News

Loading...

Wednesday, September 22, 2010

What Malthus and Sismondi Were Thinking re a General Glut

So, now that I think I understand what these folks were thinking about, thanks to Thomas Sowell's On Classical Economics, let me describe the sort of scenario I believe that they had in mind.

Imagine Bob Murphy, Silas Barta and I are living on a desert island. First Bob and I set Silas adrift at sea on a small raft while he's sleeping. (Just kidding, Silas! We love you, man.) Then we set about catching fish from the island's lagoon with our rough-hewn spears. In three hours a day, we each catch about five or six fish, enough to feed us well. Then we spend the rest of the day discussing teleology.

One day, Silas says, "Guys, we don't work that much. We could really increase our productivity if we worked six hours a day." Bob and I reluctantly go along. That day, we each catch a dozen fish, but are too tired to discuss teleology.

We each eat six of the fish and feel decently full. We eat three more each, and now we're stuffed. We take our last three and bury them in the sand, thinking perhaps they'll make the soil more fertile. Then we talk about the increased work load, and all decide, "Man, that just wasn't worth it! It was better when we had more leisure time to discuss teleology."

We just had a general glut. Now, according to Sowell, Malthus and Sismondi understood that we could get rid of all of our production at some price, for instance, the "price" we receive in more fertile soil for burying some of the fish, i.e., we sold our all of our product, but at a loss. The problem is that price isn't sufficient to prompt us to continue that level of production. They also both realized that with better technology, a new production possibilities frontier would emerge, and what once represented a glut would no longer do so. (For instance, if Bob, Silas and I had pans for extracting sea salt from the ocean through evaporation, we might have salted four or five of the fish we caught, and eaten our preserved catch later when we spent a day making fishing nets instead of fishing.)

Does this really happen in an advanced economy? Good question. But, at the least, it's now clear to me that Malthus and Sismondi were not talking theoretical nonsense, as Mill and later Rothbard contended. A general glut, as they defined it, is certainly a theoretical possibility.

39 comments:

  1. What you say here makes sense, and if you want to call that "a general glut," I can't stop you. But I'm not sure that's what they had in mind.

    At the very least, I am pretty sure that James Mill said a general glut was impossible, but then John Stuart Mill said it was possible, if you exclude money as one of the goods. I.e. you can have an excess quantity supplied of every (non-monetary) good and service, because their prices are too high quoted in terms of money.

    So the way to restore equilibrium is for the money-price of everything to come down, which might not happen for some reason.

    But this doesn't seem to be what you are talking about. You seem to be saying people regret having exchanged so much of their leisure for physical product.

    Strictly speaking, from one point of view that's not a general glut; the problem is that we overproduced fish and underproduced leisure.

    But I suppose you could say leisure doesn't count, just like JSM said money doesn't count as one of the "goods" when we ask, "Could there be an oversupply of *EVERY* good?"

    (Note that in your example, leisure is undersupplied, while in the more common one, money is undersupplied.)

    Anyway I don't really like fish.

    ReplyDelete
  2. "At the very least, I am pretty sure that James Mill said a general glut was impossible, but then John Stuart Mill said it was possible, if you exclude money as one of the goods."

    Yes -- Sowell points out that, while JS Mill mocked Malthus and Sismondi, he reached generally same conclusion that they did! (As Sowell notes, "Because he never bothered to go back and read them.")

    ReplyDelete
  3. By the way, I have it on good authority that when Bob lays on the living couch for several days and Rachael tells him, "Why dont get off your butt and do something?" he tells her, "But honey, I've been very busily producing leisure right here!"

    ReplyDelete
  4. My wife speaks with proper punctuation.

    ReplyDelete
  5. Good points, except that you should have specified that your love for me is strictly platonic...

    When you bring up the issue of a general glut, is this the same general glut worried about in modern economic discourse, and where many economists insist we must somehow engineer things so that producers can unload their stuff at the previous prices, despite it being worthless?

    I ask because most discussion of Say's Law (and the liquidity trap) seems to be locked on the idea that it's such a horrible thing for producers to have to eat (er, endure) a price cut for something they made that no one wants, even though this is exactly what needs to happen -- and by preventing this, we're just setting ourselves up for more unsustainable production.

    That is, modern critics of Say's Law don't bring up the general glut to say, "well, yup, looks like prices are going to have to drop!"; they do it to say, "We've got to make people buy junk!"

    ReplyDelete
  6. "Good points, except that you should have specified that your love for me is strictly platonic..."

    Or so you hope.

    "When you bring up the issue of a general glut, is this the same general glut worried about in modern economic discourse..."

    Well, it's certainly similar. As far as what could /should be done about it, I'm thinking that through.

    ReplyDelete
  7. I don't get it. Food was overproduced relative to leisure time, i.e. scarce resources were exhausted producing a good worth less than the next best alternative. This does not seem to me anything like a "general glut", and if Malthus and Sismondi used the term in this manner, then they did so very misleadingly.

    Overproducing a good reduces income below what it otherwise could have been. But in the intermibale long-run income and consumption are equal, so there cannot be overproduction relative to consumption, by definition.

    ReplyDelete
  8. Well, Lee, people in the 19th century were not yet so daft as to call doing nothing "producing leisure." The question on their minds was, "Is it possible to have a general glut of economic goods?"

    Now, you can certainly make Say's Law into a tautology, but then, "So what?" is the right response, not "See, the market always works!"

    The fact that Malthus and Sismondi in the end convinced Say himself might indicate that you "don't get it" because you haven't thought it through, mightn't it?

    ReplyDelete
  9. And you might see Bob's post on this as well, Lee.

    ReplyDelete
  10. I don't think it is daft to say that people "produce leisure time." For example, time is scarce resource that people spend, and it seems quite sensible to say that it can be spent to produce an opportunity to consume leisure.

    In an important economic sense, one cannot "do nothing" (as Mises adamantly asserted), because one is always acting to pursue some end, i.e. to produce some future state as opposed to another -- whether one is laying bricks or watching TV is irrelevent.

    If one good is overproduced relative to another, then income is less than it would otherwise be. Since income and consumption are equal in the long run, it follows that overproduction is impossible relative to consumption. The value of what is consumed is merely less than it would have been without the overproduction of less valued goods.

    This may appear like a "general glut", especially when the overproduced good is something tangible (like fish) and the underproduced good is not (like leisure time), but to call it such seems highly misleading.

    This point may be tautological in form ("analytic" is a better description), but that is merely a consequence of the way it is expressed. Whether these concepts and relative correctly describe anything in the real world is a seperate matter. In a informal sense, that something has a tautological form doesn't mean it has to be true.

    ReplyDelete
  11. Well, fine, Lee. Rather than actually engaging the discussion that Malthus, Sismondi, Say, Mill, Ricardo, Mill, etc. were having, you are altering the meaning the terms had for them and then saying, "Presto chang-o, problem gone!"

    One can always define a problem away; just don't expect others to be impressed.

    ReplyDelete
  12. I am sorry, but after I read in one of Sowell's books that England conquered Scotland (and here he is referring to the period AFTER Robert the Bruce) I just cannot take any of his historical accounts seriously. Sowell qua economist fine, but Sowell qua historian...let's just say that the principle of caveat emptor should be applied a wee bit more vigorously than usual. I mean, come on, King James was James the Sixth of Scotland long before he also became James the First of England. I learned that in junior high school, in ENGLAND. I haven't read the book, but based on what I have skimmed in it and on some reviews of it that I have read,I wonder if the title of his book "Black Rednecks, White Liberals" should be changed to, "Scotsmen Bad, Nazis Good."

    ReplyDelete
  13. I am sorry, but the fact that Sowell was wrong about some event he was casually commenting upon in military history says nothing about his worth as an historian of economic thought. There is absolutely no need to take Sowell's word for this, even in the book -- he documents his contention with very extensive quotation.

    I am sorry, dumb objection.

    ReplyDelete
  14. Don't people usually attribute this "general glut" to causing depressions? I don't see how having too much fish to eat would be considered a depression. After consuming your fill, you then used the leftover fish for its next most highly valued use (guess you guys took a vote), and then later came to the unanimous decision that the extra time spent fishing for fertilizer was worth less to you all than leisure time. Just a case of poor entrepreneurship, which was then corrected by the "market" almost immediately. Also, I think that leisure could be considered investing in your own human capital. And really, you are saying that the only actions by which you profit in a 24 hour period is some combination of catching/eating fish and leisure. It sounds like fishing for 3 hours, eating 5-6 fish, and leisure for 21 hours is the most profitable combination. At least it has higher utility than fishing for 6 hours, eating 9 fish, investing 3 fish as fertilizer, and having 18 leisure hours.

    ReplyDelete
  15. So Malthus was right, if by "general glut" you mean entrepreneurial error (also known as malinvestments). Instances of entrepreneurial error happen all the time, and in varying degree. A cluster of entrepeneurial errors will cause a depression. These errors occur due to misinterpretations of price signals. In your example, Salis, uncertain about the future, guesses that the cost of catching more fish (3hours leisure time), will be less than the utility gained by the extra fish. He was wrong.
    You can't give an example and say; " the only options are fishing and leisure. We have an overproduction of fish, but leisure doesn't need to be produced, so there can't be underproduction of leisure, therefore we have a "general overproduction" off all goods." And then you go on to say how you ended up in the red, because more leisure would have been more profitable... Confusing. Or it could just be me.

    ReplyDelete
    Replies
    1. OK, Steve, you have shifted the focus from general gluts to depressions. This post was only about the former.

      Delete
  16. Still, in your example the market clears.

    ReplyDelete
    Replies
    1. Yes, Malthus and Sismondi did not mean markets would not clear.

      Delete
  17. Isn't it true, that after the 6hour fishing day, you decided what you needed to do the next day was to fish less and leisure more?

    ReplyDelete
  18. I don't know, but it sounds like a surplus of fish and shortage of leisure. That's already been rejected, but I think without any trade going on, and only one production process to choose from, that's the best I can come up with.

    Or maybe an objection could be made that, from the perspective of and outside observer, your actions demonstrated that the fishing for 3 extra hours, catching twice the fish, stuffing yourself, and fertilizing the soil was more valuable (at that time) to you, since you did that instead of leisure. But the next day your value scale changed again.

    ReplyDelete
    Replies
    1. "I don't know, but it sounds like a surplus of fish and shortage of leisure."

      Sure, you can make Say's Law into a tautology. But that was not the debate going on at the time.

      "Or maybe an objection could be made that, from the perspective of and outside observer, your actions demonstrated that the fishing for 3 extra hours, catching twice the fish, stuffing yourself, and fertilizing the soil was more valuable (at that time) to you, since you did that instead of leisure. But the next day your value scale changed again."

      No, Steve, you don't get to change around the conditions of a thought experiment. These people did not have a change in value scale: they made a mistake they later came to regret.

      Delete
  19. How does Say's law apply to this situation? Say's law is: supply of X constitutes demand for Y, Z, etc. In your example you only have one good.
    Also, they did choose fishing over leisure. Given a choice, we always choose the most valued option.

    ReplyDelete
    Replies
    1. "Say's law is: supply of X constitutes demand for Y, Z, etc. In your example you only have one good."

      Did you notice my post never mentions Say's Law at all?

      But also, you are wrong in your statement "Say's Law is..." There IS no single version of Say's Law: it has meant a variety of things to a variety of thinkers.

      Delete
    2. "Also, they did choose fishing over leisure. Given a choice, we always choose the most valued option."

      And again, no, that is wrong. We always choose the option that at the time we THINK is most valuable. We make mistakes. As Mises said, "There is many a slip between cup and lip."

      This was an example of a mistake.

      Delete
  20. I do not think that this example is a good illustration of Say's law. First, this example applies only to a single good and only one person (yes, they are three but they agree to do the same thing all three). Therefore, in that system, human errors can temporarily lead to over(under)production. It is, at once, a general and specific glut. Second, Say's law is only stating that there can be no demand without supply in the sense that production gives the means, the power to consume. These three people could not eat (demand/consumption) if they did not go fishing (supply/production). Sure, they can catch more or less fish than they actually need. But with time, experience and improved techniques, the gap should be reduced considerably.

    ReplyDelete
    Replies
    1. "I do not think that this example is a good illustration of Say's law."

      Funny that this is not a "good illustration of Say's law," when the entire post never mentions Say's Law once. hey?! Maybe that is why it is not a "good illustration" of it.

      "Say's law is only stating that there can be no demand without supply in the sense that production gives the means, the power to consume."

      But also, you are wrong in your statement "Say's Law is..." There IS no single version of Say's Law: it has meant a variety of things to a variety of thinkers.

      Delete
    2. "First, this example applies only to a single good..."

      And you know *why* I choose a 1 good economy? Because that was the *hardest* case for showing a general glut!

      Delete
    3. "Funny that this is not a "good illustration of Say's law,"

      Sorry, I should have said "rebuttal" instead of "illustration". Your article focuses on the possibility of a general glut. Say's law refutes this possibility. Even if you never mention its name, your article is entirely devoted to the refutation of Say's law. Do not pretend this is not the case.

      "There IS no single version of Say's Law"

      The version of Jean-Baptiste Say is the only that should matter, right?

      "Because that was the *hardest* case for showing a general glut!"

      Really! Whatever, it does not matter. Your world just does not exist. It is a completely fallacious case to discuss the possibility of a general glut. In your world, there is only one good! Your general glut is also and above all a specific glut! The classical economists have always said that partial (specific) gluts were possible! Nothing to do with the debate on the possibility of a general overproduction which took place in the 19th century between Say, Mill, Ricardo and Malthus.

      Delete
    4. "Even if you never mention its name, your article is entirely devoted to the refutation of Say's law. Do not pretend this is not the case."

      There are a certain sort of people who can only think in terms of attacks and defenses. Those people cannot, generally, conceive of someone who just wishes to understand. I guess that is your situation.

      "The version of Jean-Baptiste Say is the only that should matter, right?"

      1) He never formulated anything at all he called "Say's Law."

      2) In the last edition of the Traité, he admitted that Malthus was correct, and general gluts can exist. So, OK, I will go with you here: We should all agree with Say on this!

      "Your general glut is also and above all a specific glut!"

      Your general idiocy is also your specific idiocy!

      Delete
  21. Yes, I noticed the article never mentions Say's law, that why I waited for YOU to bring it up first. Which you did.
    I'm not an economic historian, but the two versions of Say's law that I've heard of are; 1) supply creates demand (strawman version, that started with Keynes)... and 2) supply of X creates demand for Y,Z,etc. (the correct version). It should be obvious why the latter is better than the former, because it actually makes sense and doesn't cause all kinds of confusion.
    Again, you were the first one to mention Say's law.

    ReplyDelete
    Replies
    1. No, Steve, you obviously invoked Say's Law here: "I don't know, but it sounds like a surplus of fish and shortage of leisure."

      Keynes's formulation is probably as good as a one sentence formulation can get.

      Delete
    2. And what's more: you admit you don't know anything about the history here, and yet somehow, you KNOW your formulation is correct and Keynes's is wrong!

      And I don't know anything about the Civil War, but I'm pretty sure Washington was president then!

      I think we're about done here, Steve.

      Delete
  22. Well, I didn't say I don't know anything about economic history. (If I said I was an expert, would you have responded differently?) I know you probably know a lot more than me, and that's why im trying to get your take on all this.
    If you dont want to spend any more time addressing me, then i will thank you for the time you already gave, and leave you alone.
    Ill just say that I can't understand how you can be saying that Keynes's version is better, and then go ahead and join Keynes in tearing it (Keynes's version) down. Try attacking the real Say's law (supply of X constitutes demand for Y,Z, etc). It's odd that you say there are so many versions but pick the weakest one to dispute. Classic strawman tactic.
    Anyways, thanks again for your time, Prof. Callahan.

    ReplyDelete
  23. "and yet somehow, you KNOW your formulation is correct and Keynes's is wrong!"

    I'm not saying I "know" anything, but if you were looking at these two versions: 1) supply creates its own demand. And 2)supply of X constitutes demand for Y,Z,etc.... It would be obvious that one is false (which you, me, and Keynes all agree on) and one is true (dont you think?). Except, your response is "Keynes's version is awesome but false, and the real version is just one of many that I ignore."
    Ok I'll stop bugging you.

    ReplyDelete
    Replies
    1. No, Steve, it's not "obvious" the first one is false: it is mostly true. And if it is partly false, then the second one will be as well.

      That is what my example showed.

      Delete
  24. "And if it is partly false, then the second one will be as well."

    Could you possibly elaborate on why?

    ReplyDelete
  25. "And you know *why* I choose a 1 good economy? Because that was the *hardest* case for showing a general glut!"

    I doubt that Say ever argued there could be no losses in a market economy (and really, in your example there is no market). It seems to me that, in your scenario, any loss you three experience can be considered what you refer to as either a "general glut" or, inversely, a "general" shortage, right? With only one good, the word "general" always applies, does it not? In fact, the only three conditions that your economy could be in would be "general" glut, "general" shortage, and equalibrium. Am I wrong? (I suspect you'll say "yes")

    Any feedback you can give would be greatly appreciated, and I'm really sorry to keep pestering you.

    ReplyDelete