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Thursday, October 11, 2012

The Curious Doctrine of Sectoral Imabalances re Say's Law

Say (when he was still fighting Sismondi), Ricardo, Mill and others often blamed gluts on "sectoral imbalances," denying there could be any such thing as a general glut: we could have too many guns and not enough butter, or vice versa, but never an overproduction of goods in general. The solution was always to produce more of the good relatively under-supplied, which could be used to buy up the glut of the one relatively over-supplied.

The curious thing about this is that it seems to assume sticky prices: otherwise, the price ratio of the two goods could simply change until the market cleared, and there would be no need to produce more of the one under-supplied: it is only under-supplied at some price. But once we assume sticky prices, we seem to have posited the condition needed for a general glut: goods in general have been produced at costs that cannot be recovered, but rather than dropping their prices and accepting a loss, producers sit on inventory.

I have to look at the original arguments here and see if anyone had addressed that point.

4 comments:

  1. If one assumes that the over/underproduction is relative to the expectations of the producer then I think it makes sense, even if one assumes non-sticky prices.

    If the market-clearing prices for guns is above expectations and for butter below then one could say that there is a shortage of guns and a surplus of butter even if both markets cleared. This would presumably lead to changed expectations about relative prices and changes in relative levels of production.

    If one assumes "sticky prices" and markets not clearing then I don't see anything in this logic changing.

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    1. Rob, I am certainly not an expert on the classical economists, but the feeling I get from the quotes I've read is that they were talking about the piling up of inventories, goods unsold on the docks, etc., which does require sticky prices.

      "If one assumes "sticky prices" and markets not clearing then I don't see anything in this logic changing."

      Yes, I get this. What I don't see is why they then couldn't accept a general glut as well, where all goods are over-produced relative to producers expectations for money.

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    2. I see no reason why one could not have a situation where demand for money is so high that the expectations of all producers on selling price fail to be met , and they decide they would rather not sell than sell at a price that would clear their inventories. This would indeed leads to " piling up of inventories, goods unsold on the docks, etc.,".

      This would seem to be a "general glut" caused by a mismatch between expectations of sellers and buyers.

      I suppose that technically one could say that the general glut in non-money goods is matched by a general shortage of money-goods since (under commodity money) the demand for money must have risen as the demand for other goods falls at the prevailing price level but that would be semantics rather than economics.

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    3. "suppose that technically one could say that the general glut in non-money goods is matched by a general shortage of money-goods since (under commodity money) the demand for money must have risen as the demand for other goods falls"

      Interestingly, this was what JS Mill did. He essentially conceded the general glut theorists' case, while claiming that Ricardo and Dad had crushed them in the debate!

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