Say's Law and the Austrian Business Cycle Theory

0:00I'm Bill Anderson. I'm here to, you know, I'm doing a space while in the theory of the business cycle. I'm very, very glad to be able to be in a session with my Jewish mother, Walter Block, and, but, and, you know, hope it all works out. Before I do this though, to sort of highlight what's going on in the rest of the world on the business cycle, it seems that our friends at the New York Times, they're very good at giving advice to people, in fact whole governments now. Now we're talking about a newspaper that basically is on its way to bankruptcy and can't manage its own finances, but it does still give advice but the reason I did this is because it ties in with what I'm talking about here.

0:58If you think about the current way of thinking and certainly what you hear on the news, In governments, I think they're always going to be biased towards spending, sort of politicians are. But what the Times is saying is, look, these guys need to go out and spend more money. They're not spending enough and they're not going to prop up the economy. And the whole issue is just spending, if we can just spend, spend, spend enough. Now this is ironic because Japan struggles through a recession in the 1990s, in the 1990s, constrained by weak government, and an enormous pile of debt. And I'm thinking, what the hell do we have in this country?

1:44I think that's what we call an enormous pile of debt, but nonetheless, that's not a constraint here, but it must be a constraint in Japan. And so, I look at that, and you wonder what it is that they're smoking, but then you've already figured it out. The world would be much better off if they could substantially increase fiscal spending at home to provide financing for poor countries so they can do like us and get themselves some debt and spend more money, as Peter Schiff likes to say, to borrow money from foreign governments and boil it on consumption goods, but they do argue against protectionism, but I'm sure they'll get around changing that too.

2:30And I like this. In a recent speech, Christina Romer, another of President Obama's economic advisors, pointed out some lessons from the Great Depression. You know, that fiscal stimulus works. It does. I had no idea. In a recent speech, I may see. And the more countries around the world do it, the better off we all will be. In Europe and Japan, just listen. And so should Washington. So at any rate, now why do I bring that up? Because in, I think that Jean-Baptiste Say, which he first wrote what we called Say's Law, not really Say's Law at all, but a law, but he wrote this back in 1803.

3:15So somebody back in 1803 actually had something to say about this whole mess. Also along that line you'll notice I didn't have anything up there by Paul Krugman. It just kills me. He is off today. I was counting all week on putting some outrageous statement by Paul Krugman up there and now the guy disappoints me and he's not there. I'm sure my Jewish mother would have something to say about that too. But anyway, what we've got is in Book 1, Chapter 15, and what Satan does is he starts out describing what would be slow business conditions, you know, what we might call recession.

4:01In 1803, obviously, you don't have the business cycle like we have now, but you have slow time. It's common to hear adventurers in different channels of industry assert that their difficulty lies not in the production, but in the disposal of commodities. Two centuries later, Paul Krugman is saying that the difficulty lies not in the production, but in the disposal of commodities. That products always would be abundant if there were but a ready demand or a market for them. When demand for commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce. The ground object of their desire is consumption, risk enough to quicken sales and to keep up prices.

4:51Oh my gosh, I mean, this is the New York Times editorial page, and Mises in 1996 writes, When ever business was bad, the average merchant had two explanations at hand. Evil was caused by scarcity of money and by general overproduction. Adam Smith exposed the first of these sayings and invoked a reputation of the second. And so what we've got really with what we call sayings laws, why does it relate to the business cycle, is because the arguments that Say was making are very, very much apropos to what we're doing. Okay, and I want to go to a quote by Thomas Soule and then come back to the rest of the material and explain how Say's law actually does relate to the Austrian business cycle.

5:46Say's law is not sufficient, or what he lays out in chapter 15 is not sufficient to explain the Austrian business cycle, but it is necessary. So it's a necessary but not sufficient passage. And so writes, before, long before Engels and Marx came upon the scene, economists had divided into two main groups. Those who explained depression by inadequate demand, this is the general bluff theory, led by Sismondi and Malthus, And those who insisted that the pressures were caused by internal disproportionalities in the composition of overall and aggregate output. I hate that term, but too much of A and too little of B, rather than by being, it's total being excessive relative to aggregate demand.

6:34okay and so then I take a passage from chapter 15 okay page I've got the book let me see it from eight his edition from 1826 this is where it comes out but it made me ask how does it happen that there are times when so great a lot of commodities in the markets and so much difficulty in finding that for them why cannot one of the super budget commodities be exchanged for another I I answer that the glut of a particular commodity arises from its having outrun the total demand for it in one of two ways. Either because it is produced in excessive abundance or because production of other commodities has fallen short. It is because the production of some commodities has declined and other commodities are superabundant.

7:23Now, another way to do that is what Peter Schiff has been saying. You know, I know nobody in this room has ever heard of Peter Schiff, but he's a guy who appears on YouTube once in a while. And what he says is, the fundamentals are out of balance. Now, we've all heard him say that, the fundamentals are out of balance. Well, basically, this guy's not Peter Schiff, he doesn't know about YouTube, he's dead. But, he's saying the fundamentals are out of balance. And what we're really dealing with in the Austrian business cycle is that Whether or not we talk about monetary inflation, which by the way I really like that previous paper because that really does bring some interesting issues because Rothbard said simply the presence of fractional reserve banking in and of itself will cause that and what you're saying is that that's necessary but not sufficient and so you add the credit expansion in there, and if Rothbard were disagreeing with you, I wouldn't be able to argue with him, because he's also dead.

8:32But like Say, at least they left something, unlike Keynes, who left something too, but it was not very good. But, if we go to, Say's Logging, this is from an explanation from Tom Sowell's Classical Economics Reconsidered, the total factor payments received for producing are necessary and sufficient to produce that volume of output, as opposed to the leakage theory, okay? There is no loss of purchasing power in the economy, okay? No Keynesian Leakages. People save only to the extent of their desire to invest and to not hold money beyond the transactions needed during the current period.

9:19Of course, I'd like to point out that why do we save money so we can consume in the future? I mean, even savings will be consumed, but you know, there's a purpose there. You know, in the Keynesian business, you just, you know, it's not only do animal spirits guide the investors, but animal spirits guide the rest of us to stuff money on our mattress, which is always what savings is in terms of view, and the proven view, of course. Investment is only an internal transfer, not in that reduction of aggregate demand. In real terms, supply equals demand is empty, since each individual produced only because of them, to the extent of demand for other goods. In other words, the source of your demand, folks, is your supply. It's what you produce.

10:04and whereas what they're talking about with a New York Times editorial, let's create some demand, okay, we can do this, yes sir, we will now, okay, throw the money out there, we now have demand, we're going to sell all those commodities, they're not going to sit in warehouses by George, they're going into your homes. And a higher rate of savings will cause a higher rate of subsequent growth in aggregate output, oh my gosh, It's an Austrian view, but it was a standard view held by economists pretty much until Mr. Keynes came on the scene. A few other people were called cranks, and then like Silvio Gizelle, who wanted to issue a currency that timed out, and so Keynes called him a prophet, this equilibrium in the economy can exist only because the internal proportions of output differ from the consumer's preferred mix because output is excessive, not excessive, in the aggregate.

11:07This is very important. We are being told, ladies and gentlemen, that this current downturn is a problem in aggregate demand. We're just not spending enough. Now, you got to spend more, you know. So, you know, get that. I want you to max out that credit card and then go get another one. But in Benjamin Anderson, one of the 1949 prevailing view among economists has long been that purchasing power grows out of production. The great producing countries are the great consuming countries. The 20th century world consumes vastly more than the 18th century because it produces vastly more, not just prints more money, Mr. Kruger. Supply and demand in the aggregate are not merely equal, but they are identical since every commodity may be looked upon either as a supply of its own kind or as demand for other things.

12:01But this doctrine is subject to the great qualification that the proportions must be right. And again, the Austrian business cycle is in the proportional camp. The proportions are wrong. What do we mean by malinvestment? What we're saying is that the malinvestments, especially with the injection of credit, and also more money goes into capital goods, but people's spending do not match the intertemporal structure that is created. You get a structure of production that is out of balance with the preferences of consumers.

12:47And so what happens is they begin to spend their money, they direct, they're trying to direct the balances, you know, the economy back into balance. And what we've got right now is the government that says, we can't allow that. I mean, if you want to know what the Obama stimulus program is, it basically is a declaration and that we cannot go back to those old proportions because that's just morally unacceptable and politically unacceptable too, and then let's go to Michael Harrington. Yes, remember Michael Harrington? He's also dead and that's probably a good thing because he can't write anymore. I remember in 1981, he wrote this in the National Education Association's magazine, Education Today. During the 30s there was a glut of consumer goods because workers lacked the purchasing power to buy back what they produced. That's why the government began to play a role in the economy on behalf of middle and low income people during the period of Franklin Roosevelt's New Deal.

13:54Okay, in other words, what they're saying is that production and consumption are separate. They're unrelated things. You produce and maybe this stuff will kind of get sold. If the consumers have enough money, but however, because of the internal contradictions of capitalism, why then there's leakages from the system, they don't spend enough and then we get this aggregate flood. I mean that's okay, that's the entire theory in a nutshell and so but what happens as Rothbard points out that once the money, the new money comes into the system through an injection of credit what occurs is that it ultimately ends up in the hands of people as income and then they rush to establish the old proportions, in other words not the proportions as being laid out in the structure that's given by the interest rates by the Credit Structure that, in other words, that says one set of signals, but the buyers are going out to buy goods and they're setting another set of signals, and demand shifts

15:01back from the higher to the lower orders. And that goes all the way back to Menger in his 1871 book, Principles of Economics. And so, the favorite explanation of the crisis stems from underconsumption, okay? That's what we have. The New York Times editorial is about, darn it, it's not just the individual consumers who are under-consuming, it's those governments. You know, you're not spending enough, buddy. You know, print some more stuff, get out there and spend, and then the economy will be fine. And here's an interesting point, too, and in reading Krugman, yes, I actually read his stuff, what they're saying is that this spending is just filling a hole. It's temporary.

15:46We're getting this money out until the economy recovers. So in other words, it recovers, it's sort of this mysterious thing that recovers on its own. And so, the, and so actually what Rothbard points out is that the boom is actually a period of wasteful misinvestment. It's a time when errors are made due to credit tampering with the free market. And that's what we've got now because we've, you know, we've had this expansion of credit. We've, we've had the boom. Ladies and gentlemen, we had our boom. I hope you enjoyed it. It's time to pay for it. And so now we're in that situation, in fact, when this thing is starting to, you know, it's coming back to claim its own. And the government is desperately trying to keep these old orders, you know, reflate them, keep the old orders going, when in fact the spending is still going to do it.

16:41You know, I hadn't thought about it tonight. Give me one example. If you've been in New Orleans, or the city formerly known as New Orleans, but although Walter is helping to restore it to its great glory, you've got levee systems there. And it pulls that Mississippi River right along there. And they've got to have that Mississippi River in New Orleans, because it is a port city. They actually do some work there. And whereas, if you go back and you see where the Mississippi River used to go, if you go a little farther up into it, what they call Louisiana, and what you have to understand, the Mississippi River wants to go elsewhere, and one of these days, it's just going to go, and you know, New Orleans, and then, what?

17:27Not if the Federal Government can help. Precisely, I see. And millions and millions will be a foreign country. Defy gravity. Yeah, exactly. Defy gravity. And it's basically that same sort of thing. But it won't matter in New Orleans. They'll get their booze by truck. And they'll just, you know... Alright, thank you very much.