Fella name o’ Keynes. He’s been proven right by experience, don’tcha know. This Laffer fella, not so much.
Keynes never said anything approaching a blanket statement as silly as “spending is better for the economy than investment”. Cite please.
iiandyiiii:
Another way to think about it – I can think of tons and tons of examples of slow economies in which there was plenty of money available to invest, but relatively little spending going on – such as the recent slow economies in the US. 10 years ago, there were plenty of rich people with money they could have invested, but because there was a lot less spending going on, they held onto it (speaking generally).
On the other hand, I can’t think of a single slow economy in which there was tons of spending going on, but little investment… can anyone else? If this is rare or unheard of, then that would seem to indicate to me that government policy should probably always favor spending, since historically the problem is always on the lack of spending activity, rather than the lack of investment activity side.
I’m just wondering if there is a real deal economist out there saying stuff like this.
Shodan
February 27, 2019, 8:58pm
64
Did you ever hear about Weimar Germany? How about Greece, or Venezuela? Venezuela especially - lots of spending, based on the idea that the oil revenues would continue forever. Investing in diversifying their industries, not so much.
Regards,
iiandyiiii:
IOW, I’m saying the spending has to come first – spending can lead to investment by itself, but investment can’t lead to spending by itself, all else being equal. With more demand, even if you can’t borrow the money right now, you can change your strategy and save a bit more knowing that the demand will be there when you eventually save enough to by another grill and hire another cook.
No. Say’s Law has not been overturned. Production precedes consumption.
Shodan:
Did you ever hear about Weimar Germany? How about Greece, or Venezuela? Venezuela especially - lots of spending, based on the idea that the oil revenues would continue forever. Investing in diversifying their industries, not so much.
Regards,
IANAE, but it was my understanding that there wasn’t actually that much consumer spending in those economies – it was my understanding that people were really pinching pennies, because they knew times were tough, and they wanted to spend as little as possible beyond the necessities.
From my reading, Wikipedia disagrees: Say's law - Wikipedia
Today, most mainstream economists reject Say’s law. Steven Kates, although a proponent of Say’s Law, writes:
“Before the Keynesian Revolution, [the] denial of the validity of Say’s Law placed an economist amongst the crackpots, people with no idea whatsoever about how an economy works. That the vast majority of the economics profession today would have been classified as crackpots in the 1930s and before is just how it is.”
Keynesian economists, such as Paul Krugman, stress the role of money in negating Say’s law: Money that is hoarded (held as cash or analogous financial instruments) is not spent on products. To increase monetary holdings, someone may sell products or labor without immediately spending the proceeds. This can be a general phenomenon: from time to time, in response to changing economic circumstances, households and businesses in aggregate seek to increase net savings and thus decrease net debt. To increase net savings requires earning more than is spent—contrary to Say’s law, which postulates that supply (sales, earning income) equals demand (purchases, requiring spending). Keynesian economists argue that the failure of Say’s law, through an increased demand for monetary holdings, can result in a general glut due to falling demand for goods and services.
Many economists today maintain that supply does not create its own demand, but instead, especially during recessions, demand creates its own supply. Paul Krugman writes:
“Not only doesn’t supply create its own demand; experience since 2008 suggests, if anything, that the reverse is largely true – specifically, that inadequate demand destroys supply. Economies with persistently weak demand seem to suffer large declines in potential as well as actual output.”
Shodan
February 27, 2019, 9:22pm
68
iiandyiiii:
IANAE, but it was my understanding that there wasn’t actually that much consumer spending in those economies – it was my understanding that people were really pinching pennies, because they knew times were tough, and they wanted to spend as little as possible beyond the necessities.
Quite the contrary. In Germany they spent it as fast as they could, because inflation was so great the value of the money would decrease literally overnight.
In Greece, they spent the money they were supposed to use to revamp their economy on social programs instead, and in Venezuela, the government spent their oil revenues instead of investing in diversification of their economy. So all kinds of people spending all kinds of “free” money. With that much demand, their economies should have gone like gang-busters. Only they didn’t.
Regards,
So consumption can precede production? Of course I am talking about this much simpler interpretation of Say’s Law.
Keep in mind we aren’t talking about stimulus in downturns. The statement was that “spending is better for an economy than investment”.
DSeid
February 27, 2019, 10:42pm
70
Years back I asked a University of Chicago economist friend of mine this question, which does the economy want to encourage, spending or investment, given that one of more must mean less of the other.
His answer was that it was the wrong question.
We are (were even then) a globally intertwined set of economies. Not a static fixed pool. What mattered he said was how it impacted investment and spending from and to elsewhere. FWIW.
Chronos
February 27, 2019, 11:52pm
71
On the planet I come from, it’s quite common for things to be sold before they’re produced.
Shodan
February 28, 2019, 4:22pm
72
Vice versa is also common, as most new car buyers will know. Certainly Just In Time inventory is a thing, but so are end-of-model-year sales events.
Regards,
That’s why I didn’t say production must precede sales.
Something that has been sold has not necessarily been consumed.