Investment vs. Consumption

Economics Economics Questions
41

“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.

42

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?

43

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.

Clayton -

44

@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:

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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.

45

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.

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?

46

Dave,

It is not as easy as putting it down to “lowering real wages”. The wages are too high at the current level of spending. Furthermore, if you adhere to some of the more radical Keynesian claims and believe that prices are sticky in general during a recession, then this actually means that real wages are heightened through this process. It is not a worker trick as much as a worker fulfillment. As I believe I have shown on multiple occasions now they key here is not that workers are “fooled” through a general fall in prices, as is one of the common narratives as to how inflation affects the economy. If done perfectly this would not involve any fooling in the first place.

“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.”

Weren’t you citing Austrians talking about sticky wages a few posts back? As I stated I’m sure that there’s plenty of real world evidence for sticky wages, indeed Rothbard did work in AGD showing that wages rose slightly in the first part of the Great Depression. You could call Keynes’ claim a misinterpretation, but I think it’s foolish to say that he made it up.

47

What Keynes made up was that inflation can trick the workers.

The wages are too high at the current level of spending.

I think we are going in circles here. Then why aren’t they all hired, and from the money they make they will buy up what they make?

Your answer was their wages are too high. Meaning once the wages are lowered by any means, including an impassioned speech, what is the answer now to why arent they all hired?

You can’t have it both ways.

48

“I think we are going in circles here.”

I agree

49

But I think we disagree about who is in error. Guess we’ll have to leave it at that.

All I can say is that someone who is serious should carefully take this apart and analyze it to see for himself what’s what.

In any case, none of this is my original stuff, I found out recently. Austrians have long ago seen through Keynes’ smokescreen of double talk.

They noted that if the problem is “lack of demand”, what it can only really mean is that the employer will lose a dollar a meal if he hires at the current high wages, and thus getting more people in to buy will solve nothing.

What the solution really is, they also noted, is trickery into lowering wages, and once that is done by any means, equlibrium is acheived and the folks start coming into the shops to buy. No need to increase demand, it is already there at that wage. After all, there is a demand curve, telling us that at some wage, the demand will be enough to hire everyone.

Both things they noted have been borne out in this discussion.

My sources: http://mises.org/daily/5077/ [look for the word “Hutt” on that page, it’s in the key paragraph].

Also: http://brookesnews.com/gerard-jackson/keynes%E2%80%99-dangerous-fallacies-and-errors/

Thanks to G. Sanchez, who linked to those pages in his latest article.

50

Neo, you wrote something I would like you to clarify, please.

You said about money printing “real wages are heightened through this process.”

Earlier you wrote that about money printing that “the increase in demand by firms for goods primarily increases output sold with relatively small increases in prices…Inflation results later after we reach approximately full employment.”

In other words, that printing money does not lower wages enough to change things, and may even raise wages.

So if there is enough demand, the initial wage is certainly going to provide full employment if there is enough demand. In other words, at the going wage, the employer’s costs of production, including wages, are less than the selling price he is asking. He will profit nicely. All he needs is someone to buy the stuff at the current price. Which means the marginal value of labor is just fine, right?

If so, then before any money printing all of the unemployed can be hired at the initial wage, and the demand comes from the newly hired workers.

After all, we are not talking about a malinvestment. He is not making something undesirable, because if he was printing money would not lead people to buy what they don’t like. The problem is poverty, lack of demand because there is no one to buy the stuff. But if he hires the workers, they will buy it. Why shouldn’t they? It’s good stuff, they have the money, they were not overpaid, so the employer is not losing money, what’s wrong with this picture?

When I asked this earlier the reply was:

“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.”

I have three questions:

  1. Could you kindly elaborate, with a numerical example, what it all has to do with the marginal value of labor?

  2. Could you kindly explain, with a numerical example, what you mean by “relative to what they produce with the spending increase”?

  3. You wrote that the money printing is only going to increase demand, but wages are going to stay the same or even go up.

So why do we need money printing to increase demand? Hire the workers and they will supply the demand.

51

“indeed Rothbard did work in AGD showing that wages rose slightly in the first part of the Great Depression. You could call Keynes’ claim a misinterpretation, but I think it’s foolish to say that he made it up.indeed Rothbard did work in AGD showing that wages rose slightly in the first part of the Great Depression. You could call Keynes’ claim a misinterpretation, but I think it’s foolish to say that he made it up.”

Actually Rothbard showed that the reason for this was because of the government, so inflating the money supply would be a bad idea. As for labor unions which were not a big problem in the United States yet (in the Hoover administration) they could have been taken care of in Great Brittan if the government didn’t give support to union violence. It was government policy that kept wage rates up. Keynes wanted to cure something (sticky wages) that was being caused by government

In fact Keynes hailed the American record of keeping high wages, kind of contradictory. I’m no expert in this stuff but how can you hail a record of keeping wages high and then complain of sticky wages

Electronic page 307

http://library.mises.org/books/Murray%20N%20Rothbard/Americas%20Great%20Depression.pdf

Wolman concluded that “it is indeed impossible to recall any past depression of similar intensity and duration in which the wages of prosperity were maintained as long as they have been during the depression of 1930–31.”13 He noted, however, that pressures to cut wage rates were building up almost irresistibly, and that some construction labor had been able to maintain their employment by accepting sub rosa wage cuts. Wage cuts responding to severe losses at the end of 1931 took place secretly for fear of the disapproval of the Hoover administration.14…

…[b]It is no wonder that British economist John Maynard Keynes, in a memorandum to Prime Minister Ramsay MacDonald, reporting on a visit to America in 1931, hailed the American record of maintaining wage rates.16[/b]