A Simplification of Say's Law

[Voyager]

@WillFarnaby

Again, Say states that "A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value."

The value of these produced items lowered once the bust took hold.

Basically what I said. Production of zero-value goods - or goods valued less than their cost - will lead to a decrease in production, if not production capacity. Producing stuff of zero value does no one any good, and certainly does not magically drive consumption.

Borrowing relies on savings. Any future increase in production means that factories will have to rely on these accumulated savings in order to acquire raw materials and grow payrolls. This production* must take place* before the desired increase in consumption.

I trust you are not saying that borrowing for a person depends on his savings, which is clearly absurd. Over the economy people do have savings, perhaps from a time of prosperity, perhaps from a sector which is doing well. Certainly in 2009 there was precious little consumption but plenty of capital/savings. Do you not remember this?

I don’t want to encourage investment over consumption. I want no government intervention in either case.

So, you want the economy to blunder along on its own? The government can easily find profitable investment opportunities, not repairing broken windows but repairing and extending infrastructure. What we did helped, just not enough. That preserves jobs which creates consumption.
Since industry is never going to be precise about production, there are usually ample signals about whether increased production is required. Imperfect, of course. For instance toy orders for Christmas are placed the February before. So businesses do not have to wait for increased consumption to increase production, especially in today’s data-driven environment.

Look. Human desire is infinite. We live in a world of scarce resources. In order to satisfy desires, there must be production. There is no lack of adequate demand. Only a lack of items that fulfill these demands.

If desire paid the credit card bills, we’d be in fat city. Sorry, people wanting something and not feeling they can afford it is a lack of demand. Fear reduces demand also. See people around you getting laid off and you will save, not spend. This should be obvious.

[Voyager]

@Sam_Stone

The problem I have with this is in treating ‘consumption’ and ‘production’ as aggregates. We do this as an abstraction, but the danger of abstraction is that we might abstract away the stuff that really matters.

As a simple example, let’s say that we incentivized our economy to make way more chairs than the marketplace demands. At some point, people stop buying chairs. Consumption goes down. If we ignore the fact that the problem is that we’re making things people don’t want, and instead just talk about production and consumption, we might be tempted to say, “Okay, consumption is down, and so is chair production. Let’s throw a big stimulus into the economy to get people buying chairs again!” Except people don’t want them, so they take the money and sit on it. And the people focused on aggregates instead of specific reasons scratch their heads and can’t figure out what happened.

I think you are disaggregating. While chair manufacturers might offer incentives for chair consumption, everything I’ve seen calls for government to directly (through tax cuts) or indirectly (through stimulus) put money into the hands of consumers and thus let the market decide where production growth due to increased consumption should be.
One thing to add is that the consumption should be sustainable. During the Bush years consumption grew despite wage stagnation due to the housing bubble and increased debt. That worked to keep consumption up, but was not a good idea.

[Little_Nemo]

@WillFarnaby

A typical way of stating Say’s Law is “supply creates its own demand”. IOW the corn I raise, when brought to market creates demand that is equal to its value.

That’s obviously not true. Plenty of products go unsold. If supply created its own demand, what incentive would there be to offer better products than your competitors? A business would just manufacture the cheapest possible products, secure in the knowledge that a market for them would magically appear.

[Nametag]

@WillFarnaby

[QUOTE=Nametag]
Say’s law is rejected by most economists. Furthermore, since Say formulated the law specifically to refute the idea that production and employment were limited by low consumption, any argument using Say’s law to refute that idea must be supported by external arguments supporting the law itself.

Say regarded money as a fungible article that was not desirable to hold, and his law holds that producers, having produced, are eager to sell; and that having sold, they are eager to buy, thus creating the demand he speaks of. In addition, since money is fungible and not desirable to hold, buyers who are not buying the producer’s product must be buying something else. In other words, Say rejected the idea that producers might hold their earnings, and therefore argued that a general glut of produced goods was impossible.

While his view of money was certainly correct as far as cash is concerned, he seems to have dismissed the role of personal investments, rainy day funds, and retirement savings. Sure, any money invested in any instrument will eventually make its way to a producer who wants to increase capacity, but it can take decades - even generations - to do so. And let’s not forget that such producers are not entrepreneurs by any but the broadest definition - true entrepreneurs start businesses, attempt to create or change markets, and usually fail. Most capital investment serves to increase or maintain capacity to meet existing demand - often reducing marginal costs in the process, which actually shrinks aggregate demand.

No mention of how consumption can occur without production. You are presenting a standard critique of Say’s Law. I am saying less than Say with this simplification. Again, I am saying that consumption cannot increase without a corresponding increase in production occurring before consumption
[/QUOTE]

Nonsense. Producers keep stock in inventory, they accept orders, they take out loans, and sometimes they solicit capital investment. They do all of this because Say is wrong. Everybody saves money, if they can, to provide for unanticipated changes in demand. One thing successful businesses don’t do is increase production in anticipation of demand increasing simply because they made more stuff. That is a recipe for market glut, falling prices, and bankruptcy.

Oh, and this: “In the example, corporations are taxed, discouraging investment”? Governments spend tax money on infrastructure, goods and services. Their demand still drives production, and motivates investment by (and in) those producers with whom they do business. The infrastructure they build, maintain, and improve reduces marginal costs for many producers, thereby increasing the earnings available for investment. The money they pay their employees and contractors also contributes to demand.

Yes their demand drives production into areas that are not satisfying a demonstrated consumer desire. You can not say that these govt expenditures better satisfy consumer desires because nobody has voluntarily exchanged for these “services”.

The government, in this scenario, IS the consumer, and its desire is demonstrated, and the goods are produced. However, what is also demonstrated is the public desire for adequate roads, safe bridges, effective police and military forces, and many other things that everybody wants, but nobody can pay for unless they team up to do it - which is, in part, what government IS. So yes, I can say that “government expenditures better satisfy consumer desires,” as long as I am talking about those desires that governments are uniquely capable of satisfying.

Look. Human desire is infinite.

No it isn’t. Otherwise, we wouldn’t have rotting food, abandoned inventory, or landfills.

We live in a world of scarce resources.

SOME resources are scarce. Others are plentiful.

In order to satisfy desires, there must be production. There is no lack of adequate demand. Only a lack of items that fulfill these demands.

Tell that to 2008, they want their money back. While you’re at it, tell John Locke, Adam Smith, and Jean-Baptiste Say himself, as well as both Hayek and Keynes, all of whom understood that production responds to demand. Or just go tell a buggy-whip maker.

[Budget_Player_Cadet]

Say’s law is rejected by most economists.

Given that the OP is basically appealing to intuition, to “common sense” in his definition of the law, I think that pretty much amounts to the only refutation that’s actually necessary. “I believe this based on intuition and flimsy reasoning.” “Okay, but the entire relevant scientific field thinks it’s wrong.” At that point, you might as well hold up Aristotelian physics. Supply-side economics is basically at that level - it fails. Miserably. Every test. Say’s law is a 210-year-old economic doctrine held up because it’s politically convenient, not because it actually says a whole lot about reality.

Also, this:

[QUOTE=WillFarnaby]
There is no lack of adequate demand. Only a lack of items that fulfill these demands.
[/QUOTE]

Yeah… Citation needed. When you don’t have money, how do you demand shit? Since the recession, we’ve been dealing with a massive debt overhang and nobody buying things. You seem to imagine that somehow, if they just came out with the iThing 2000, people would somehow find the money for it (despite their existing debt) and stimulate the economy. Prove it. When has this ever worked in a liquidity trap? It wasn’t what got us out of the great depression most of a century ago, and it sure as hell wasn’t what got us out of this one. And how do you even falsify a claim like this? It seems like no matter what items exist, you can just shift the goalposts, claiming “oh, those items don’t fulfill demand either”.

[jayjay]

The OP side of this thread is just a stunning example of right-wing economic mythology in action. It may not make sense, and it may actually just be a giant pile of silly long-refuted fallacy, but goddamit, they’re going to defend it to the death…

[Budget_Player_Cadet]

@Budget_Player_Cadet

When you don’t have money, how do you demand shit?

Just for clarification, this is not to imply that people don’t have certain demands. Producing, say, a hamburger does not suddenly “invent” the demand for food that people have. People have a natural demand for food, for shelter, for entertainment, et cetera. What I mean by this specifically is, how do you demand it from the market? Demand without a means to realize it is meaningless to the market.

Also, +1 to jayjay’s post.

[WillFarnaby]

@Little_Nemo

That’s obviously not true. Plenty of products go unsold. If supply created its own demand, what incentive would there be to offer better products than your competitors? A business would just manufacture the cheapest possible products, secure in the knowledge that a market for them would magically appear.

I should have been clear. Keynes mangled Says law to say supply creates it’s own demand. Probably to confuse people but who knows. Here is a better formulation.

http://wiki.mises.org/wiki/Say's_law

“To put it another way, Say was making the claim that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption. My ability to demand food, clothing, and shelter derives from the productivity of my labor or my nonlabor assets. The higher or lower that productivity is, the higher or lower is my power to demand other goods and services.”
I will reply to the rest of the non-screamers when I can. Thank you all for your participation.

[Voyager]

@WillFarnaby

“To put it another way, Say was making the claim that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption. My ability to demand food, clothing, and shelter derives from the productivity of my labor or my nonlabor assets. The higher or lower that productivity is, the higher or lower is my power to demand other goods and services.”

I’d think that the power to demand food, clothing, shelter etc. depends upon the exchange of these things for ones production. The act of producing itself does not create the money we exchange for these things, only the sale of the things produced. If production is below the demand for the things produced then the producer is giving up possible value of his production, and should increase production. That is clear. If his production is above the demand, then producing more, all things being equal, makes things worse.