No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Seventeen: A Short History of Macroeconomics 426 goods, not a general oversupply of all goods. Once we identify the problem as one of disproportionality between goods and services, the solution is still a microeconomic one. At the root, there needs to be a lowering of the price of the overproduced goods (as well as the wage rate of workers and capital values in that industry) relative to goods in the under-produced area. This would steer resources into the relatively under-produced goods and equilibrium would ultimately be restored. To illustrate the difference, assume a three-good world consisting of iPhones, cars and green beans. Why green beans? Probably because I don’t like them. That may play into this example! So let’s further assume that sales are slack in all three areas—people aren’t buying many iPhones, cars, or green beans. The general glut theorist would suggest the problem is that too much has been produced. It is self-evident in their eyes because you can see the supply is too high in all the stores: there are cans of green beans to the ceiling! And iPhones, too. The car lots are also full. Their solution? We need to stimulate demand to “jump start” the economy. Meanwhile, there are economists who believe the problem is disproportionality in the mix of the goods. It is likewise self-evident to these economists that as long as there are unmet needs, there can be no general oversupply. The reason people get up in the morning and go to work to supply more goods is so they can get money from which they will demand more goods. People produce goods to get goods. They grow green beans to drive a car! Others make iPhones so they can eat green beans. And still others produce cars to buy an iPhone. So how can there be too many iPhones, green beans and cars, while there are people that want iPhones, green beans and cars? For disproportionality theorists, the reason must be that there are too many green beans! Since there are so many green beans, normal supply and demand processes mean that a new equilibrium can only come with lower prices. But if the current price is just enough to cover costs, to lower the price would mean the green bean growers would lose money. Maybe we just wait until the market recovers? But while we wait there is no money coming in. Which means our farmers aren’t able to buy a new car. As car sales slow, the autoworkers don’t have the money to be able to buy iPhones. And now the iPhone workers don’t have money to buy green beans. Commerce stinks for all businesses, but it is not a general glut—although the bad effects are felt generally. The root problem for disproportionality theorists is that too many scarce resources were devoted to produce green beans—the workers and capital going toward that production need to move toward the iPhone and auto industries. Prices and wages in the green bean business need to fall relative to those in iPhones and cars, and this will lead to resources being reallocated as people respond to the incentives of prices. For disproportionality theorists, attempts to stimulate demand generally will not solve the problem, although it could mask it for a while. SAY’S LAW OF MARKETS Much of the discussion above is captured in an economic concept called Say’s Law . J.B. Say (see this chapter’s great economist feature) originated the concepts to clarify Say’s Law: production of valued goods and services generates the potential purchasing power to enable demand of other goods and services