Brad DeLong Should Read More

October 10, 2010

by Mario Rizzo  

In March of this year Brad DeLong wrote a post called “More from the History of Economic Thought: John Stuart Mill Contra Say’s Law, 1844”  

It contained a long quotation from John Stuart Mill from his essay “Of the Influence of Consumption on Production,” in Some Unsettled Questions of Political Economy (1844, but written in 1829/30). The quotation purports to show that even John Stuart Mill did not believe “Say’s Law.” However, DeLong leaves out the three final paragraphs of the article. (I append them at the conclusion of this post. The italics are mine.)  

These paragraphs make clear that to say “there cannot be excessive production of commodities in general” is not to say that depressions are impossible. Mill makes clear that this is a wrong interpretation of Say’s Law: “[I]t in no way contradicts those obvious facts.” Furthermore, Mill says that the deniers of general overproduction have never claimed otherwise.  

The only meaning of a general “excess” of commodities that makes sense is a fall of their value relative to money.  In other words, people might want to hold more money as a proportion of their income. Say’s Law does not exclude this.  

What is does exclude is the possibility that production of wealth might not create the potential to demand it. In other words, we need not worry about deficient demand when commodities are produced in the proportions desired by consumers.  

What becomes clear, especially in Mill’s Principles of Political Economy (1848), is that Say’s Law points us in the direction of entrepreneurial miscalculation and the associated “want of confidence” as the fundamental cause of depressions. The fall in the money value of commodities in general (the only valid sense of “excess production”) is a symptom of something more basic than demand failure. That more basic thing is, however, simply alluded to here as the “want of confidence.”  

Fundamentally, DeLong is suggesting that Mill did not (always) believe Say’s Law when, in fact, Mill is explaining Say’s Law and claiming that his understanding is not novel — but the same as those who expounded the law in the past.  

In Mill’s presentation, the most important implication of Say’s Law is:  Economic growth can never be “too fast” for the consequent increase in wealth to be demanded by consumers. People have unlimited desires and entrepreneurs would not invest and produce unless there was demand for the output.  

If problems develop it is because of a breakdown in the market mechanism and not a fundamental lack of demand. The cause of what appears to be a general glut is panic-induced want of confidence leading to increases in the demand for money. In an analytical sense, the increase in the demand for money is a secondary phenomenon. Thus, Say’s Law warns us not to mistake symptoms for causes.  

We do not, of course, have a business cycle theory per se in Say’s Law. And, in fact, Say’s Law, as Mill is rendering it here, is about capital accumulation and economic growth, not about business cycles.  It makes the point that there is no secular or long-run limit to growth based on a failure of demand.  

But when correctly understood, the implication of Say’s Law for the analysis of business cycles is to distinguish what is fundamental from what is superficial. Demand failure is not the cause of depressions.  

Mill believed in Say’s Law as most economists of his day understood it and would continue to understand it for many decades – and not as John Maynard Keynes (and presumably Brad DeLong) understood it. It is a misinterpretation of Say’s Law and of Mill to claim that Mill did not adhere to Say’s Law. 

Why does this matter, especially if the reader is not a historian of economic thought?  

It matters because people, including academics, use history to make points about the present.  

This is the point of DeLong’s mangled intellectual history:  Say’s Law is the basic assumption held by the critics of Keynes and if one of the smartest classical economists did not believe in Say’s Law, then these critics cannot claim the support of a great classical economist. And thus this history should give us pause before accepting the ideas of modern day “classical” critics of Keynes. 

Nice try, but the story fails. Mill believed in the real Say’s Law. He did not believe in the distorted version reported by Keynes and seemingly endorsed by DeLong. Bad history of economic thought contributes to bad economics.  

A mere three more paragraphs of reading would have avoided many errors.  

Appendix: From John Stuart Mill, Some Unsettled Questions of Political Economy (1844): 

It is, however, of the utmost importance to observe that excess of all commodities, in the only sense in which it is possible, means only a temporary fall in their value relatively to money. To suppose that the markets for all commodities could, in any other sense than this, be overstocked, involves the absurdity that commodities may fall in value relatively to themselves; or that, of two commodities, each can fall relatively to the other, A becoming equivalent to B – x, and B to A –x, at the same time. And it is, perhaps, a sufficient reason for not using phrases of this description, that they suggest the idea of excessive production. A want of market for one article may arise from excessive production of that article; but when commodities in general become unsaleable, it is from a very different cause; there cannot be excessive production of commodities in general.

II.77

The argument against the possibility of general over-production is quite conclusive, so far as it applies to the doctrine that a country may accumulate capital too fast; that produce in general may, by increasing faster than the demand for it, reduce all producers to distress. This proposition, strange to say, was almost a received doctrine as lately as thirty years ago; and the merit of those who have exploded it is much greater than might be inferred from the extreme obviousness of its absurdity when it is stated in its native simplicity. It is true that if all the wants of all the inhabitants of a country were fully satisfied, no further capital could find useful employment; but, in that case, none would be accumulated. So long as there remain any persons not possessed, we do not say of subsistence, but of the most refined luxuries, and who would work to possess them, there is employment for capital; and if the commodities which these persons want are not produced and placed at their disposal, it can only be because capital does not exist, disposable for the purpose of employing, if not any other labourers, those very labourers themselves, in producing the articles for their own consumption. Nothing can be more chimerical than the fear that the accumulation of capital should produce poverty and not wealth, or that it will ever take place too fast for its own end. Nothing is more true than that it is produce which constitutes the market for produce, and that every increase of production, if distributed without miscalculation among all kinds of produce in the proportion which private interest would dictate, creates, or rather constitutes, its own demand.

II.78

This is the truth which the deniers of general over-production have seized and enforced; nor is it pretended that anything has been added to it, or subtracted from it, in the present disquisition. But it is thought that those who receive the doctrine accompanied with the explanations which we have given, will understand, more clearly than before, what is, and what is not, implied in it; and will see that, when properly understood, it in no way contradicts those obvious facts which are universally known and admitted to be not only of possible, but of actual and even frequent occurrence. The doctrine in question only appears a paradox, because it has usually been so expressed as apparently to contradict these well-known facts; which, however, were equally well known to the authors of the doctrine, who, therefore, can only have adopted from inadvertence any form of expression which could to a candid person appear inconsistent with it. The essentials of the doctrine are preserved when it is allowed that there cannot be permanent excess of production, or of accumulation; though it be at the same time admitted, that as there may be a temporary excess of any one article considered separately, so may there of commodities generally, not in consequence of over-production, but of a want of commercial confidence.


43 Responses to “Brad DeLong Should Read More”


  1. […] Brad DeLong Should Read More […]

  2. Greg Ransom Says:

    DeLong does this selective quotation thing constantly, he’s nototious for doing so on his blog.

    More significantly, DeLong’s bogus selective quotation technique routinely sails right through peer review in the journals.

    Note the asymmetry.

    DeLong’s selective quoting on his blog gets exposed routinely on other bogs.

    In the peer reviewed journals — it sails on through.

    Hmmm.

  3. Zach C Says:

    the day after you discussed this in your class Dr. Rizzo, my history of economic thought professor taught us, verbatim, the caricature that you warned against and then told us that this proves classical economists believed that ‘the economy is always operating at full employment.’

  4. Current Says:

    Greg is right. See Delong’s discussion of Mises comments about fascism is his book “Liberalism”.

  5. chidemkurdas Says:

    Re “But when correctly understood, the implication of Say’s Law for the analysis of business cycles is to distinguish what is fundamental from what is superficial.”

    Very good point. In the heat of the General Theory controversies & the Great Depression, Keynes relegated “fundamental” factors to the long-term and focused on explaining the cycle. Whether or not one likes Keynes’ method, DeLong’s twist on it is hard to justify.

  6. Bob Murphy Says:

    Here’s something I still haven’t figured out in the Keynesian framework. Maybe Daniel Kuehn (sp) can set me straight.

    OK so if I’m understanding Mario’s take, he’s saying, “JS Mill knew perfectly well there could be a general glut of products and workers, but only because they all had their prices too high relative to the medium of exchange. There wasn’t ‘insufficient demand.’ All that had to happen was the money-prices of the surplus goods needed to fall, to restore full employment etc. So Mill wasn’t saying full employment was necessarily always going to exist, he was just saying you could always get it with flexible prices.”

    Now the Keynesians have at least one response, which is, “Prices/wages are sticky.” There was literally a professor at NYU who said that in one class, that we should stop arguing about sticky prices because, “Prices are sticky, period.” (I am repeating what another student told me.)

    But do the Keynesians also go further? Isn’t there a portion in the General Theory where Keynes argues that even if you had perfectly flexible wages, that a systematic drop in money-wages would be self-defeating?

    I have never quite understood what the argument is there. It’s something like, “…because this leads to a fall in the price-level, raising real wages back above the market-clearing level,” but I never quite got the full story.

  7. Current Says:

    Bob,

    In the General Theory Keynes says that there is a “more fundamental reason” than sticky prices why market clearing wages don’t occur. I’ve never been able to understand what it is either.

    I think the professor at NYU you mention was quite right to say “prices are sticky, period”. I don’t think anyone really disagrees that prices are sticky, even Joe Salerno thinks they are. It’s all a matter of degree, the question is “how sticky?”

  8. Bob Layson Says:

    As for the most radical claim of Keynes that cutting wage rates cannot cut real wages see W H Hutt’s twelth chapter in The Keynesian Episode: ‘Are Price Adjustments Self-Frustrating?’ where he conclusively refutes it.

    The property investment crisis broke when it became obvious that without continuing price rises a great deal of investment was so much malinvestment. Building was slowed or halted and factors released to find employment in something sustainable. Loss of income to spend by the redundent and the fears of those still in work led to a fall in demands elswhere in the economy. The banking crisis compounded the fears and the rush to get liquid and start saving again. Sober statesmen with panic in their eyes then exacerbated matters by saying that the fundamentals were sound and the situation called for the most extreme and unprecedented measures.

  9. Nikolaj Says:

    Current,

    of what analytical value is to say that all prices are “sticky”? What is “sticky”? That means that they are not “perfectly flexible”. But, what the “perfectly flexible” prices would be like? As Jerry O’Driscoll said once at this blog, that would mean to assume an instantaneous production, or to eliminate the time dimension entirely from the theory of production. And that’s impossible. The price changes are always instantaneous, only the adjustments in the real structure of production take time. “Stickiness” of prices is not a defect of price system to reflect the real preferences, but a “defect” of reality in which it is not sufficient to have the knowledge about the people’s preferences, but you must use the physical factors of production and time-consuming production processes to bring about the needed change.

    In this sense, all prices are always “sticky”, “messy” and so on, but to use that as an “argument” against the efficiency of price coordination is a typical instance of Nirvana fallacy. One should be able to show some non-sticky prices in order to make the argument sensible. But, we don’t see non-sticky prices anywhere in the real world, just as we don’t see an instantaneous production anywhere in the real world.

    So, the question in my view is not “how sticky?”, but rather “why use at all the term sticky?”.

  10. Richard Ebeling Says:

    Henry Hazlitt made the same criticism of Keynes that Mario has correctly made against DeLong.

    In “The Failure of the New Economics” (1959), Hazlitt points out that if Keynes had included in “The General Theory” a couple of more passages from J.S. Mill, in a quote that Keynes’ uses from Mill to try to debunk Say’s Law, Keynes would have shown that his own caricature of Say’s argument was all wrong.

    Always the sleight-of-hand, the distortions, and misrepresentations of the free market perspective.

    Is it surprising that often one finds a tone of impatience, anger, and contempt against these pseudo-scholars in the writings of people like Ludwig von Mises and Thomas Sowell?

    Sometimes it is very difficult to “suffer fools gladly.”

    Richard Ebeling

  11. Mario Rizzo Says:

    I think many economists treat the history of their own discipline like a decoration or garnish. Find a nice quotation somewhere and append it to your article — looks classy, even sophisticated and knowledgeable. Their lack of respect for the great thinkers like Mill and Say is obvious. They should hope that some “kid” some fifty or more years hence doesn’t treat *their* work with as little respect.

    But the dangerous thing is to use history as propaganda for present purposes. Many bad people in world history have done this. We economists should not follow them.

  12. Richard Ebeling Says:

    If one wanted to be “conspiratorial,” one might believe that the banishing of the history of economic thought from most economics department curricula is a way of reducing the likelihood of young, budding economists knowing about earlier contributions, and making up their own minds about much they are taught in the undergraduate and graduate textbooks or the contemporary journal articles they are assigned.

    A sort of Orwellian Ministry of Information, in which you rewrite the past to make it conform to the current “party line.” Only in this case, you ignore the past in economics, and treat it as if nothing exists earlier than, say, ten or twenty years ago as relevant material for any student to learn or know about.

    Of course, what is really going on is another example of the scientistic fallacy, all past theories that are not already embedded in contemporary micro- or macro-economic theory and policy is not worth knowing.

    As Mario pointed out, much of the early 19th century discussions surrounding Say’s Law was about growth, because some economists, such as Malthus, feared that an economy’s supply of goods and services could out-grow the capacity of the population’s ability to consume.

    The issue did not revolve around issues such as the business cycle. But Mill’s discussion concerning the demand for money relative to the offered supply of goods on the market at prevailing prices and wages, easily fits into an analysis that extends Say’s Law to situations surrounding the business cycle.

    Obviously, to get a handle and orientation on these things, secondary literature can be extremely use as a “road map.” But, at the end of the day, there is no substitute for devoting some time to reading those earlier authors in the original.

    Besides, the vast majority of them wrote in ordinary language, making them easier to read, and they usually were more grounded in taking as their (often implicit) assumptions the everyday reality of real market situations and activities.

    And they possessed, frequently, a good working knowledge of historical and institutional detail about the world and markets they were attempting to analyze and understand.

    To be frank, I’d rather go back in time and spend a few hours talking to Nassau Senior or Philip Wicksteed, for example, than any of the three individuals who were awarded the Nobel Prize in Economics just today.

    Richard Ebeling

  13. Mario Rizzo Says:

    Richard,

    I agree. A history of economic thought class, to the extent original sources are read, encourages students to think about diverse approaches and alternatives to the current orthodoxy. My experience is that most economists do *not* want to encourage this kind of questioning, speculation, etc. They view their task like that of a mathematician — give the “kids” the theory and the homework problems. No time to read about alternative approaches.

    I have no idea if this is a good thing to do in mathematics. But I know it is not good in economics. The profession is creating another generation of idiot-savants.

  14. Wonks Anonymous Says:

    Bob Murphy, you might want to read Keynesian Splenetics, which says modern “Keynesians” have completely altered the economics of Keynes. Sticky wages was actually a recommendation! But for a critique of Garrison & Meltzer, there’s Greg Hill (which I haven’t read).

  15. Current Says:

    Nikolaj,

    There are too parts to this, firstly the name we use to label the problem and secondly the meat of the issue.

    I fairly much agree with your view on the “meat of the issue”. Though I would say that production issues are not needed to cause stickiness. The simple fact that entrepreneurial activities like coming up with new prices require time and resources leads to price stickiness. Price stickiness occurs in an auction.

    On the issue of the name… As you point out, what I mean by “sticky prices” economists pre 1930 would just call “prices”. But, the reason I bring it up in a reply to Bob Murphy is because of the opinions on it I sometimes see on the LvMI website. Sometimes people blame price stickiness on government interventions and union action. Certainly those things make prices more sticky than they would be otherwise. However, as we’ve discussed prices are sticky by their nature. No economic reform can change that.

    Let’s suppose that there is a real shock or nominal shock. And let’s suppose that this leads to a rise in the demand to hold money, but the quantity of money cannot change. In that case in the short-run prices and output will fall. If there are strong unions and government interventions then certainly output would fall more, and if those things weren’t there then output would fall less. But it would fall.

  16. Greg Hill Says:

    Mario writes,

    “The only meaning of a general ‘excess’ of commodities that makes sense is a fall of their value relative to money. In other words, people might want to hold more money as a proportion of their income [wealth?].”

    And he goes on to say,

    “If problems develop it is because of a breakdown in the market mechanism and not a fundamental lack of demand. The cause of what appears to be a general glut is panic-induced want of confidence leading to increases in the demand for money. In an analytical sense, the increase in the demand for money is a secondary phenomenon. Thus, Say’s Law warns us not to mistake symptoms for causes.”

    The mechanism described above isn’t too far off the mark, but its significance has been too easily glossed over. It’s more informative to begin, not with a general excess of *existing* commodities (which could be sold off at lower prices), but with a general excess of productive capacity, i.e., idle capital and unemployed labor.

    This excess may, indeed, come about because households and firms have lost confidence in their judgments about the future and wish to hold a safe store of value rather than buying expensive durable goods or investing in plant and equipment. But why call this a “secondary phenomenon”? What could be more fundamental than a change in the public’s view of the future?

    Mario claims that “the only meaning of a general ‘excess’ of commodities that makes sense is a fall of their value relative to money.”

    So, why not let prices (including wages) fall until the excess demand for money disappears? Two reasons [at least]: 1) falling prices will lead to a debt deflation, bankruptcies, and, very likely, a further loss of confidence; and 2) there are less destructive ways of restoring prosperity.

    As Frank Hahn put it, all that’s “required to do away with a Says Law-like proposition that the supply of labor is the demand for goods produced by labor” is the existence of “resting places for savings other than reproducible assets.”

  17. Niko Says:

    I find the notion of “sticky prices” a great embodiment of stupidity. It is interesting that there are talks about it only when prices fall, but not when they rise, then we have strong fundamentals and economic growth, or (in rare occasions it is mentioned) inflation.

    The hole concept goes against the theory of prices and you don’t have to be very smart in order to understand that “stable” prices are the result of economic engineering, not a natural outcome from market activities and so is “price sticknes”, or however it is called.

    The existence of this concept is a testimony that economists still don’t know how inflation works, in spite of all the claims routinely made on the contrary, and of the state of extreme primitiveness this ugly “science” is in.

    This notion makes sense only in the minds of schizophrenics and economists.

  18. Current Says:

    Greg Hill writes:
    “It’s more informative to begin, not with a general excess of *existing* commodities (which could be sold off at lower prices), but with a general excess of productive capacity, i.e., idle capital and unemployed labor.

    This excess may, indeed, come about because households and firms have lost confidence in their judgments about the future and wish to hold a safe store of value rather than buying expensive durable goods or investing in plant and equipment. But why call this a “secondary phenomenon”? What could be more fundamental than a change in the public’s view of the future?”

    OK, let’s suppose that a loss of confidence could be a primary phenomenon. That doesn’t really change things.

    What you have suggested above isn’t a general surplus of all goods. It is a specific surplus of goods related to risky investment activities, it’s a relative issue. Even if what you write is true then Say’s law in the proper sense is not broken.

  19. Current Says:

    Niko,

    I think I’ll strip out your accusations of stupidity and look at your arguments, as will others on this forum.

    You write:
    “you don’t have to be very smart in order to understand that ‘stable’ prices are the result of economic engineering, not a natural outcome from market activities and so is ‘price sticknes’, or however it is called.”

    Ask yourself this: How can price possibly adjust perfectly and instantaneously? In any business information gathering and discussion is needed before a price can be changed. Even if there are no minimum wage laws and no union activities prices cannot adjust immediately.

  20. Niko Says:

    @Current:
    You passed over the previous paragraph about when prices rise. Prices don’t adjust perfectly and instantaneously, but this doesn’t mean they don’t adjust at all, unless prevented by factors outside the market. The factors that cannot adjust at all, are cut out of the market until something happens and they can be employed again.

    Should I understand that in normal times the prices are perfectly adjusted and they don’t change at all? What is the roll of the markets then?

  21. Niko Says:

    I think we should lay a definition of “sticky prices.” The way I understand the concept is that prices don’t change at all, or very slow and very little. Maybe people have a different definition.

  22. Current Says:

    Greg Hill,

    After having read through your post again, I think I see what you’re getting at. You’re making an “animal spirits” type point. We suppose first that the relative supplies of goods is suitable for future production. Then we suppose that entrepreneurs believe that those relative supplies are unbalanced, and act on that view. So, the relative lack of low risk assets and over-abundance of high risk assets exists subjectively but not objectively. I see your point, but I don’t think this is what opponents of Say’s law have been saying.

  23. Mario Rizzo Says:

    Just to make my purposes in this post clear: I am interested in what Say’s Law is and whether Brad DeLong misinterpreted or misrepresented it by his quotation. Then there is the other issue regarding the correctness of Say’s Law. They are separable matters.

    My point is that Brad Delong doesn’t know what Say’s Law is or what Mill was talking about.

  24. Current Says:

    Niko,

    I agree with you that prices adjust unless the state intervenes. “Sticky prices” doesn’t mean that prices are sticky to some particular degree. The point is that there is always a degree to which they are sticky, one that varies from market to market and even amongst a specific firm’s output. In normal times prices are sticky too. And, they’re sticky in both directions, but the degree of stickiness may not be the same in each direction.

  25. Lee Kelly Says:

    I don’t like the sticky metaphor. It seems more appropriate to say that some prices are more sensitive than others. That is, some prices need a lot more pressure on them to react than others, because they are less sensitive.

    Another way of describing the situation might be that some prices have a greater tolerance for being out-of-sync with reality. When the discrepancy grows enough, eventually the price will adapt, but it is particularly resilient to feedback.

  26. Niko Says:

    @Current:
    I don’t agree that prices are more sticky in a direction than another. Prices could rise fast, fall faster for all kinds of commodities and products and since we have so many of them, we can find examples for the possible combinations.

    I don’t agree with the idea of “sticky”. The economists should call this “time” and the Austrians should be more aware of this notion than others. If we don’t want prices to be so “sticky:, meaning to take so much time to adjust, then we should remove the breaks from the market and talk about it in ways that actually explains what happens, not argue in metaphors that have no connection to reality and make fools of our self.

    No wonder economics is a joke as a science and most of the economists are apologists for the state and socialism, they just can’t think, period.

  27. Niko Says:

    Since we are talking about Say’s Law, I would like to point out that Hutt’s “Politically Impossible?” was just publish as a pdf file by the Mises Institute.

    Hutt has a book, “A Rehabilitation of Say’s Law”, which helped me a lot in understanding the classics. In my opinion he was one of the greatest British economist of the XX-th century. But it is my opinion.


  28. Hutt was very good. He had his own quirky terminology, which hindered acceptance of his ideas. His “Yield on Money Held” is very important.

  29. Current Says:

    > I don’t agree that prices are more sticky in a
    > direction than another. Prices could rise fast,
    > fall faster for all kinds of commodities and
    > products and since we have so many of them, we
    > can find examples for the possible combinations.

    I think your second sentence here contradicts your first. As you say the prices of specific goods and services could be sensitive in different directions. Some more sticky upwards than downwards, others vice versa. We can’t really say in what the situation is for the entire volume of goods put on the market, and we certainly can’t say a priori.

    > I don’t agree with the idea of “sticky”. The
    > economists should call this “time” and the
    > Austrians should be more aware of this notion
    > than others.

    It’s related to time. There are associated concepts that use time more explicitly such as the split between the short-run and the long-run in Wicksellian thinking, which is something I think is very useful.

    I don’t particularly like the term “sticky” either, it’s vague. There are so many different reasons that prices cannot move quickly that it’s troublesome to sum them all together in one term.

    > If we don’t want prices to be so “sticky:,
    > meaning to take so much time to adjust, then we
    > should remove the breaks from the market and
    > talk about it in ways that actually explains
    > what happens, not argue in metaphors that have
    > no connection to reality and make fools of our
    > self.

    Certainly removing legal obstacles works. However, as I said above it’s a very important point that stickiness can never be removed. A theory of economics that doesn’t account for it’s existence cannot be complete for any conceivable economy. Whenever you observe a market price you cannot assume that it depends entirely on underlying real forces.

    For example, take our current discussion of Say’s law. Mario writes above:
    “The only meaning of a general ‘excess’ of commodities that makes sense is a fall of their value relative to money. In other words, people might want to hold more money as a proportion of their income. Say’s Law does not exclude this.”

    Now, if the demand for money rises and there is no money creation then prices must fall. But, prices cannot fall immediately due to stickiness and that means output can fall. As Greg Hill points out if the prices of non-producible commodities rises then the prices of producible commodities must fall, and sticky prices would cause an output fall there too. Mario’s argument here is that neither of these issues mean that Say’s law as he interprets it is wrong, since both are essentially relative problems.

  30. Lee Kelly Says:

    I recently read Horwitz’s paper A Subjectivist Approach to the Demand for Money where Hutt is quoted often. It definitely helped clear up my thoughts, though Horwitz only outlines an approach to the issue.

  31. Niko Says:

    @Current:
    – My first sentence does not contradict the other. You were trying to make a general argument that prices take more time to fall than to rise. I was saying that this is not the case and even if a service or a product could take more time to adjust downwards, this doesn’t mean it will always be so.
    – “But, prices cannot fall immediately due to stickiness” We could also say prices don’t rise immediately due to stickiness and this is a great harm for society because the price mechanism fails to signals very fast the alternative uses for that commodity which caused the price rise. This is because of time, entrepreneurial activity and so on, other resources available to the seller for his survival and so on.

    I think we are not on the same line. Any way, you win, I give up.

  32. Current Says:

    > You were trying to make a general argument
    > that prices take more time to fall than to
    > rise.

    As I’ve said several times in this discussion it’s all dependent on the situation. In some case prices are more sticky in the upward direction, in some cases more in the downward.

    My point about a shortage of money is that it makes general downward stickiness the relevant problem.

    > We could also say prices don’t rise
    > immediately due to stickiness and this is
    > a great harm for society because the price
    > mechanism fails to signals very fast the
    > alternative uses for that commodity which
    > caused the price rise. This is because of
    > time, entrepreneurial activity and so on,
    > other resources available to the seller
    > for his survival and so on.

    Yes, that’s what the part of ABCT theory that describes the artificial boom is all about.

  33. Niko Says:

    @Current:
    What shortage of money? Today with zero interest rates, massive expansion of all Ms we have a shortage of money?

    And this concept of shortage of money is very flawed too!! There can never be a shortage of money.

  34. Current Says:

    > What shortage of money? Today with zero
    > interest rates, massive expansion of all Ms
    > we have a shortage of money

    I’m not saying that there is necessarily a shortage of money *today*. I’m defending the concept in general.

    > There can never be a shortage of money.

    Yes there can be, if money supply doesn’t match demand then there is a shortage of money, just like in other market situations.

  35. Niko Says:

    @Current:
    There is always a “shortage of money” at an individual level, that’s way people go to work everyday.

    There is always a shortage of money at a national level since there are so many things there could be done, but simply there is not enough money for it.

    We can go on and on and on and on … and on again and then once more …

    Why not just print them? Oh, but that would be inflation!

    The idea of unsatisfied demand of money lacks any anchor in logical thinking.

  36. Current Says:

    Niko,

    In economics a “demand” is something that a person can back-up with a supply. It’s not a desire. In your reply you confuse the demand for money with the desire for it. A person doesn’t work to accumulate money, he works to accumulate wealth – purchasing power – which is initially paid to him in the form of money. The question we’re discussing about money holding is “how much of his wealth does a person want to hold as money?” It’s just like any other demand, if I demand X then that means I go to the market with other possessions wishing to exchange them for X.

    If you read p.403 and 404 of Human Action you’ll see Mises deals with your objection there.

  37. Niko Says:

    @Current:
    I admit I don’t understand what you are saying.

    For me someone works in order to satisfy desires (wants). Those desires can be satisfied by the “wealth” a man is able to amount. This wealth is mostly represented in money, since only money can buy (almost) anything. Since there are unlimited want and desires in a complex world with billions of people, the demand for money is infinite. It is only the scarcity of goods and services in the worlds that puts a break to the greedy people, not the limited quantity of money (or money substitutes).

    If you say something else, please clarify.

  38. Current Says:

    > This wealth is mostly represented in money, since only money
    > can buy (almost) anything.

    Wealth may be represented by money, but it isn’t just money. Money just one *form* of wealth.

    Let’s suppose I lived in a primitive barter economy. I own a pig, a mud hut and an acre of land. These things form my total material wealth, my assets.

    Now, let’s suppose I live in a modern money economy. I own a car, a house and $5000 in an on-demand bank account. Those things are my assets, they have a total money value which is much larger than the $5000 in my bank account. My money is only one form of wealth that I own, and makes up only a part of my portfolio of assets. Just as in the primitive example my pig was part of the total assets but not all of it.

    > Since there are unlimited want and desires in a complex world
    > with billions of people, the demand for money is infinite.

    You’re confusing “demand” with desire. Demand is what you take to market to exchange for what you want. Suppose I live in the primitive barter economy mentioned above. I offer my pig in exchange for two goats. In this case I am “demanding” using the pig, it is the supply, and what I’m demanding is the goats. I may not get the goats at the price I want, that’s another issue. If the trade does go ahead then I supply a pig and demand two goats, the other parts supplies two goes and demands a pig. I could also offer two weeks farm work in exchange for the goats, in that case I’m offering labour. I could sell the pig in exchange for the goats because I want to buy something else with the goats, that would be indirect exchange and my demand for the goats would be a transactional demand.

    The demand for money is the same. In a modern economy we always work through indirect exchange via money. I could put my car on the market and ask for money for it, in that case the car is a supply and it’s what I’m demanding with. If I just say “I want a car” then that’s not demanding, it’s just desiring, it only becomes “demanding” in the economic sense if I offer to give something up in exchange. The demand for money is not infinite, people are not willing to sell everything they have in exchange for it. I’m demanding money and that’s what the other side would supply. I may do this because I want to hold more money in my portfolio of assets, this is the “demand for money to hold”. Or, it may be that I want the money only so that I can immediately spend it on something else, in that case I have a transactional demand for money. Alternatively, suppose I decide my holding of $5000 is too much, so I buy shares with $1000 of it. In that case I supply money, and it’s the other party that demands it.

  39. Lee Kelly Says:

    Current,

    Brilliant explanation!

    But just to be annoying, I am going to argue that money demand doesn’t exist.

    Consider that money is a medium of exchange. Money is not any particular good: it is not gold, silver, copper, paper, chequing accounts, cacao beans, cigarettes, or anything else, though each of these goods has served as money at some time.

    Now, imagine an economy where gold is the only medium of exchange — the only money. Then suppose that one day people wake up and forget this fact. They discover all these gold discs in their wallets but see nothing but a hard, shiny metal with non-monetary uses. It occurs to nobody to offer or accept gold in lieu of final goods and services.

    What has happened to the money supply? Although the amount of gold is exactly the same as the day before, the money supply has fallen to zero, because people no longer use any good as a medium of exchange.

    What is my point? Well, what you describe as an increase in money demand is in fact a decrease in the money supply. Different goods have different degrees of moneyness about them, i.e. they are used more or less as a medium of exchange.

    When the “demand for money” increases, some good is decreasing in its degree of moneyness — it is less used as a medium of exchange. Therefore, what is actually occurring is a decrease in the money supply, and there is no such thing as money demand.

  40. gcallah Says:

    “Therefore, what is actually occurring is a decrease in the money supply, and there is no such thing as money demand.”

    Lee, in economics, I don’t think it makes sense to talk about te supply of something for which there is not demand.

  41. Lee Kelly Says:

    gcallah,

    I know, and that’s why the argument is interesting, at least to me. Maybe money is not a “thing” like other economic goods; perhaps it is nonsensical to talk of the supply and demand for money.

    You see, when I try and describe what an excess demand for money is like, I basically end up saying is that people stop using money like money (or less than before). In other words, the good’s moneyness, its use as a medium of exchange, declines. The physical good may exist in just as much abundance as before, but it isn’t serving as money to the same extent. Although I have described this situation as an excess demand for money, it could with equal validity be called a deficient supply of money, right?

  42. Current Says:

    Lee,

    I agree with Gene Callahan. I’m starting to feel like that Parrot that Thomas Carlyle talked about.

    I know what you mean. When we use the term “demand for money” we mean “demand for money to hold”. And, if money is being held rather than used in indirect exchange then it’s becoming more like and asset and less like money. However, I’d still argue that the normal Austrian usage is correct. Normal demands are demands to hold something primarily. Conceptually the economist considers what the holder does after that along with the next market transaction. So, if we call money the medium-of-exchange then demanding it means the same thing it normally does.

    This could be seen as odd since normally people demand things because of the service they perform and demand them more if they want more of that service. If you look at the service of a money as being it’s “medium-of-exchangeness” then it appears backwards. But, to the individual the service of money isn’t that. To the individual money provides a fund of purchasing power that can be spent at any time. As the fund increases it provides more of that service, so the economists definition of money demand correlates with the individuals perceptions.

    The example you give of a fall in demand for money to zero is one of a general set of problems…

    If there is a fall in demand in a particular market, that is usually called a fall in demand. It may be argued that entrepreneurs should have correctly anticipated that situation and altered supply to at least partially compensate. And, it may be argued that there can’t be a fall in demand in all markets at once, which is the Say’s law argument.

    You’re point is that all demands for money are derived demands for a particular amount of purchasing power for use in indirect exchange. If all people stopped demanding money all of a sudden then they would also stop supplying it at the same time. The same is true of all goods.

    In Ray Bradbury’s short story “The Last Night of the World” he supposes that the world will end the next day. As the story progresses it becomes clear that everyone in the world is happy with this, they are looking forward to the afterlife and no longer value the material world. Now, no matter what your views on God what Bradbury suggests isn’t a failure of Say’s law. When all goods in a market become worth nothing they cease to be economic goods, as such we can’t say that a failure of demand or of supply has occurred. The item that was traded has simply become non-scarce or non-tradable.


  43. […] Brad DeLong Should Read More [Mario Rizzo on ThinkMarkets] […]


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