...the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.This is yet another example of the fallacy of "buy back the product" in which production and consumption are regarded as two independent and unrelated things, except that unless workers can "buy back" what they have produced, then the economy will plunge into recession.
This makes a huge difference. A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods. Nothing in business experience prepares one for the paradox of thrift, or even the inflationary impact of increases in the money supply (which is real when the economy isn’t in a liquidity trap.)
In other words, what an economy produces really means nothing in terms of wealth. The production of goods is seen as an impediment to employment. Now, it is one thing when President Obama declares that capital creates unemployment; he is a politician and cannot be held responsible for saying anything of economic intelligence.
However, Krugman is supposed to know better. Economists actually are supposed to understand that when capital is created within a free market system, permitting people to create more goods, that this ultimately creates new opportunities for others.
So there you have it. Capital creates recessions; savings creates recessions. More brilliant economic analysis from Princeton University.
23 comments:
"This is yet another example of the fallacy of "buy back the product" in which production and consumption are regarded as two independent and unrelated things, except that unless workers can "buy back" what they have produced, then the economy will plunge into recession.
Geez - and if domestic demand for your output collapses, whose going to buy that output?
The Martians?
Non tradable goods and services will not be bought by foreigners by definition, nor can you just ramp up external demand for exports. Your might get some export led growth by severe wage and price deflation - but that is a recipe for domestic depression, as in Ireland, where domestic sectors contunue to contract.
If a large enough number of businesses reduce output and employment, of course there'll be a recession.
You might as well deny that the sky is blue on a clear day.
" A businessman can slash his workforce in half, produce about the same as before, and be considered a big success;"
Wait what? If you can slash your business in half and still produce about the same...
I'm still trying to figure this one sentence out.
Is he referring to the government with that?
" A businessman can slash his workforce in half, produce about the same as before, and be considered a big success;"
The government is not a business.
I can't believe the amount of bad faith deliberate misreadings going on here.
LP said:
Geez - and if domestic demand for your output collapses, whose going to buy that output?
The Martians?
Non tradable goods and services will not be bought by foreigners by definition, nor can you just ramp up external demand for exports. Your might get some export led growth by severe wage and price deflation - but that is a recipe for domestic depression, as in Ireland, where domestic sectors continue to contract.
If a large enough number of businesses reduce output and employment, of course there'll be a recession.
You might as well deny that the sky is blue on a clear day.
Hi LK,
I asked this before on your website but could you please explain by the deductive-nomological method what your explanation is in detail, I must admitted I do not follow your explanation given the framework of the deductive-nomological method which I believe you follow. Also given your believe in Sir Karl Popper falsifiability method, in other words what would you consider to falsify your explanation above.
Thanks
LK,
"Geez - and if domestic demand for your output collapses, whose going to buy that output? The Martians?"
Who cares??? Burn it if no one buys it. Try learning that it was a bad decision to produce that good, at least a that quantity. At least the next time around, just try not being this foolish.
Incidentally, that's what happens in a recession or rather a depression as they used to call it in the good old days.
"If a large enough number of businesses reduce output and employment, of course there'll be a recession."
Genius!! Large number of business reduce output and unemployment BECAUSE there is a depression. As usual, you have your cause and effect topsy turvy. And having understood that, could you now explain what CAUSED the depression in the first place.
Krugman: "A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods."
Earth to Krugman: Not if prices for the goods and labor are free to fall, as they would in an unhampered price system totally unlike the hampered system you preach.
LK:
"Geez - and if domestic demand for your output collapses, whose going to buy that output?"
Domestic demand doesn't collapse to zero. Whatever demand exists, can buy up every good and every employee, provided the government lets prices and wage rates FALL, which of course the government does everything in its infinite regulation, inflation and spending wisdom to prevent, thus exacerbating the very problems you ignorantly believe ought to be solved by government and the consequent initiating of violence against those in the economy.
LK:
"Non tradable goods and services will not be bought by foreigners by definition, nor can you just ramp up external demand for exports. Your might get some export led growth by severe wage and price deflation - but that is a recipe for domestic depression, as in Ireland, where domestic sectors contunue to contract."
Depressions aren't caused by price deflation you idiot. Price deflation is a SYMPTOM, an EFFECT, of what causes depressions.
People don't just slash prices for no reason, and consumers don't just collapse their spending for no reason.
Consumers who are workers drop their nominal spending when they either lose their jobs, or suspect they might lose their jobs. That means that what workers are experiencing, or fearing as may occurring, is a drop in the amount of money that will go their income, i.e. their wages. But wages are money that is paid via savings, not consumption. In order to pay wages, people must save and invest, and abstain from consumption spending.
So the question then becomes, why, even though consumers are willing to spend money and willing to keep their jobs, why do the savings and investment drop, that causes their unemployment? It can't be a collapse in spending, because we already said that this depends on savings and investment.
The answer is that investors, capitalists, employers, entrepreneurs collectively realize that the market value of accumulated savings and capital is too high. So they start to reduce the value of accumulated savings and capital. They start to reduce their demand for assets and they increase their demand for cash. A "credit crunch" ensues.
Since wages are financed by savings, alongside reducing the demand for assets, employers start to reduce wage payments. That's when unemployment rises, and when consumer spending takes a dive.
You moron Keynesians fallaciously and ignorantly believe that the reduction in consumer spending is the cause for why workers are being laid off.
Like the imbeciles you are you believe that it is "consumer spending" that drives employment and output, and so you commit the correlation equals causation fallacy and say that unemployment is falling because of the fall in consumer spending.
LK:
More inflation financed demand for output will only increase the profits of consumer goods companies. It won't do a lick about employment, especially unemployment in the higher productive stages away from consumer goods. You can't escape from this by claiming that what you are really saying is that with inflation inducing higher profits of consumer goods companies, that consumer goods employers will then turn around and save and invest their additional profits and hire more labor. For that is against the Keynesian dogma that it is spending, not saving, that drives employment.
The reason why the value of accumulated savings and capital is too high is because the TRUE value of the invested heterogeneous capital goods and labor are not in their correct physical configuration.
At the end of the day, the physical configuration of invested capital goods must be in line with what consumers want. It's not the lack of money that is the problem, it's the fact that consumers want X, Y, and Z in a time trajectory T1, but the invested capital is configured to produce X, Y, and A in a time trajectory T2. Artificially low interest rates puts too many scarce capital in time trajectory T2, and not enough scarce capital in time trajectory in T1.
More money printing isn't going to solve the problems on the real side of the economy, which is where the actual problems of depression reside. You stupid Keynesians don't see this because you're too busy focusing on the effects, i.e. on the spending changes, and not on the causes, i.e. the capital changes.
YOU LACK A PROPER THEORY OF CAPITAL.
That is your problem.
"If a large enough number of businesses reduce output and employment, of course there'll be a recession."
WHY do they do that, if workers are willing to keep their jobs and willing to keep spending? Why would workers suddenly drop their spending if it weren't for a previous cause of being laid off, or being threatened with layoffs?
"You might as well deny that the sky is blue on a clear day."
You might as well find a new career, because you're not cut out for economics. You're better cut out for being a criminal and behind bars, if you actually personally acted upon the values and advocacies that you spew out on your worthless and irrelevant blog.
LK:
And before you take a steaming dump and call it a rebuttal again, please note that the ABCT model that I am using above is one that presumes multiple natural interest rates, subjective expectations, and "non-ergodicity."
Your nonsense just collapses to a disgusting ethic of violence against innocent private property owners.
"> If a large enough number of
> businesses reduce output and
> employment, of course there'll be
> a recession."
WHY do they do that, if workers are willing to keep their jobs and willing to keep spending? "
In other words, you don't deny it will lead to a fall in the volume and value of real output (recession): the rest of your ramblings are irrelevant, since that was the only point at issue above, e.g.,
"Domestic demand doesn't collapse to zero."
Straw man
Depressions aren't caused by price deflation.
Another straw man, etc., etc.
LK:
"WHY do they do that, if workers are willing to keep their jobs and willing to keep spending?"
"In other words, you don't deny it will lead to a fall in the volume and value of real output (recession)"
The fall in output and employment is not caused by the decline in spending. The decline in output and employment is caused by the same thing as the decline in spending: a decline in the value of accumulated savings and capital.
The decline in the value of accumulated savings and capital is due to investors realizing their investments are not properly coordinated.
The capital and labor configuration cannot be sustained. The unhampered price system is the only way to correct the errors, because it was hampering the price system in the first place that caused the real economy to become discoordinated.
"Domestic demand doesn't collapse to zero."
Straw man
It wasn't an attribution. You said demand collapses, but you did not say to what extent. It is important to include that demand does not fall to zero.
"Depressions aren't caused by price deflation."
Another straw man
You said:
"Your might get some export led growth by severe wage and price deflation - but that is a recipe for domestic depression,"
You just claimed that price deflation causes depressions. You can't even keep your nonsense straight.
Just a point for clarification here:
MF says: "u moron Keynesians fallaciously and ignorantly believe that the reduction in consumer spending is the cause for why workers are being laid off."
What about (for example) failed investment attempts..? I'm thinking about Circuit City's DVD format disaster, or Blockbuster's unsuccessful stab at preventing loss of market-share to Netflix. If several of these events happen at once, a change in consumer spending habits "WILL" direct at least some unemployment, no?
There could also be a change in advertisers responding to this change, and other feedbacks, resulting in more decisions to unemploy workers. Could this not then snowball into (for example) housing/lending markets feeling the pinch as consumers are "then" forced to make decisions based on changing finances, and only at that point "then" other industry catches on and tries to anticipate potential changes to ensure most efficient supply to meet maximum demand / profit-taking / and then a move of cash to the sideline till the coast is clear ... paradoxical thrift taking over...
It seems to me it is at least "possible" that a change like this can be lead by consumer spending (at the very least a change in consumer spending habits from outfits with higher labor costs to lower labor costs)
yes? no?
Can anyone point me to any business (or businessman) that have been able to slash their workforce in half and keep their production at the about the same?
In Krugman's example, wouldn't the economy be better off if the businessman laid off half the workforce and still produced the same amount of goods? Those laid off workers could then filter into other segments of the economy and hopefully boost productivity and supply more net goods into the economy, making us all more wealthy. And let's say that none of these laid off workers were able to find jobs, wouldn't that just be a wash since the same amount of goods were created with or without them?
Conversely, wouldn't North Korea be a Krugman approved economic model to study? They achieve 100% employment, though they don't even produce enough to feed their people.
I'm just a laymen, so please tell me if my thinking is off. Thanks.
Mike,
Media entities have been able to slash > 50% of their workforce and not only maintain production-- but actually extend it.
Radio stations, TV stations, Print-- you name it. Their 'product' is advertising inventory, which does not change in a given 24-hour day (only the rates for the various spots). Now there are stations that have reporters shoot their own video, edit their own stories, produce their own news shows, and anchor it themselves (effectively combining 4 jobs into one-- you could add a 5th if you throw in their cross-promotional requirements within web/social media).
In many of these stations, the ratings have not gone down (so the attractiveness to advertisers is still equitable-- because everyone's doing it... and the one that doesn't isn't as profitable. Sometimes the #1 station in town is the least profitable because they can't get the right return on their more valuable ad time, and they're lugging around all this extra employee overhead.
Brilliant analysis. Keep up the good work.
The interesting thing is how Krugman never chases the logic as far as Keynes does. This idea that the inability of consumers to purchase everything due to their antisocial saving behavior leads naturally to the conclusion that nothing whatsoever must be saved. That is precisely where Keynes went, and he confidently proclaimed that to achieve an optimal economy, all capital investment must be done by the government via deficit spending. All. As in 100%. As in zero private initiative.
@Anonymous
While things like reality shows have lowered the costs for media I don't see how this is any different than any other business that finds innovations that lower costs.
It seems to me that lacking these innovations a business that is running at peak performance cannot just decide on the fly that they are going to cut their work force in half whilst maintaining the same level of production.
@Prof Anderson
"So there you have it. Capital creates recessions; savings creates recessions."
I think this is correct. It would not be correct had you appended "in a free market". But with Keynesian forces at work this is the result.
The mistake, it seems to me, is that Krugman doesn't like comparing businesses to the economy when talking about whether or not they can do similar things, but then suggests that they act similarly (cutting employment). Krugman needs to follow his own advice and cut the comparisons altogether.
In a healthy economy, when a business cuts its labor force those laborers are not open to be bidded towards other productive processes. Human labor is the ultimate scarcity, and so the more laborers there are the more productive our society is. You can never have a surplus of labor (and, I would go on to argue that mass unemployment is an artificial surplus caused by interventionism -- but we all know this argument).
Anonymous @ January 12, 2012 8:04 AM:
"What about (for example) failed investment attempts..? I'm thinking about Circuit City's DVD format disaster, or Blockbuster's unsuccessful stab at preventing loss of market-share to Netflix. If several of these events happen at once, a change in consumer spending habits "WILL" direct at least some unemployment, no?"
That means the investments are wrong. The cause is therefore the error on the part of the investor. He hired people thinking consumers would pay, but then finds out they don't. The cause is not the lack of consumer spending. That is an effect of the same cause for the unemployment.
"There could also be a change in advertisers responding to this change, and other feedbacks, resulting in more decisions to unemploy workers. Could this not then snowball into (for example) housing/lending markets feeling the pinch as consumers are "then" forced to make decisions based on changing finances, and only at that point "then" other industry catches on and tries to anticipate potential changes to ensure most efficient supply to meet maximum demand / profit-taking / and then a move of cash to the sideline till the coast is clear ... paradoxical thrift taking over..."
Consumer spending falls, blah blah blah, snowballs, magic happens, savings bad, paradox of thrift, government is supposed to spend.
Spending and investment does not drop to zero. Whatever nominal demand exists, can buy up every capital good and every worker, provided prices are free to fall. People holding more cash will in fact expedite this process of price correction. But the government is misguided by Keynesian stooges who conflate falling prices with depression.
"It seems to me it is at least "possible" that a change like this can be lead by consumer spending (at the very least a change in consumer spending habits from outfits with higher labor costs to lower labor costs)"
Not really concerned with how things "seem" to you, or anyone. I am only concerned with how things are.
How things are: people don't just capriciously decrease their consumption spending, such that economic calamity can be "lead" by consumer spending changes. People ALWAYS want to consume more than what can ever be produced. The key is that what is produced has to be in line with consumer preferences, cross sectionally and over time. The unhampered price system corrects bad investment decisions, and rewards good investment decisions. The more the price system is hampered by government, through "interest rate management" and "inflation targeting", the more investment will fail to be in line with consumer preferences.
In a complex division of labor society, no one individual can know what the economy should look like. It cannot be centrally planned to be more productive. The price system is the only means by which an individual can acquire objective information concerning every one else's economic preferences.
Mr consistency Anderson. Once again you attack an argument Krugman never made. What is going on here?
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