Bryan Caplan  

Woolsey's Counter Rant

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Bill Woolsey's comment on Arnold's rant against monetarism deserves more attention.  Highlight:

Kling:

Your argument doesn't apply to a world of scarcity. There is huge variety of products, all of which are currently being produced, of which additional quantities could be used by someone for some purpose.

There is no problem coming up with goods and services that people could use. We know this because they have prices greater than zero.

You imagine a world in which we have trouble thinking of things for people to do. A world without scarcity.

Not quite right: The scarce good would then be new ideas.  But we can easily rephrase Woolsey's basic point: Since the price of goods created using old ideas remains positive, people could just produce familiar goods until some better ideas come along.

Woolsey's punchline:

Of course, this all applies to an economy with scarcity. You know, the one economists study. It doesn't apply to your world where people want to produce, presumably to earn incomes, but not because there is anything they want to buy.

Arnold could still insist that in our current situation, finding new ideas is especially important.  But I think that Woolsey would correctly reply that producing more familiar goods is better than sitting on unemployed resources for years.


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COMMENTS (16 to date)
Arnold Kling writes:

Bryan,
What do you mean by "producing familiar goods?"

Suppose I am familiar with putting up drywall in new houses. The marginal revenue product from that falls to ten cents an hour. No one is going to pay me anything close to minimum wage to put up drywall.

When the recalculation is over, I may be producing a very familiar good or service, just not something that I am familiar with right now.

Maybe I am missing something.

Hyena writes:

This sounds right to me. I also think that high unemployment undermines Mr. Kling's goal. Though I think he's correct in that we need new business models, I don't see how we can do this quickly when we have large numbers of unemployed people.

The unemployed are cut off from the productive flow and so less likely to make the observations which lay the groundwork for innovation. There's also the issue that new graduates are struggling to find jobs, meaning that people who are learning an industry--whose job is in many ways to make observations--are a smaller part of the market now. Finally, the workloads of many people are greatly increased, so there is less time and fewer resources available to conceive of and implement new ideas.

I think even if we have a high credence in PSST, which I think we should, there's no reason it should preclude stimulative measures which get people back to work on patterns of not-so-sustainable specialization and trade. At least they'd have the vantage point to think of new ones.

Hyena writes:

Mr. Kling,

I believe Prof. Caplan and Prof. Woolsey are pointing out that, at a subjective "want this" level, demand for products is not low. However, there is excessive demand for money or, equivalently, skittishness about spending.

No one will currently employ you hanging drywall not because no one wants houses, but because not as many people can afford houses. If those people had money, they'd buy a house. Likewise with a lot of other goods.

Yancey Ward writes:

What is meant by "excessive demand"? If we were talking about houses 4 years ago, would we say "There is an excessive demand for houses, so we must make a policy to build more houses"?

Also, I am still really, really bothered by the idea that there is something wrong with unemployed resources. For example, when housing crashed, there was slack demand for lumber and other building materials. As Kling would put it, these resources must find employment elsewhere, but if we enact policies that unsustainably support the use of these resources in, for example, building more houses again, how does this make it more likely that the economic order will find other uses for them?

Hyena writes:

Mr. Ward,

No, if there was an excessive demand for houses you'd craft a policy which lowered the demand for houses.

The problem with unemployed resources is that you're losing productivity and productivity, all things being equal, is wealth. Or soon will be, whatever.

Mr. Kling's thesis is that the former economy had an unsustainable pattern and for convenience everyone has used "housing" as that pattern. Prof. Woolsey's argument is that, because we live in a world of scarcity, there are real opportunity costs. When we were doing all that unsustainable home-building, we were forgoing a lot of other production and consumption. We built and bought houses instead.

The logical conclusion is that there are things people still demand: all the things they forwent to buy houses. If they hadn't lost so much on houses, they'd be at the mall right now buying them, other people would be at the mall selling them and yet other people out making them. To then go to the mall and buy things again.

So what can we do? We can use monetary and fiscal policy to give people money. We can create that money out of thin air and "replace" all the money they spent on houses. They will then go and buy the things that, in retrospect, they should have bought.

Joseph K writes:

I'm totally behind Yancey Ward on this. There's no evidence that there's an excessive demand for money. It might be just right. People in general may need to rebuild their savings. Once savings levels are up to a level people are comfortable with, they'll start spending.

Also, we should note that Prof. Kling's original argument was simply that excessive demand for money is not the only explanation for economic downturn. Woolsey's argument fails to explain how misallocation can never explain economic downturn. Both are clearly at work. What would be better to say is that there is high demand for money, but that is a response to the economic slowdown (people building up savings to weather the storm), which was primarily caused by misallocation. Sure you can stimulate the economy by pushing money demand down, but this is unsustainable since excessive debt levels are precarious. Correcting for the misallocation (or allowing the economy to correct itself) is the only sustainable solution.

Matt C writes:

Bryan, I second Arnold's question about what is meant by producing familiar goods. Other than subsidizing unemployed people to work at their old jobs and wages regardless of the value of their output, which I'm guessing is not what you mean.

"So what can we do? We can use monetary and fiscal policy to give people money. We can create that money out of thin air and "replace" all the money they spent on houses. They will then go and buy the things that, in retrospect, they should have bought."

I'm pretty sure you realize that creating money out of thin air is in effect a transfer away from creditors and savers, to debtors and to those who get to spend the new money first. Let's not lose track of that, though.

Second, the money recipients will not go out and buy the things that they should have bought, because we don't yet know what those things are. We cannot just leap from broken and unprofitable patterns of production instantly into a new, economically efficient equilibrium. We have to search out new profitable ways to employ resources a bit a time. Hiring guys to, say, dig ditches and then fill them back up again won't increase real production, and it will slow the process of those guys finding employment making something that people would actually like to pay for.

Hyena writes:

Mr. K,

Our evidence for excessive monetary demand is that the inflationary policies of the Fed have failed to reduce the price of money. Currently the Fed and the Congress have been increasing the money supply but there has been no corresponding increase in government bond yields. That means demand for money still outstrips the supply.

"Excessive" merely means "excess". The Fed needs to print more money. Were the Federal Reserve a private firm, it would be printing like mad because it would be making a killing on every dollar printed.

Mr. C,

I don't see that as likely. Do you personally have trouble crafting a wish list this holiday season? If not, then you personally have things you know you want right now provided you can afford them. And that's the point: we're not all full-up on stuff, there's still stuff out there we want right now. We'd buy it if we could afford it and people will produce it if we'll buy it.

What we need is a monetary miracle this Christmas.

Matt C writes:

We want producers to engage in new lines of production that will ultimately prove to be profitable. We want them to refrain from employing resources in efforts that will ultimately prove unprofitable. They have to make these decisions in the real world, with real consumers facing resource constraints.

It's true that I, and most people, could easily find ways to spend a million dollars if someone dumped it on me. I don't see how this helps answer the question of whether building a new roll-on-deodorant factory will end up being profitable. Not at all.

Hyena writes:

Mr. C,

Precisely. The primary resource constraint on consumers, however, is money. A lot of them are unemployed, many more are underemployed and likely far many more face poor advancement prospects.

If we give those consumers additional money, they will buy all of those things. A lot of those things won't be around in two or three years. That's fine! You wouldn't have told Valve not to make Half Life or Apple not to design iPods because you'd need to develop a new product later. That's how business works and you factor that cost into your decision.

Hyena writes:

Basically, we're not concerned about what businesses will produce. We give the money to consumers, they buy what they desire and businesses will naturally meet the demand.

That's it, it's no more complicated than that.

Sonic Charmer writes:

If one is to take this story on its own terms at face value - 'people aren't spending because they are un/under-employed and don't have cash' - then printing/'giving' them some one-time cash can't possibly work. So the story that this will boost demand is incoherent on its own terms.

If you think you can't afford some $100 consumer good because you don't have a job, and then I give you $100 cash, that doesn't suddenly mean you 'can afford' it. Ability/inability to afford things is not a question of comparing 'how much cash do I have' with some definite/absolute threshold, it is a calculation that embodies theories about one's expected future cashflows. And that's the thing, giving you $100 doesn't affect your projected future cashflows at all if you're still unemployed.

The story that any of this will work tacitly assumes either that people are stupid and have no forward-looking capability, and/or that they can be easily tricked. I am in the (unusual, for me) position of disagreeing with the misanthropic position here.

Hyena writes:

Mr./Ms. Charmer,

Or it assumes the policy is designed so that you can expect future cash flow.

Sonic Charmer writes:

If/when someone from the government claims to have designed a policy according to which unemployed people can safely PV to themselves a neverending future cashflow stream (implicitly, with no attendant loss of purchasing power), said unemployed people are entitled to doubt that person from the government and therefore discount the likelihood of that actually happening accordingly.

Unless (again) we are supposed to believe mostunemployed people are stupid/easily duped, as some people evidently do.

Daublin writes:

It's a good point, Bryan. However, it has a straightforward response: do we really think a specialist in one field can significantly increase output in another field?

If I understand the monetary and fiscal approaches, the idea is that the better-off enterprises should be trying to hire out of the unemployed pool at bargain basement prices. The home builders are supposed to go work in hospitals, and the bankers are supposed to build railways. The non-specialists won't produce as much as the specialists, but they'll produce more than zero, and the amount they produce is the amount the wage should be. Everybody wins, if only we could get the unemployed into these lower-paying jobs.

How realistic is this scenario in the modern economy, though? If you look at bankers, train builders, house construction, and medicine, it's really hard to make *any* use out of someone from another field. You might not take them even for free.

To draw an analogy, if employees are like capital, let's remember that it's normal for capital to sit unused in storage for long periods of time. If you have one closet full of dot matrix printers, and another full of vinyl record players, you might leave them there gathering dust even though they are yours to use for free.

Bill writes:

Ok, so it looks like we've diagnosed a symptom (excess demand for cash).

My problem is when policy is designed to treat the symptom while ignoring, or even spurring on the disease.

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