of this, we are left with several possibilities regarding the argument between Keynesians and Austrians:
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Keynes interpreted Say’s Law correctly and refuted it correctly.
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Keynes interpreted Say’s Law correctly but refuted it incorrectly.
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Keynes interpreted Say’s Law incorrectly and refuted the strawman incorrectly.
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Keynes interpreted Say’s Law incorrectly but refuted the strawman correctly. Two possibilities remain with this:
4a. The correct interpretation of Say’s Law does not contradict Keynes’s theories.
4b. The correct interpretation of Say’s Law does contradict Keynes’s theories.
I get the feeling that Smiling Dave adheres to 4b, given that he claims Keynes had some sort of reason for “lying” about it. But for me, it seems that either 1 or 4a is correct. I can’t see a way of interpreting it that contradicts Keynes’s theories without rendering it vulnerable to Keynes’s critique.
*This definition of consumer goods is how I interpret its use in Marx. I’m not sure how Keynesians define consumer goods, but I’m guessing its compatible with this.
Can you please remind me where he says such a thing? Has he never heard of loans, gifts, or this:
I.XV.8
It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products.
- I think you are getting sidetracked from the main thrust of Sayś Law by going into this detail of what wages are. Who cares?
Because spending money on wages has some unique effects that Marx and Keynes thought were relevent in refuting Say’s Law.
FOTH,
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I admit that the point of view that working in a factory can be considered a service, just like the work a barber does, is valid.
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I am unfamiliar with Marxś critique.
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¨But for me, it seems that either 1 or 4a is correct.¨ This is bad bad news. There is only one Sayś Law. Eithe Keynes summarized it correctly [before refuting it], or he didn´t. Your uncertainty whether 1 or 4 is right means you have not yet made up your mind as to what Sayś Law actually is. So that you have still not completed the very first task of understanding, summarizing the law in a manner an austrian would accept. And yet you are jumping ahead to the next step, having opinions about refutations. Meaning you think you have refuted something you admit you know nothing about.
Dont let me down here, FOTH. You can do better than that.
About consumption: Yes, I think that if a farmer grows wheat, and he and his family eat it all up, selling none of it, that he has consumed the wheat.
Now Keynesians may have a specialized technical definition of consumption, different from common usage, and thatś fine. We spoke about this before.
I doubt that any profound insight is hidden behind these two uses of the word consumption.
As for the worker eating his spinach to be big and strong and so be able to work, that does not make his eating an act of investment.
Reisman lays it all out in his free book, Capitalism, on page 452. Too long to copy and paste, but a short one page read.
Dave isn’t consumption only able to be defined by the consumer, subjectively? For example, how does one consume a TV other than purchasing it and deciding when it has become obsolete. Some will throw it away in 4 weeks, some will hoard it.
Or is consumption, as the Keynesians purportedly claim, defined by the moment of purchase? Or has the Austrian definition of consumption been mischaracterized?
I don’t think that the Keynesian one can be true, because if an entrepeneur purchases a capital good but does not allow it to expire before he dies, did he ever consume it?
Jargon,
I like Reismanś definitions. Anything bought or used to make money is a capital good; anything not bought or used for that purpose is a consumer good.
Since the TV was not bought to make money, it became a consumer good right when they bought it, even if they hoard it untouched in the box. [Unless they bought it with the intent to sell later at a profit, or to use in their business in some way].
It is indeed subjective, as it all depends on the individualś intention.
Note that his definitions are of objects, capital goods and consumer goods. The act of actually consuming the consumer good would be [the way I see it] when they turn on the TV and start wearing it out
Not familiar enough with the Keynesian, or even the accepted Austrian, definition to answer your q.
Esuric said: “expand the structure of production (look this phrase up)”
http://en.wikipedia.org/wiki/Extended_order
?