I know this is asking for trouble, but here goes…
http://mickanomics.blogspot.com/2011/11/how-can-demand-be-less-than-supply.html
Get rid of legal tender laws, the “problem” goes away. Money is just a medium of exchange. Gold being hoarded? OK, let’s try silver, or oil, or acorns.
@mickanomics: You’ve overlooked an elementary point - there are not only two uses of money (spending or investment). There are, in fact, three uses of money: spending, investment or cash balances. Money stuffed under the mattress is neither spent nor invested.
Clayton -
You have a valid point, but I don’t see that it harms my general argument.
I posted at length but concisely on your blog.
Have you read Rothbard’s America’s Great Depression, Chapter 3, where he addresses your points?
That’s not the paradox of thrift. That’s Say’s law not always holding in a monetary economy.
“That’s not the paradox of thrift. That’s Say’s law not always holding in a monetary economy.”
My argument is about how a falling money supply (which is a direct consequence of aggregate thrift) leads to a downward spiral of unemployment. How is that not paradox of thrift?
“I posted at length but concisely on your blog.”
Ok, but I’d like to keep this discussion all in one place, so I hope you don’t mind if I cut and paste your points here.
“So they go bust instead of lowering their prices? Who does that?”
Lots of people! It happens all the time. If the profit margins were tight in the first place and the fixed costs were a large fraction of the selling price then the scope for lowering prices may be minimal.
“The Austrian reply is that price of production also go down, plus the purchasing power of money goes up [if there is a decrease in the money supply, as posited], so companies will still make a profit, but for those that misunderstood the market and overproduced in the first place.”
If the entire economy was perfectly coordinated and the demand fell across all produce evenly, then you could be right. But in practice it doesn’t happen. Companies go bust without being able to reduce their input costs all the time.
“But the guy who sold the land and the gold and the shares of stock will spend the money he gets on something or other, or else will invest it. There is no reason to think there will be any more hoarding than before.”
My whole argument is based on an environment where there is an aggregate desire to save, so there will be an increase in hoarding by definition.
“And there is no decrease in the money supply, it has just changed hands. Until now a had gold and land and stocks and no money, B had money, and now they traded. So what?”
I agree that this hoarding does not change the overall money supply - but if the fraction of the money supply that is being used in trading non-job-creating assests increases, there must by definition be less money available for trading job-creationg assets.
“That is not unemployment, in the strict sense of the term. Unemployment happens when a person had a job that was productive and loses it. The public sector jobs consist of what are called parasitic jobs, where people are payed tax money to do little or nothing. The less we have of those, the better for the economy.”
You have a point there.
“But you don’t “inject” money into a “system”. You print it, and give it to a particular person. There is no guarentee it will fall into the hands of debtors. in fact it won’t; it will be given to banks.”
How and where you inject it into the economy is up for debate. It does not have to be given to banks. Governments could spend it into the economy for example.
“You also assume that newly printed money is free, and has no detrimental effect on the economy. This ignores the law of supply and demand, that states that the value [=purchasing power] of money decreases the more there is of it. So printing new money steals from all those who have the old money.”
But I am not talking about printing money to add to a constant money supply to make it increase. I am talking about printing money in a falling money supply environment in order to keep it constant.
“Have you read Rothbard’s America’s Great Depression, Chapter 3, where he addresses your points?”
I hadn’t - but I will take a look.
Nothing in the article you linked refers to total income falling as a result of everybody reducing autonomous consumption at once (ie, the paradox of thrift). It only refers to the fact that demand need not necessarily equal supply (ie, refutation of Say’s law), which is a necessary condition for a falling money supply to have real effects.
If you’re interested, here’s a pretty good paper on the paradox of thrift: http://www.umass.edu/economics/publications/2009-14.pdf
Perhaps a better way to put it is that there is no fall in base money, but hoarding does result in a contraction of broader aggregates.