Re: [Pen-l] Re: Re: Re: a dialogue

["Jim Devine" <jdevine03@xxxxxxxxx>]

me:
>> note that I am not against criticisms of Keynes. But that does not mean clinging to Say's Law the way the ["Austrian"] school does.

Julio:
> I'm curious: How would you state Say's Law?

Say's Law says that there can be no general gluts. Gluts (situations
with excess supply) are only specific, appearing in individual
markets, and are balanced by shortages (situations with excess
demand). Thus, no matter what level of real GDP is produced, there
will be sufficient aggregate demand to purchase it.

The idea is that if a rGDP of Z is produced and sold, its production
implies the paying of income Y to owners of the "factors of
production." Since all income is distributed, Z = Y.  Those recipients
spend all their income (with any saving automatically balanced by
fixed investment) so that Y = spending (X). Thus, X = Y = Z. There
will always be enough spending (X) to purchase Z, no matter what its
level.

Note that this story does not imply full employment yet.

A. There can be price or wage rigidities which prevent the attainment
of potential output (Z*) and the corresponding level of employment.
But these rigidities imply the existence of some Z level (Z') below Z*
that reflects supply-side inefficiency. In the Say's Law world, the
economy then oscillates around the Z'. (Going beyond Z' leads to
imbalances that must be purged by going below Z' temporarily.) Price
and wage flexibility are advocated to raise Z' up to equal Z*. The
market system's problems arise because the real world isn't enough
like the perfect market.

B. Also, it's possible that Z could be below Z* simply by accident.
Demand would keep it at that level (in my simple story) since Z = Y =
X. The idea is that price cuts would fix this (increasing the stock of
real balances and thus aggregate demand). Again, the economist would
advocate price and wage cuts to encourage this "real balance effect"
process. Again, this fits with the neoliberal response to all market
failures: the problem is that there isn't enough of a market!

To really understand this "law," it's good to consider the
alternative. First, Marx pointed to realization problems, where
production Z > Y distributed in one sector (for whatever reason). This
reduces demand for products of another sector, imposing realization
problems there. The "multiplier" process can feed on itself, creating
a general glut.

Marx never completed his work, so we have to bring in Keynes (who
clarified the multiplier process and, unlike Marx, actually used the
word). His emphasis was on the gap between income Y and demand X: an
increase in saving does not automatically lead to an increase in fixed
investment. This lowers X relative to Y, leading to a general glut
(unplanned inventory adjustment), so that output Z falls, pushing down
income, etc.

"New" Keynesians (a.k.a., new Monetarists) respond by bringing in the
real balance effects (point B above) and thus advocate aggregate wage
and price cuts to fight low employment situations. (It's also helped
by the so-called "Keynes effect.") Keynes himself dedicates an entire
chapter to debunking this idea, especially for a deep recession.
Irving Fisher helped with his 1933 "debt deflation theory of great
depressions," which seems quite relevant today.

The Keynesian story does not contradict the idea that there may be
supply-side inefficiencies that keep Z' < Z* (point A). But it allows
for persistent stagnation with Z below Z' and of course a business
cycle.

(a lot of the story was left out.)
-- 
Jim Devine /  "Nobody told me there'd be days like these / Strange
days indeed -- most peculiar, mama." -- JL.
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