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Thursday, December 13, 2012

A General Glut in a Three Commodity Economy, with No Money

In honor of Adam Smith, production in this economy will consist of beaver and deer, and, in an addition in honor of Silas, arrows (intended to pierce the heart of blog writers he dislikes).

I produce beaver.

Bob produces deer.

Silas produces arrows.

In period 1, I produce 10 beavers, intending to trade 5 of them with Bob for 10 deer, and 5 of them with Silas for 20 arrows.

In period 1, Bob produces 16 deer, intending to trade 8 of them with me for 6 beavers, and 8 of them with Silas for 20 arrows.

In period 1, Silas produces 30 arrows, intending to trade 15 of them to me for 6 beavers, and 15 of them to Bob for 10 deer.

In period 2, I find Bob only offers 7, not 10, deer for 5 beavers. I find Silas only offers 13 arrows, not 20, for 5 beavers.

In period 2, Bob finds I only offer 4 beavers, not 6, for 8 deer, and Silas only offers 10 arrows, not 20, for 8 deer.

In period 2, Silas finds that I only 3 beavers, not 6, for 15 arrows, and Bob only offers 6 deer, not 10, for 15 arrows.

Ex ante, every market participant produced with the belief his production would produce a subjective profit at the exchange rate he foresaw holding in the market. But, when he actually brought his goods to market, he founds he was forced to sell at what, for him, was a subjective loss. If he had known what the market outcome would really be, he would have produced less. (And in the next period he is likely to produce less, leading to a "slump.")

As Malthus and Sismondi saw it, the above describes a general glut. (Perhaps some current macroeconomists would say, "No way! The market will equilibrate anyway." Well, OK: I am talking about a Malthusian-Sismondian general glut, not whatever you think of as a general glut.)

Money is not the (fundamental) loose joint in the economy: the fundamental loose joint is the "dark forces of time and ignorance."

UPDATE: The above scenario assumes we each have some reservation demand for the items in question.

9 comments:

  1. Of course you'd be the one to produce "beaver". Gene the Pimp!

    Beans ... meet nostril.

    Also, I don't think that the fact that Bob produces deer and Silas produces arrows was a mistake. It's quite metaphorical if looked at through a certain lens.

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  2. Gene: "(And in the next period he is likely to produce less, leading to a "slump.")"

    No. Next period, the boom ends. You had people producing *more* than the optimal amounts. A "slump" means they are producing less than the optimal amounts.

    The optimal amount of production is not infinite. It's where the Marginal benefit equals the Marginal Costs.

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    1. "The optimal amount of production is not infinite. It's where the Marginal benefit equals the Marginal Costs."

      Yes. But as I am understanding the Malthus / Sismondi slump story, the period over over-optimism is replaced by one of over-pessimism, where over-production is replaced by under-production.

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    2. Gene: OK. let's simplify the model. 2 people, 2 goods, apples and bananas.

      The apple producer thinks the relative price of apples to banas will be high, and the banana producer thinks the relative price of apples to bananas will be low. So both produce lots of apples and bananas, and both are disappointed when they meet to trade.

      That is Lucas' 1972 story. But Lucas actually gave an explanation of why all producers could have overly-optimistic expectations at the same time. Because they can't distinguish monetary shocks from real shocks. They face a signal-processing problem.

      Lucas' theory makes perfect logical sense. But most of us stopped believing it during the 1982 recession. People aren't that ignorant. Statistics Canada publishes the CPI monthly, with a short lag.

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    3. Nick, what I am engaged in here, both in the sense of "in this post" and "at this time in my life," is trying to make sense of various cycle theories, and if possible turn them into comparable models. I am NOT advocating any of them (for now).

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    4. And in this post in particular, since many people rejected the Malthus / Sismondi theory as incoherent, I wanted to see if I could get a simple model showing its coherence. I am not here claiming it is what really happens.

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    5. Gene: OK. I *think* though that your model is much closer to Lucas than to Malthus/Sismondi (I haven't read Sismondi, and my memory of Malthus is not great). You, like Lucas, (and the Austrians) are assuming people make production decisions before observing relative prices. You are assuming that people can sell all their output (but they choose not to, because the prices are lower than they expected, so they eat their own apples instead).

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    6. "You, like Lucas, (and the Austrians) are assuming people make production decisions before observing relative prices."

      Again, Nick, this is not me per se, but me trying to model Malthus / Sismondi. (I.e., if Malthus / Sismondi assumed people make production decisions before observing relative prices, then it is excellent that my model does so, whether or not people really do that!) But I understand them mostly through Sowell, so now I am reading the primary sources, to see if I have them correct.

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  3. "Beaver."

    I really got to you with that Salma Hayek thing didn't I?

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