AUSTRIAN ECONOMICS ADDICT

I usually try to share articles and videos that are brief because I know your time is scarce and has alternative uses. You want to be informed at the lowest cost in time. Here is an article titled Say’s Law And The Permanent Recession, by Robert Bulmen, at mises.org, that requires a higher investment of your time. It starts with Say’s law, {which essentially states, the ability to demand comes from producing, or production comes before consumption}, as a basis for his analysis of our present economic state of permanent recession. We’ve talked about many of the concepts Mr. Blumen covers in his article, but it is important to listen to different explanations to gain a deeper understanding of economic principles. Repetition is the best way to learn, and this article is a quality repetition. It is well worth the investment of your time. Here are a few excerpts from Mr. Blumen’s outstanding article.

PRODUCTION BEFORE CONSUMPTION

“Say’s Law can be explained in the following terms:”

1) “The way that a buyer demands a good is by supplying a different good.”

2) “The supply of one type of good constitutes the demand for other, different goods.”

3) “The source of demand is production, not money. Money is only a temporary parking place for past production.”

“In the modern economy with division of labor, most of us demand goods when we supply our labor. I work as a software engineer. I supply my labor writing computer software. And from that supply I am able to demand other goods, such as coffee.”

COUNTERFEIT MONEY CAUSES MALINVESTMENT

“Mises called the production errors malinvestment. These errors happen systemically because of fractional reserve banks loan money into existence that is not backed by savings. That misleads producers into thinking that there are more real savings available than society wishes to save. Producers then make both the wrong mix of capital goods of different orders, and the wrong proportion of capital goods in relation to consumption goods.”

“When there is malinvestment there must be a recession, for the following reason: there were never enough real resources to complete all of the capital projects that were started during the boom….. Somewhere along the way, firms will discover that they cannot obtain all of the factors they need at a price below their costs. They cannot make profits. Many of them fail.” 

“…Keynes was right that there is an interdependence of all economic activity. But Keynes was wrong about consumption being the driving force of this: it is producing, not consuming. According to Say, the interdependence is constituted by the relationship of all production, not of expenditure. Expenditure of money is only the culmination of the process that began with production.”

WHAT CONSTITUTES REAL RECOVERY

“Mises’s theory explains why the boom starts and why it comes to an end. Production errors cannot continue indefinitely because they result in losses. But why do we have a lasting recession?”

“It takes time for entrepreneurs to sort through the broken shards of the boom to figure out what is really in demand, and what the supplies of factors are. But the recovery will occur because eventually entrepreneurs see all of those unemployed resources as a bargain. Productive assets and labor won’t stay on sale forever. When prices of some factors get low enough, then the people who held on to some cash will see attractive yields.”

“Anything that prevents wages or asset prices or capital market prices from falling moves markets away from clearing. In the modern world, one of the main barriers to recovery is Keynesian stimulus. Stimulus tries to create more demand without creating more supply. We know from Say’s Law that this is doomed to fail because supply and only supply constitutes the demand for other goods. What stimulus is really trying to do is to inflate the fake price system of the boom so that more expenditures can occur at the fake prices producing more of the wrong things for which there was never a real demand in the first place. And that cannot work because it was the breakdown of production under the fake prices that caused the boom to end. For a real recovery to occur, production must be reorganized along the lines of consumer demand.”

CAUSES OF OUR PERMANENT RECESSION

“Given the work of Hutt and Higgs in explaining why a recession persists with no recovery, here is a list of factors causing price inflexibility and regime uncertain in today’s economy:

1) Capital market price floors, like the Greenspan-Bernanke put and QE which prevent the markets for capital goods from clearing.

2) Bailouts of Wall Street, which are another form of price floors, and keep the incompetent management teams in place.

3) The nationalization of the mortgage market, another form of capital market price floors and house price floors, which removes the largest sector of credit markets from the domain of economic calculation.

4) Obamacare. Besides the direct costs for taxpayers, the bill introduces massive incentive changes in labor markets, the implications of which are still not clear.

5) Economist Casey Mulligan documents extensive changes in labor market incentives in his book The Redistribution Recession. He argues that these changes have created a huge implicit tax on income for the unemployed contemplating an offer of paid work.

6) The pending default of most pension plans including Social Security, the medical welfare state, US states, counties, and cities. How the default will be paid for is creating great uncertainty.

7) Uncertainty created by the threat of wealth taxation and bail-ins, as outlined in an IMF paper.

8) The surveillance of all financial transactions and expanded reporting requirements for the assets of wealthy investors

As Hayek said, the more the state centrally plans, the more difficult it becomes for the individual to plan. Economic growth is not something that just happens. It requires saving. It requires investment and capital accumulation. And it requires the real market process. It is not a delicate flower but it requires some degree of legal stability and property rights. And when you get in the way of these things, the capital accumulation stops and the economy stagnates.”

Related Article – What Comes First Production Or Consumption? by austrianaddict.com.

Related Article – Capital Consumption, aka Eating Our Seed Corn. by austrianaddict.com.

Related Article – Is The Economy Is Improving? It Depends How You Define Improving. by austrianaddict.com.

Related Article – Real Savings vs. Counterfeit Savings. by austrianaddict.com.

Related Article – Does The Supply Of Money Have To Increase To Accommodate Increasing Production? by austrianaddict.com.