Sunday, June 25, 2017

Marshall's Magic Confidence-Wand

Remember when Say's Law immediately sank without trace once Keynes debunked it?

Here was Alfred Marshall and Mary Paley Marshall in 1881 explaining why there is no such thing as over-production (if there is any such thing as a magic confidence-wand):
§ 4. After every crisis, in every period of commercial depression, it is said that supply is in excess of demand. Of course there may easily be an excessive supply of some particular commodities; so much cloth and furniture and cutlery may have been made that they cannot be sold at a remunerative price. But something more than this is meant. For after a crisis the warehouses are overstocked with goods in almost every important trade; scarcely any trade can continue undiminished production so as to afford a good rate of profits to capital and a good rate of wages to labour. And it is thought that this state of things is one of general over-production. We shall however find that it really is nothing but a state of commercial disorganization; and that the remedy for it is a revival of confidence. 
To begin with, it is clear that, as Mill says, "What constitutes the means of payment for commodities is simply commodities. Each person's means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange." 
But though men have the power to purchase they may not choose to use it. For when confidence has been shaken by failures, capital cannot be got to start new companies or extend old ones. Projects for new railways meet with no favour, ships lie idle, and there are no orders for new ships. There is scarcely any demand for the work of navvies, and not much for the work of the building and the engine-making trades. In short there is but little occupation in any of the trades which make Fixed capital. Those whose skill and capital is specialised in these trades are earning little, and therefore buying little of the produce of other trades. Other trades, finding a poor market for their goods, produce less; they earn less, and therefore they buy less; the diminution of the demand for their wares makes them demand less of other trades. Thus commercial disorganization spreads, the disorganization of one trade throws others out of gear, and they react on it and increase its disorganization. 
The chief cause of the evil is a want of confidence. The greater part of it could be removed almost in an instant if confidence could return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others. If all trades which make goods for direct consumption agreed to work on and to buy each other's goods as in ordinary times, they would supply one another with the means of earning a moderate rate of profits and of wages. 

4 comments:

Bruce Wilder said...

The confidence fairy! Wonderful.

One really does have to wonder at this:
as Mill says, "What constitutes the means of payment for commodities is simply commodities. Each person's means of paying for the productions of other people consist of those which he himself possesses.

What debility of mind leads economists to be so determined not to admit even at the outset of a chain of reasoning, that the means of payment are typically and almost universally money and credit? How can an economist use a term like "means of payment" and not identify money? This is some very ripe stupidity.

Sandwichman said...

Overripe.

Anonymous said...

we can have too much of a given commodity
but there is always a need for ways to increase utility
increase human capital, human abilities that increase utility for all
need for technologies to reverse damage, increase technologies to make make technology and quality of life sustainable, improve economic theories so they accurately reflect reality ,
for efforts into all sorts of production, now we just have to find a way to devise payment for same, so people involved in all these productive activities can have an income
one way to do this is to have people undertand the benefit of all these activities, but then tht understanding would be a form of human capital wouldn't it
who is going to help create that human capital

Bill said...

It sounds like the Tooth Fairy would do more to restore confidence than the Confidence Fairy. Put $1,000 under everybody's pillow and people will have the confidence to spend some of it.