Economic Musings VI: Modern Economies – Dying of Consumption
There is a great debate in the history of economics whether there can be under-consumption in any real historic moment of the state of an economy and if so, whether it has detrimental effects and if so, what is to be done about it. And modern economists seem to have found a magic wand with which to unfailingly repair any such damage and smoothen the otherwise rough ride of economic cycles. We’ll see if they have and what it might be worth, whether it’s a wand or a cane.
(Find more statistics and indicators etc. in our References section!)
Note: this whole idea also ties in with the deflation/inflation debate which we will eventually cover in greater and conclusive depth in one of the upcoming posts, but first we need to establish some solid ground on which to tread before tackling this most divisive debate today being waged in the economic blogosphere and the mainstream media.
Let us wonder, with what you could buy anything to be consumed (or invested, for that matter)? Let’s rule out the obvious answer of the use of force – with coercion (or fraud, which is just the avoidance of a situation where, would the defrauded understand in time, you would still to have to resort to violence and threats or else give up your goal), with coercion you can of course always extort value from anybody, if you use enough of the force – in the last analysis if the other “party” doesn’t yield, the goods will be yours once you annihilate their possessor. This is how wars, although mostly more destructive to all sides involved (and innocent bystanders as well), in some exceptional cases result in a positive yield if the “enemy” subdued has sufficient funds to make up for what was already spent in the effort to subdue him (although whether even the greatest profit could ever make up for the loss of even one life is another matter and outside of the strict remit of economics – in fact even the unlawful use of force already may destroy more immaterial or ethical, moral, values than can be weighed in gold, at last that is what almost all, if not all, religions seem to teach, notwithstanding the sordid fact that they have been used to justify all kinds of extortion in contravention of their apparent teachings, but we’re discussing the economics of the case and try not to wax too philosophically). Even a war that yields a “profit” to the victorious party could be proven to contract both economies more in the long run due to diminishing the division of labour than could ever be gained by the destruction caused – but these are finer points which can always be plastered over by a skilled statistician.
Let us therefore wonder, with what you could buy anything to be consumed (or invested, for that matter)? That used to be pretty easy to answer – in the time of pure barter, without the intercession of any money, you could hardly imagine a farmer to go to market to, say, buy a shovel, a pot of clay or a cow without at the same time carrying with him the means which to exchange for that good to be “purchased”. Let’s say he carried bushels or sacks of wheat. So he had to first produce, then consume.
Certainly in but the rarest of cases and where there probably were personal ties, would a market participant have separated himself from his goods on that market without at the very same time receiving a good of perceived equal or greater value than what he would give up in the face-to-face transaction.
Even if, though, one party to an exchange transaction would grant “credit” to another, say, give the farmer a cow without immediately insisting on the equivalent in wheat, then, if the cow vendor wasn’t prepared to starve, at least he in turn would have needed to produce enough in advance to bridge the gap in order to be able to sell “on credit”. So whichever way we look at it, we should think it inescapable to first produce before we or someone else can consume, even if on credit!!! Such simple truths do not change only because you blur the picture with more consuming agents such as governments, civil servants or central banks and their employees!
Thus we may safely conclude that whatever it was that was bartered or purchased in that market was equally already in existence prior to the act of purchase or consumption.
Now, let us imagine the peasant would have arrived in the marketplace with the iron-clad intent to buy a shovel only to discover they were all sold out. Would he then have randomly bought something else? To a certain extent yes, if he couldn’t at that time procure a shovel and he hadn’t brought wheat but, say, a cow to market, if someone would still be in need of his cow, he would have probably tried to exchange that cow, which would not become fatter and more valuable by walking her all the way home again. If he had wheat and could not find a counter-party to offer something he’d think equally or more valuable then he might have taken it back home with him again.
Is this “underconsumption”? Is there a secular or religious law that gave every market participant an equal right to expect that he should get rid of his wares at an exchange value of his choosing? Well, if that were so, as in the initial phase of the market state no one were ready to trade anything as was asked by the peasant then in a second phase of the same market, if nothing had changed, somebody else would necessarily have been made to yield to the farmer’s wishes. In a proposed transaction, where one party cannot find a counter-party to exchange with, there is only one way to go forward: break the will of the other party. So, we would be back to the coercion paradigm where real perceived value of a transactions becomes subsidiary.
Barring that forcible exchange there are only two possible outcomes: either the farmer “sells” for less or for something else than he has originally intended (which in his valuation is equally “for less”!), which is nothing but weighing the cost of returning “empty-handed” against that discount and if finding it still in the slightest positive, go forward with a changed plan or else refrain from any exchange for that moment.
Now the farmer can of course muse about the negative economic effects of “underconsumption”. After all, here is a good that could be consumed and isn’t. We won’t go down the alley of how eating too much can cause obesity – the answer is actually quite simple: there is no such thing as underconsumption. If he were prepared to part with his wheat for less, at least if he were to give it away for free, there surely would be someone ready to alleviate him of his burden. Except in the rarest of circumstances, like if he had brought totally unusable goods, maybe alcoholic beverages to a muslim village or milk to an African tribe lacking the lactase enzyme to digest it, might he be snubbed. But that would essentially be the same as carrying sand and trying to pass it off as wheat and wondering why no one would buy.
Since all other market participants obviously were quite content with what at that day they bartered or traded or else somebody would have entered into a transaction with that farmer, we cannot assume there was underconsumption – everyone consumed as much as they felt they needed or else as they thought were able to afford.
The problem is no economic problem at all, it just reduces itself to the simple fact of overproduction not underconsumption – he offered to the market something for which the market was not ready at the time or not at the minimum exchange rate at which that tenderer was prepared to part with his wares.
So we see two things at play here:
- the goods traded or bartered had to be in existence prior to the transaction and no worldly force could make up for any lack of goods to be exchanged at the time of market if they hadn’t been grown, sculpted or forged in time beforehand and
- if there were goods that found no trading partner then the vendor obviously must have misjudged demand even if it came as a surprise to him or if for years and years each market day before he never encountered such problems. Such are the vagaries of markets.
Let’s say, that for the first time in history a new stall had opened on that market selling “savon de Marseille” and every man and esp. woman went crazy about it – the natural result would have been that the structure of supply and demand could have changed to such an extent that some previously sound judgments about market forces would come to nought on this day, esp. if such new and fashionable good had no established price except what one’s own folly would entice us to pay for it.
So it is in no way unnatural that under certain but normally rare circumstances a part of the goods on the market might remain unclaimed or unsold. Either they would sink in price until a new market clearing price had been established and would still change hands or they would perish if they were perishable goods. In either case they would eventually be withdrawn from the market.
We could now call the “industry” that produced such goods industry “X” (whether it’s a farm or a steel mill makes no difference for the purpose of economic study). In hindsight that industry obviously suffered from what we today call “overcapacity”. We could of course call the phenomenon “underconsumption”.
But calling it underconsumption would beg the question, who defines the “right level of consumption” in the first place? If market forces are not allowed to define and shape the structure of supply and demand then some exterior force must make these decisions. When someone proposes a theory whereby markets can for the most part be left to themselves, however, when they do not “function properly” then one must intervene with some superior knowledge as to how they should instead have behaved that always begs the question how to determine when such moment has come and still more confounding how to determine what to do instead. There is a profound hubris in believing one could supersede market knowledge with some mathematical formulae and rules of thumb. If you want to understand where “mathematical” second guessing of market forces leads to, just look around you and at the current global economic mess.
But not everyone will be convinced. What, they say, if indeed people cannot buy the products and their prices therefore go down and down and down – will buyers now not speculate on how much further they might fall and start to defer buying decisions ever further into the future until the factories cannot sell and in doing so need to lay off those workers who then even less can afford to buy anything?
This is an interesting suggestion and it cannot be proven or disproven theoretically as it rests on two differing concepts of what laws constitute economics. Of course there can’t be two conflicting laws in any science – only one can be right, but such is the current state of economics.
The “classical” approach states unambiguously that it is the laws of supply and demand that determine “market-clearing” prices or (in barter), relations of exchange that make all, all! goods eventually change hands that were designed to be exchanged in the first place (we’re not talking exceptions such as heirlooms etc.). Even in a bankruptcy everything that’s saleable gets sold somehow, the rest being scrap or refuse, just as there’s scrap or refuse in normal production.
The “modern” approach states that, no, there can be situations where a buyer, seeing that goods’ prices tend to fall “across the board” decides to refrain from buying since tomorrow the price might be even lower. Thus underconsumption results and something must be done about it.
Well, forgive CrisisMaven, if a government or central bank with all their economists with insight “second to none” are unable to spot bubbles in highly documented and “uniform” markets such as stocks or real estate, how on earth can anyone hope to tell when a price is right and when goods should be bought because “surely now the market errs on the downside”?
Any theory of underconsumption and “buyers’ strike” has to come up with an explanation why sometimes prices fluctuate and it is “normal” supply and demand and then sometimes it is “irrational austerity” and they are denounced to err on the downside?
The fact of the matter is that there is no such imbalance. People buy always what they need to live, like bread, shoes or cars – if, and that is a big if, they can afford it. When you look at alleged deflationary tendencies, at buyers’ strikes and the like you will, if you are willing to accept your findings, find that before that episode there was a period of overconsumption, of the draining of funds and reserves and savings that now make it impossible for anyone in his or her right mind to just continue spending as they did before. They may simply have no job, they may decide to retire debt, they simply may have run out of credit and so on.
The only other way we discussed initially to make someone part with their goods or means of exchange without offering something in return which is worth their while at the time is by use of force.
Imagine the whole populace is not prepared, on average, to spend more than 70% on cars than compared with the year before. And as a result of it, auto workers would be let go, and hence even less people would now have the incentive or the wherewithals to spend, and hence the auto market would contract another 20% the following year and so on.
In light of general economic theory we would conclude that the market had changed, the demand wasn’t there, hence the industry would need to adapt and other uses be found for the redundant labour. But no, we can’t let it happen, when these people get laid off, then the bakers and shoe-makers suffer too as no one can now afford to buy their products.
But how can you make (potential) auto buyers who are either not able to afford a new car, are not in the mood to spend money on cars or are afraid, while still they could, to spend as they are afraid of their future and prefer to save, how can you make these people buy and spend more and the auto industry to keep up its production? By the use of force, and only by the use of force, only that this force nowadays is more veiled, hidden or dissipated than it used to be: It is, in the last analysis, only via taxation, via taking the money to spend by force, one way or another, that you can “generate” the money to “pick up the slack”. It makes no difference, if you first sell bonds and later raise tax revenues to repay them or whether you increase taxes now (which obviously would contravene the spending policy, so it’s always more government debt and only then taxes -maybe- later!), it makes not the slightest difference – you essentially force people to buy, or force some people to make a present to those who are enticed to resume spending. But now they don’t spend their own – that is not an economic proposition nor does it in any way refute the law that you can’t consume without producing. The slack necessarily appears elsewhere – for example, with taxation or bonds sold, there is either less consumption elsewhere or less savings and thus less capital goods bought and produced in consumption’s stead. You cannot escape the simple law that you cannot consume without producing the wherewithals to buy prior to the consumptive act!
So only by illicit means (and the other, inflation, is even more fraudulent as we know) can you ever hope to assuage a “buyers’ strike” and for some time artificially prop up an economy. As we have proven before, it can only be temporary since the money goes missing elsewhere in any case, so it doesn’t even work. But the main point is: any government that tries to stave off “deflation”, that tries to “make up for the slack”, tries to “manage” an economy, can only do so by resorting to means that, were it not the government, would, if Enron or Worldcomm or Madoff are any guide, result in imprisonment for life. And he, who accepts such dole-outs would in private enterprise be found in collusion and tried alongside the main perpetrators. But rest assured, as long as the government is the government, nothing will happen to you, and when they’re found out, by the time sound economic reasoning has found its way back into academe and government, justice will not be able to pay to keep you in prison …
No economy dies of underconsumption, only to the extent it suffered from (unfunded, hence over-) consumption before. If theory and logic, nor the facts of the housing markets and cash for clunkers are no guide, then you better rewrite the laws of economics.