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Commentator after commentator focuses on consumer demand
as the key to a US economic recovery. But as the classical economists pointed
out when presented with this fallacy, the problem is production and not
consumption. They adhered to this view because — in accordance with
Say's law — they understood that production is the source of demand.
The American Marxist economist Paul Sweezey was
spot on when he wrote: "...the Keynesian attacks, though they appear to
be directed against a variety of specific theories, all fall to the ground if
the validity of Say's Law is assumed."
Now every knows that Keynes
refuted Says Law." No he didn't. What he did was to deliberately
misstate the law so that he could refute his straw-man version of it. He then
tried to support his conclusion with a truncated passage from Mill. Now the
heart of Say's Law is very simple and amounts to the fact that there cannot
be general overproduction. Say never claimed, nor did any other
classical economist, that depressions were impossible along with gluts of particular
goods, far from it. What classical economists stressed was proportionality or
what we today call equilibrium. This is why Mill was able to say:
Could we suddenly double the productive powers of
the country, we should double the supply of commodities in every market; but
we should, by the same stroke, double the purchasing power...the
community...may already have as much as it desires of some commodities, and
it may prefer to do more than double its consumption of others, or to
exercise its increased purchasing power on some new thing. If so, the supply
will adapt itself accordingly, and the values of things will continue to
conform to their cost of production. (John Stuart Mill, Principles of
Political Economy, University of Toronto Press 1965. Books III-V, p. 572).
As Benjamin M. Anderson put it: "If we doubled
the supply in the salt market, for example, we should have an appalling glut
of salt". The key to avoiding a glut in one good, which amounts to a
shortage elsewhere, is equilibrium or producing them in the right proportions
as demanded by consumers. The classical view that demand springs from
production ("supplies constitute demands") which in turn must be in
equilibrium to avoid gluts and depressions brings us not to the American
economy of 2001 or its dismal state today but to its condition in the early
1930s, with which many are now drawing a comparison.
When the US economy first appears to be hit with a
recession economic commentators insist on focusing on consumer demand. Bad mistake.
The classical economists, including Marx, knew that depressions always
started in the producer goods industries and then worked their way down to
the point of consumption. Most economists in the 1930s, e.g., Dr Benjamin M.
Anderson and Joseph Stagg Lawrence, also knew where depressions first made
themselves felt.
While others of the time were arguing that
maintaining, or even increasing, consumer spending was necessary to restore
prosperity, Lawrence pointed out that consumption was being maintained and
that it was the producer goods industries that were contracting. And this is
exactly what happened during 2000 and 2001. If the consumptionist
school were right the very opposite would have happened with the economic
decline starting with a fall in consumer demand, the effects of which would
have worked their way up the production structure.
On 29 June 1931 Barron's published an article
by John Oakwood in which he strongly attacked the purchasing power of wages
doctrine which stated that maintaining money wage rates at pre-depression
levels, despite falling prices, was the key to recovery. The tragic
consequences of this misbegotten policy were to expand withheld capacity and
so aggravate unemployment and reduce output further.
Oakwood made the vital distinction between wages and
purchasing power, stressing that purchasing power is the ability to produce
goods for exchange against other goods and services. These exchanges take the
form of values. Where the wage exceeds the value of the workers' services
unemployment rises and idle capacity emerges. What did the Hoover government
do? It tried to keep money wages up as prices fell. This meant that real wage
rates rose as the money value of labour services
fell, causing the demand for labour to fall.
Therefore price fixing by the Hoover/Roosevelt
administrations prevented the necessary readjustments from taking place and
so kept the economy depressed for ten years. If they had allowed costs and
wage rates to adjustment, as happened during the 1920-21 depression, capacity
would not, as Professor Hutt explained, have been withheld. (The Theory of
Idle Resources, Liberty Press, 1975 and The Keynesian Episode: A
Reassessment, LibertyPress, 1979). Wilhem Rëpke put it very
well when he said: "The reestablishment of equilibrium creates
purchasing power." (Wilhelm Rëpke, Crises
and Cycles, William Hodge and Company, LTD, 1936, p. 83).
So the real economic lesson of the 1930s tells us
that the last thing a government must do to promote a recovery is try and
pump up consumption. Let market forces liquidate the maladjustments and allow
prices and costs, including wages, to readjust to the proper proportions
between production and consumption, which in turn should be dictated by
consumer preferences, not by the Fed or a gaggle of ignorant politicians.
None of this is to say there is nothing positive a
government can do to accelerate the recovery process — there is. It
could, for starters, abolish capital gains taxes and slash corporate taxes.
Unfortunately the ideologically driven Obama and his leftwing cronies are
intent on loading the US economy down with a tidal wave of tax increases
— including grossly irresponsible taxes on energy, huge deficits,
colossal increases in spending plus a massive expansion of government. And
God knows what else this ideologue has planned.
That these policies amount to an anti-growth program
that will have dire consequences for future living standards has yet to sink
into the collective mind of the American public.
Gerard Jackson
Brookesnews.com
Also
by Gerard Jackson
Gerard Jackson is Brookesnews Economics Editor
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