And there would be a coordinated overproduction at the same exact time?
This is pretty basic and general stuff, ya’ll. Overproduction was the wrong word to use. It’s a technical word that means a very specific thing, and that was my bad. But seriously, it goes like this:
Employer pays an employee less than the yield for the product they make. That’s the way profit works. When they stop making enough profit, or think they will, from whatever they’re producing, they cut wages, investments, whatever to maintain profits or protect themselves against whatever drop will happen. This leads to less investment not only in capital, but in labor, meaning laborers have less money in their pockets for commodities or capital and capitalists have a bunch of capital they’re not moving around.
When your economy’s main mode of production is wage labor this is bound to happen. When there’s not enough people willing to work for less than the yield of the product they’re making, then employment becomes less important or non-existant. There needs to be some centralization of capital in order for capitalism to function.
You’re correct in that it’s the way that profit works. Yet employers can’t just cut wages. Those have a supply and demand as well. If the employer could cut wages, why didn’t he do it in the first place?
Profit doesn’t require employees. It occurs any time a business’ revenues exceed its costs.
And? You don’t think resources - including capital - will be reallocated to other, presumably more profitable, areas?
Something tells me that you’re using your own definition of “capitalism” in a thread where nearly everyone else is using another, different definition. Do you think this is wise?
Wheylous,
“Yet employers can’t just cut wages. Those have a supply and demand as well. If the employer could cut wages, why didn’t he do it in the first place?”
That’s one of the most bizarre things you’ve ever said. Who then cuts wages?
When demand for a product goes down, so does the demand for the labor needed to make it. Or is this all executed by a magical invisible hand?
Autolykos,
“Something tells me that you’re using your own definition of “capitalism” in a thread where nearly everyone else is using another, different definition. Do you think this is wise?”
I think it’s clear enough that I’m using capitalism to mean “an economy in which wage labor is the predominant mode of employment.” If you or anyone else are confused, I’m more than willing to clarify. If the OP does not think that wage labor will be the predominant mode of employment in capitalism, I’d love to hear why. I do not intend to obscure or derail the thread by using an obtuse definition. If anyone needs clarification, please, just ask.
“And? You don’t think resources - including capital - will be reallocated to other, presumably more profitable, areas?”
Yes, it’s quite possible that it will. However there’s little reason to believe that class structure, by which I mean a very basic division between employers and employees and nothing more, will be done away with, meaning its very hard to imagine that laborers or anyone other than other employers will be able to invest in capital. My concern is not with the concentration of wealth in X’s hands, but the concentration of wealth generally amongst groups, enough so to see a general division where there’s a group that tends to own the workable capital and a group that tends to sell their time for a living.
demand for a product goes down
I’m sorry, when did we say there was a demand shock?
And again, you failed to say how there is a massive, coordinated overproduction of goods. If an employer happens to overproduce that doesn’t mean that everyone does so at the same time (unless, of course, there are monetary issues which in that case affect everyone).
face palm
You just don’t listen, huh? Try again and if the economics of the situation still confuse you I can hold your hand through it.
I’m trying to understand the Austrian position. Are you saying that recessions don’t occur? Aggregate demand doesn’t fall? The average rate of profit doesn’t fall?
Please do, then
Are you saying that recessions don’t occur?
Economy-wide busts do not happen in a market without manipulation of th emoney supply to cause interpemporal miscoordination. I assume you’ve read the ABCT?
I assume you’ve read the ABCT?
Only a little. What’s a good source on it?
It is explained simply in
https://wiki.freecapitalists.org/wiki/Argumentation:ABCT
If you have read JJ’s signature, you can find a collection of resources at
I hesitate, however, to give either of these as definitive reads. I will PM JJ and ask him what article does the best job at explaining it.
EDIT: the second link was wrong. Fixed.
So employer A is producing widgets. Widgets cost more than the employer pays his/her laborers. After producing widgets long enough, everyone that can afford one and wants one has one. So, the employer has to find a way to maintain profits. Most likely, the price will go down. We see this happen all the time with cell phones, computers, ipods, whatever.
Are you saying prices never go down? Are you saying wages never go down? I’d like to see an explanation of how employers can’t cut wages and how one avoids declining prices without moving into another sector (which would still decrease prices of the original widget and therefore demand for the labor to create them).
Wheylous,
The ABCT explains a particular kind of financial crisis and why that particular crisis is caused by the fed. It does not rule out recessions, panics, crisises, or lower prices altogether.
This is where your understanding is lacking. The ABCT explains the cycle of boom/bust, period. It is not about “a particular ‘crisis’”. “Recessions, panics, crises” are all synonyms for (yet another commonly used word) “bust”…as in “severe economic downturn” (I would have said “recession” but you already used that as a “particular kind of crisis”…which, by the way, I think it should tell you something when you have to use “crises” as a “particular type of crisis”.)
“Lower prices altogether” is not inherently bad, and can come about in 4 different ways. Professor Salerno explains this here:
An Austrian Taxonomy of Deflation [PDF]
An Austrian Taxonomy of Deflation—With Applications to the U.S. [PDF]
Thanks for the resources. I was waiting for someone with more knowledge on ABCT to come in.
Wheylous, I’m not even going as far as a recession in my example. I’m simply stating that prices eventually go down. You seem to not understand this and think employers cannot do such a thing, which is still confusing me. Are you saying that A) employers do not have the power to lower wages or B) wages do not go down?
What do we mean by wages going down? Nominal wages? Real Wages?
Say a workers is paid $100 and produces 10 widgets that sell for $15 each. Later his productivity increases and he produces 20 widgets that each sell for the same price ($15) while he is still being paid $100. Has his wage gone down or remained the same?
Or let’s say that his productivity remains constant but the price of the widgets increases to $20 each. His wage can now buy less widgets, so has his wage gone down?
I think the stickiness of wages only applies to the nominal value and not the real value.
FOTH, I’m simply saying that wage labor depends on centralization of capital. If the distribution of capital was such that everyone had a roughly equitable amount, no one would work for wages since they could produce something themselves for the full value of that product. As long as there already is a centralization of capital in a wage based economy there will remain one.
This is impossible. In our universe there is scarcity. Entrepreneurs work to ease scarcity, but no one can ever get rid of it. Your analysis comes undone right there.
You produce up to the point where you no longer make a profit by producing. This keeps you from overproducing and allows resources to go towards satisfying other wants. The law of supply and demand balance things in a free market.
Earlier, you mentioned that they cut labor. Are you familiar with the law of diminishing returns? With fewer workers, the marginal product is higher, which leads to higher wages.
And it does not lead to lower capital investments, it leads to the correct amount of capital investments in a given industry, aligning it properly with what people are demanding.