Friday, April 27, 2012

CR — Lack of demand

It really isn't hard to understand.
Read it at Calculated Risk
Lack of demand
by Bill McBride

16 comments:

Pete said...

There is no such thing as a lack of demand.

If businesses don't invest more nominal money because there is no increase in nominal demand, then economic growth can, and in the case of Japan does, occur on the side of productivity and falling prices.

If one CEO says there is not enough demand for his products, that means people prefer more of other products. It should not be used as an example that shows evidence of any alleged lack of demand in the aggregate, that supposedly justifies printing money. That would be the fallacy of composition.

Sure, more aggregate nominal demand will more than likely bring about an increase nominal demand for factors of production, but it won't increase the supply of factors of production, and so cannot increase productivity. But of course MMTers will conflate the rising prices with rising real productivity.

paul said...

@Pete

I think you made the wrong click and ended up in the wrong comment section.

Tom Hickey said...

Just goes to show that even though it is easy to understand, some people still manage misunderstand it through convoluted thinking, erroneous assumptions, and ignorance of sectoral balances.

Dan Kervick said...

Sure, more aggregate nominal demand will more than likely bring about an increase nominal demand for factors of production, but it won't increase the supply of factors of production, and so cannot increase productivity.

Sure it will. One of the things we produce are capital goods, which are factors of production. For example, a network server might be a factor of production. If there is a greater demand for network servers, the supply of network servers will increase. If more producers acquire network servers, their productivity will go up.

Pete said...

Dan Kervick:

Sure it will. One of the things we produce are capital goods, which are factors of production. For example, a network server might be a factor of production. If there is a greater demand for network servers, the supply of network servers will increase. If more producers acquire network servers, their productivity will go up.

You continue to commit the fallacy of composition.

Yes, a nominal increase in the demand for network servers will tend to boost the production of network servers in real terms, but you can't infer from this that an increase in aggregate demand via inflation will boost aggregate productivity in real terms.

The increase in network server production comes at the expense of a decrease in production of other things that those resources could have been used for.

The reason why you are committing the fallacy of composition is because you're ignoring opportunity costs.

What determines the extent of productivity is relative prices, and relative spending, not aggregate prices and aggregate spending. The scarce resources that go into network servers comes at the cost of those resources NOT going elsewhere. Even if money is printed to boost demand everywhere, there is only a finite supply of scarce resources to be invested and used for production.

We have at any given time only a delimited supply of materials that can go into motherboards, hard drives, RAM chips, etc. Investors use relative price signals to determine where among competing ends these scarce resources should go. If they go into network servers, they can't go anywhere else.

You can't bring about the production of more motherboards, more hard drives, and more RAM chips, by printing money and increasing aggregate spending. They are two totally different actions. Printing money can only redirect existing resources from one deployment to another, and raise prices above what they otherwise would have been had no money printing taken place.

That's all boosting aggregate spending via inflation does. It does not bring about more production. The only thing that brings about more production is saving and investment of real resources.

You ought to cease committing the fallacy of composition and realize that what is true for one component of the market (e.g. a single company) does NOT mean that it is true for the market as a whole.

reslez said...

There is no such thing as a lack of demand.

Wait, what? You must be one of those paleos who believe supply creates its own demand. Just keep stocking apples on the shelf in the erroneous belief that this by itself will cause you to sell more applies.

Sheer idiocy.

If one CEO says there is not enough demand for his products, that means people prefer more of other products.

What? Couldn't it also mean people can't afford his products because they don't have the money, so they go without? Or there's no demand at the price the company set?

What if the company can't afford to produce the item at a price people can afford to pay?

What if the great majority of CEOs have found a lack of demand for their products? Does that still mean people are preferring some other mystery CEO's products -- or could they really just not have any money to spend?

Trixie said...

"Just keep stocking apples on the shelf in the erroneous belief that this by itself will cause you to sell more applies."

Ok, in all fairness, those apples would indeed sell. If only they weren't so "sticky".

(Sad face)

Pete said...

reslez:

"There is no such thing as a lack of demand."

Wait, what?

Asking "what" on a board where the posted words can be read as many times as you need, is silly.

You must be one of those paleos who believe supply creates its own demand.

No, I am not here advancing any religion.

But, if you want to make a fool of yourself when it comes to Say's Law, then I shall only say that when Say's Law is typically summarized by the expression "supply creates its own demand", that does not mean that every conceivable product that can be produced is guaranteed to find a profitable market for it.

What that summarization of Say's Law actually means is that when the totality of what is produced is in the proper proportions, which is what some economists unfortunately use the easily confused expression "equilibrium" to describe, then the only source of demand is supply, as each producer can only demand goods from other producers by way of bringing goods to market himself. This is the meaning of "supply creates its own demand." Not the silly Keynesian misinterpretation of "Everything that is produced will find a profitable market."

Now, what I mean when I say that there is no such thing as a lack of demand, is that there is no such thing as "too little money sloshing around the economy." Any quantity of money is just as serviceable as any other, since money is a medium of exchange between goods, it is not a direct utility good itself.

If we compare two independent and separate economies that are identical in every way except one has double the money and hence double the prices than the other, then it would be silly to say that the economy with half the money supply and half the prices is somehow any worse off, or lacking in demand. Neither economy is lacking demand, as the two money supplies are equally serviceable.

Just keep stocking apples on the shelf in the erroneous belief that this by itself will cause you to sell more applies.

This is the uninformed caricature of Say's Law that is typical among the economically illiterate.

"If one CEO says there is not enough demand for his products, that means people prefer more of other products."

What?

Again with this silly question. If you didn't get it the first time you read it, then just read it again. Asking me what when it's already there for you to read is a ridiculous thing to do.

Pete said...

reslez:

Couldn't it also mean people can't afford his products because they don't have the money, so they go without?

If people don't have the money to buy his products, then they have proven themselves insufficient in their own productivity and thus earning capacity, such that the goods they bring to the market, or help others bring to market, are not valuable enough to buy his products.

Now, if you believe that if those who don't have enough money to buy his products somehow come into ownership of more money without earning it, without being productive, say if inflation of the money supply is used to increase their cash, then should they then buy his products at the prices he is asking, he is just being exploited, because he is bringing goods to market, but there is only paper money replacing those goods. of course the producer will feel wealthier, and to an extent he is because he can then use that money to buy goods of his own, but because of the inflation, the loss falls on people who produce goods, but only get money in return instead of enough of other goods.

In other words, it is of no benefit to producers that they produce goods and receive money. Producers don't produce to earn money only. They produce to buy products from other producers. They produce some goods in order to acquire other goods.

Thus, if producers are going to produce and sell goods to those who have inflation money, rather than earned money, i.e. money from being productive in the past, then producers are not only no better off, but they are worse off, because they produce for their buyers's benefit, but their buyers are not producing for his benefit.

The only way that you benefit me, and the only way that buyers benefit sellers, is by way of the buyers' own productivity in their job. It's not their money that makes buyers valuable, but their productivity that earned them that money. We benefit each other by producing goods and services for each other's benefit. The spending of money that we earned by being productive, is not itself the source of mutual gains.

This is what gets lost on MMTers. MMTers too often see benefits from merely spending money, as if the spending of money is what people do to benefit each other, rather than that which actually generates and generates prosperity, which is the act of being productive.

Pete said...

reslez:

Or there's no demand at the price the company set?

If there is no demand at the price the company sets, or if there is insufficient demand to generate profits, then that means this producer is producing incorrectly. The solution would be for the producer to start producing other things, or produce the same things but at lower costs so that he can sell at lower prices. The solution is not to print money and give it to the producer's buyers. That's just exploiting the producer, and all other producers, because they are putting real goods into the market, but their trading partners are just putting money into the market, which of course doesn't itself help producers, because what helps producers is the production that others engage in.

What if the company can't afford to produce the item at a price people can afford to pay?

Then he is producing the wrong goods, and he should start producing goods that buyers can pay.

What if the great majority of CEOs have found a lack of demand for their products?

Then the great majority of CEOs can reduce the bidding prices for factors of production, so that they can reduce their selling prices down to that which the great majority of buyers are able and willing to pay.

Does that still mean people are preferring some other mystery CEO's products -- or could they really just not have any money to spend?

That never happens. Even in the greatest depths of the worst depression, there is still consumer spending taking place, and there is still investment spending taking place, and because of that, the great majority of CEOs who are incurring losses at current demands, can reduce their costs so that the demands that exist can start generating profits and employment.

Nobody having any money to spend has never happened in the history of monetary economies, and never will, so long as money exists.

Pete said...

Trixie:

"Just keep stocking apples on the shelf in the erroneous belief that this by itself will cause you to sell more applies."

Ok, in all fairness, those apples would indeed sell. If only they weren't so "sticky".

Bingo. Those apples could sell, if only the sellers sold them at low enough prices. The problem is that if they have no incentive to lower prices, say because there is inflation that increases the cash balances of their customers, then they won't reduce their prices, and they won't change their investment pattern, and so any malinvestment of apples that took place, instead of being corrected, will persist.

This is how the housing boom turned into an unsustainable bubble. Inflation from the Federal Reserve prevented the malinvestments in housing from being corrected earlier on.

Trixie said...

Pete, it can be difficult to know when I am being a smart-ass. I get that. My response was one such example, but thank you for your reply regardless.

I'd like to get a better understanding of why you think the Fed is responsible for the housing crisis and what your thoughts are on the explosion of unsustainable private debt levels, thanks essentially to the elimination of lending standards and risk management responsibilities via a bank's ability to offload credit and interest rate risk onto secondary markets. And the household sector de-leveraging process that is occurring as a result when it all came crashing down.

Greg said...

" The problem is that if they have no incentive to lower prices, say because there is inflation that increases the cash balances of their customers, then they won't reduce their prices,"

Or more likely that they have a nominal debt contract they cant adjust.

Most businesses have payments that are fixed that they must make to banks, so when they lose customers thay are NOT inclined to drop prices they are inclinedto try and raise prices to keep their nominal income constant. If they cant sell the sam number of widgets they must sell less widgets for more or they get their line of credit cut off.

Pete said...

Trixie:

Pete, it can be difficult to know when I am being a smart-ass. I get that. My response was one such example, but thank you for your reply regardless.

So if I invest and produce fake dog poop that nobody wants, then should I be resistant to reducing my selling prices, the solution should not be for me to close up shop, but to print enough money so that the nominal demand for my fake dog poop is high enough to result in prices being what I expected them to be?

If you say this is ridiculous, if you say that money printing should not be used for this purpose, then why is it OK to do this when more than one producer is in this situation, for example "most" producers, thus giving the impression that it's a "macro" problem?

I'd like to get a better understanding of why you think the Fed is responsible for the housing crisis

The Fed provided the fuel for the housing boom. They created the money that the commercial banks then pyramided credit expansion on top of, which then went into the housing market boosting their prices for years. When the Fed started to worry about consumer price inflation going above target, in 2005-2006, they slowed down the rate of money creation, which then raised the fed funds rate to 5%, and thus the fuel for the housing boom dried up, and bubble burst.

Inflation of the money supply does not enter the economy everywhere. Inflation of the money supply does not enter everyone's wallets at the same time at the same rate, thus boosting the prices of everything together, in the same proportion. No, inflation enters the economy at certain points, and because of this, it affects the demand for some things more than other things.

Typically the big banks and the Treasury are the initial receivers of newly created money, so what they spend their money on is what typically sees a boost in demand first. Then, after some time passes, as the new money spreads from person to person in exchanges, this is when the demand for "most things" rises.

Inflation is like a wave that spreads from the Fed, and creates a series of smaller waves thereafter. From 2001-2007, the inflation wave was concentrated in housing.

Pete said...

Trixie:


and what your thoughts are on the explosion of unsustainable private debt levels, thanks essentially to the elimination of lending standards and risk management responsibilities via a bank's ability to offload credit and interest rate risk onto secondary markets.

Private debt is sustainable if it is backed by prior voluntary private saving. I can abstain from consuming, then lend money to you, creating private debt. This is sustainable in the real sense because I am not tying up real resources in consumption by spending that money on consumption. I am lending it to you.

Contrast this with what happens in our economy. In our economy, the commercial banks create debt out of thin air. They lend new money into existence that is NOT backed by prior voluntary savings. To the extent this new credit goes into investment, it is not sustainable in the real sense because real resources are still being tied up in consumption when they need to be released to justify the additional investment.

There is no such thing as too much private debt backed by voluntary saving.

And the household sector de-leveraging process that is occurring as a result when it all came crashing down.

Deleveraging is a good thing when it is voluntarily chosen.

Greg:

"The problem is that if they have no incentive to lower prices, say because there is inflation that increases the cash balances of their customers, then they won't reduce their prices,"

Or more likely that they have a nominal debt contract they cant adjust.

They most likely incurred that debt because their demands were boosted by inflation in the past.

What I said is more likely.

Most businesses have payments that are fixed that they must make to banks, so when they lose customers thay are NOT inclined to drop prices they are inclinedto try and raise prices to keep their nominal income constant. If they cant sell the sam number of widgets they must sell less widgets for more or they get their line of credit cut off.

Inflation encourages debt.

Trixie said...

Understood Pete, including your rhetorical questions. I'm always interested in different perspectives, so thanks for the detailed response.