Deah ain't 'nuff consumin' goin' on out deah!
Posted on 03/17/2010 12:10:56 AM PDT by rabscuttle385
Paul Krugman recently declared that our real economics problem is this: "What's limiting employment now is lack of demand for the things workers produce." Not surprisingly, this issue has been thrown about in socialist literature for more than a century.
The idea that an economy operates only if workers are paid "enough to buy back the product" is an important assumption behind Marxism. Keynesians have embraced this fallacy, and the pursuit of solutions based on "buy back the product" is the main reason our economy today is in crisis and will remain so for years to come.
It has been more than two centuries since Thomas Malthus (yes, that Thomas Malthus, the overpopulation prognosticator) conjured up the "underconsumption" theories in his many letters to David Ricardo. Indeed, I believe Malthus would have been quite comfortable not only with Krugman, but also the entire Keynesian paradigm, which is little more than Malthusian economics dressed up in the equation of Y = C + I + G (total income equals consumption plus investment plus government spending).
Unfortunately, it seems that in modern political economy Malthus and Keynes have won. Recently, President Barack Obama declared that his government "will spend our way out of the recession," which is another way of saying that the government will find clever ways to put money into the hands of people who have produced nothing or very little for it and then encourage them to spend, spend, spend.
Policies based on the "underconsumption/overproduction" fallacies are an unmitigated disaster, and are responsible in large part for U.S. economy's failure to really recover. Those who champion this irresponsibility are claiming we can have consumption without requisite production; just print money and everything else takes care of itself.
Hazlitt to the Rescue
Henry Hazlitt in his classic, Economics in One Lesson, saw through this nonsense from the beginning. Chapter 21, "Enough to Buy Back the Product," lays out the many reasons why the "underconsumption/overproduction" explanations of recessions not only are wrong but also lead to destructive policy outcomes.
Hazlitt perceptively noted: "In an exchange economy everybody's money income is somebody else's cost." In the case of the "stimulus," the administration paid for it through taxation, borrowing, and printing new money. With all three methods the net result was that someone was made better off but only at the expense of someone else. When the government forced up the minimum wage (to improve "purchasing power" by lower-wage workers), there was no added amount of production to offset the increase in business costs. Instead, we have seen a record level of teenage unemployment, something that a student properly trained in the principles of economics could have foreseen.
As Hazlitt explains, whenever government tries to force up wages (while imposing new regulations that reduce business productivity), real purchasing power falls. That is because the negative effects -- which are unavoidable when such policies are implemented -- will always outweigh the so-called positive effects. In other words, while money wages might increase for some people, overall, government has forced up business costs, so less is produced.
Some people individually benefit from such government actions, and the statist news media tend to concentrate on those recipients in order to give the impression that the policy benefited society overall. However, there is no way to avoid the negative consequences. As Jean-Baptiste Say, the great French economist of the early nineteenth century, pointed out, consumption ultimately is made possible by more production.
The problem in our economy is not that we are "producing too many goods," or that "people cannot buy back what is produced" because they are not paid enough, or that government has not flooded the economy with enough new money. No, the problem is that much of the structure of production has been geared toward generating projects that cannot be sustained.
The only way that the economy truly can recover is for us to permit these malinvestments either to be liquidated or be directed toward other, sustainable lines of production. Instead, the government tries to throw new money at us and claim that we just are not spending enough.
That's a prescription for disaster.
fyi
The supply siders were right. It’s intuitive that if there were no money and only barter, a society that could produce more would be wealthier than a society that was limited to produce less. Money is only the medium.
The minute I see Krugman, I change the channel.
IOW, there's been a tremendous outflow of American dollars to foreign manufacturers producing textiles, electronics, furniture, what-nots, etc.
That's money that is taken out of circulation and manufacturing jobs as well, which, in essence, reduces our domestic 'speed of money'.
The other big glaring hole in the logic of the article fails to mention the money being pi$$ed away at record rates by the growth of goobermint and unfunded liabilities.
Good piece, BTW. Now let’s quit buying so much and take out the frivolously employed, appointed and elected parasitic trash.
Deah ain't 'nuff consumin' goin' on out deah!
Need to scale our buying to what we can produce.
I went to Wal-Mart recently and found U.S.-manufactured furniture.
Scary, eh?
Rab thamks for the Hazlitt! post. One of the great Economic thinkers of the last 200 years. Free on-line read of “Economics in one Lesson”: http://jim.com/econ/contents.html
The fallacy of Marxism/Keynesianism/Krugmanism/Obamaoism is easy to show:
Suppose you had given a bunch of Neanderthal Men a big wheelbarrow with $100,000,000 in it, and told them: “Go buy yourselves some nice clothes and some cars, and something nice for the wife?”
What would they have been able to buy?
People who are too stupid to follow this argument are:
Obama Voters!
the problem with supply side economics...
over-success
.......................
the US now has a fifty year supply of,
vacant commercial real estate
houses without owners
empty factories
In the myopic tunnel vision of Ivy League economists on both sides of this argument, there is no overlap in the sets of people who provide labor for products and services, and those who consume/purchase the products and services.
Read The Forgotten Man by Amity Shlaes
The fallacy is so plainly stated here that even a Democrat journalist should be able to understand it.
Thanks for posting about Jean Baptiste Say, patron saint of supply side theory, and author of Say’s Law: “Supply constitutes Demand.” Perhaps Herr Krugman could better understand that this elegant truth devastates his assertion of proletarian, buy back, consumerism if he knew this parable:
The Crusoe Effect
Robinson Crusoe is stranded alone on an island and he is hungry, starving in fact. All he can think about is food. He longs for a fish dinner. Demand is therefore high. Yet, there will be no fish dinner unless he is productive and sets about catching a fish to cook. Without a supply of fish, Crusoe’s intense demand is irrelevant.
As always, the Marxists neglect productivity in their tyrannical calculus.
I have only recently begun to fully appreciate how much people used to learn by simply growing up on a small farm. Most of us who grew up that way just don’t buy into a lot of the crap the politicians are selling. We may not always be able to eloquently verbalize our objections but we know the difference between a hen’s cackle after producing an egg and a rooster bragging that he is busily making the sun rise.
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