Ricardo's Law

Brad DeLong, back in 2010, looked into The "General Glut" of Thomas Robert Malthus. DeLong offers some thoughts, then follows up with "Malthus on 'glut': all the mentions I have found". Wow, what a great resource that is!

At one point DeLong has Malthus quoting David Ricardo:

If men ceased to consume, they would cease to produce.

Supply is limited by demand.

Say's Law and Say's Other Law

From Chapter II of the General Theory by Keynes:

From the time of Say and Ricardo the classical economists have taught that supply creates its own demand; meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product.

Supply creates its own demand.


From Book III of A Treatise on Political Economy
by J. B. Say:

production cannot be effected without consumption.

Demand creates its own supply.

Incompatible

Macro:

We cannot, as a community, provide for future consumption by financial expedients but only by current physical output.

- J.M. Keynes

Micro:

It is better to have a permanent income than to be fascinating.

- Oscar Wilde

In Low Orbit

The classical theory "is best regarded as a theory of distribution in conditions of full employment", Keynes said. "If the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment".

... Sorry. What?


They used to say, I see they still do, that an atom has one or more electrons orbiting the nucleus. Like moons orbiting a planet. But electrons sometimes jump to a higher or lower orbit. The "orbit" level for the electron is like the equilibrium level for the economy. That's the level where the electron (or the economy) wants to stay. But sometimes something happens to push the electron (or the economy) far enough away from its "happy place" that it doesn't go back. Instead, it finds a new level where it wants to stay.

When an electron changes its orbit level, they say, it absorbs or radiates energy. I say that when an economy changes its equilibrium level, it absorbs or radiates jobs.

When an electron jumps to a lower level it gives off energy. When an economy jumps to a lower level it gives off jobs. When it gives off jobs, there is less employment. When an economy jumps to a higher level it absorbs jobs, and there is more employment.

People have said the economy has a "new normal". They mean it has jumped to a lower orbit and given off jobs. This change created more "involuntary unemployment". The top "orbit" level for the economy, according to Keynes, is the "full employment" level. The lower orbits produce various levels of involuntary unemployment.

The classical theory only applies in high orbit, Keynes said.

24 years, Borio says. It's not a coincidence.

Zero Hedge 4 December 2017: BIS Issues An Alert: Tightening "Paradoxically" Leading To Excessive Risk Taking; Reminds What Happened Last Time:

Valuations in asset markets are “frothy” and investors are basking in the “light and warmth” of the “Goldilocks economy” ...

The Goldilocks economy? It's right on schedule. I've been predicting it since March 2016, the same month Zero Hedge told you "The world economy is on the precipice of another Great Depression."

Oh, and if asset markets are "frothy" it just means we need a small tax on asset market transactions. Or, if we already have a tax like that, it means increase the rate a little. Just like the Fed would increase interest rates. It's not rocket science.

The Zero Hedge post links to BIS Quarterly Review, December 2017 - media briefing where Claudio Borio says:

The expansion broadened and gained momentum. Above all, despite vanishing economic slack, inflation - central banks' lodestar - generally remained remarkably subdued.

Vanishing economic slack? No, it's way too early for that. Borio probably uses the wrong measure, like everyone else. Financial slack must be measured as the size of accumulated debt relative to the size of the circulating money which is used to make payments against that debt. Or accumulated debt relative to Federal debt held by Federal Reserve banks. Or accumulated debt relative to base money. Any measure that shows how far a dollar has to stretch to cover all the debt it has to cover.

Scott Sumner has often said the economy is bad because money is tight. He's right about that, but he doesn't know how to show tight money. To see tight money, look at spending-money relative to accumulated private debt -- or relative to total public and private debt. Look at narrow money relative to broad money. Look at the total cost of finance relative to the money available to make the payments. Work with me here.

Borio says:

Even as the Fed has proceeded with its tightening, overall financial conditions have eased. For instance, a standard indicator of such conditions, which combines information from various asset classes, points to an overall easing regardless of the precise date at which the tightening is assumed to have started. Indeed, that indicator touched a 24 year low.

I can show you the 24 years:

Graph #1: Credit Market Debt per Dollar of Circulating Money

This is my debt-per-dollar graph. The higher the blue line, the faster a dollar has to move to cover all the debt it has to cover. When the line goes up, money gets tighter. When the line goes down, the financial system gets more slack.

24 years ago it was the end of 1993 and the economy was just getting ready to start its "Goldilocks" phase. And things are just now ready to start improving, again.

BIS is right to worry, because the blue line on the graph is going to go up again until we get in trouble again. But we still have time to prevent a recurrence of the problem.

We need to make sure debt (especially private debt) does not accumulate too rapidly. That means people have to pay down debt faster. Instead of having policies that encourage people to accumulate debt, we need policies that encourage people to pay down debt. Instead of letting people deduct their mortgage interest, for example, give people a tax deduction for making an extra mortgage payment or two each year. You can even design the new policy to create the same amount of tax advantage as the old policy.

We must make debt grow more slowly. That's crucial. As a bonus, a policy that gets us paying down debt faster is a policy that fights inflation. Why should interest rates have to do all the work?

Oh, and it's no coincidence, that "24 years" thing.


H/T Tom Hickey

The trend of long term growth

Two images, not quite at random.

This, from Revisionguru, showing a rock-hard erectile trend:

 
And this, from CaixaBank Research, showing a more flaccid trend:

 
Economists always show the boner, but the other is more honest.

I think I'm done here.

A comparison of Adam Smith and Jean-Baptiste Say, based on their "Lotteries" paragraphs

Adam Smith

Smith looked at who gets the money from lottery ticket sales, and pointed out that lotteries are not "perfectly fair". If they were, he said, "the undertaker could make nothing by it".

From this observation he draws the conclusion that

There is not ... a more certain proposition in mathematics, than that the more tickets you [buy], the more likely you are to be a loser. [Buy] all the tickets in the lottery, and you lose for certain ...

That doesn't stop me from buying the occasional lottery ticket. I've never hit the big one, though, so on net I'd have to say Smith is right: I've lost more than I've gained by the lottery.

Other than that, Smith makes use of the lottery to look at aspects of human nature. We love the chance of gain, he said:

That the chance of gain is naturally over-valued, we may learn from the universal success of lotteries.

And we are dazzled by the big prize:

The soberest of people scarce look upon it as folly to pay a small sum for the chance of gaining ten or twenty thousand pounds; though they know that even that small sum is perhaps twenty or thirty percent more than the chance is worth. In a lottery in which no prize exceeded twenty pounds, though in other respects it approached much nearer to a perfectly fair one than the common state lotteries, there would not be the same demand for tickets.

Smith is fine with the idea that a laborer should get his wages, and an entrepreneur his profits. But if the entrepreneur is in the lottery business, Smith says, his cut is unfair... And the entrepreneur becomes an "undertaker"!

In this one particular case, the entrepreneur's profit is not "fair" to his customers. I don't know why Smith says that, unless he really didn't like the lottery. But if you accept Smith's premise, you have to accept his whole paragraph. It's all one argument. It all hangs together.

Jean-Baptiste Say

"[T]he chances are manifestly against" lottery players, Say says. Smith said the same, but Smith at least did the math. J.B. Say only makes the assertion.

Say's assertion makes a good conclusion to his paragraph. But it is not a conclusion to an argument about the chances of winning a lottery. Say's argument is not about the chances of winning a lottery. His argument is that lotteries are bad.

Say says that lotteries are an unprofitable use of capital. That's in contrast to Smith's view that the undertaker's profit is unfair or excessive. Say also says that lotteries cannot possibly contribute much to the Treasury, and that they are like a tax that falls heavily on the needy.

In addition, he points out that lotteries are a "vast" waste of time, and that they teach people to trust chance more than their own talents and to favor zero-sum gain over productive activity.

None of Say's assertions are backed up the way Smith backs up his "not perfectly fair" assertion. And half of Say's remarks are moralistic generalizations focused on harmful effects of the lottery on human character.


Smith was a great thinker. Say was a petty man.

Adam Smith didn't like lotteries, either

I had to go looking for it, but memory did serve. This is the paragraph I remember:

That the chance of gain is naturally over-valued, we may learn from the universal success of lotteries. The world neither ever saw, nor ever will see, a perfectly fair lottery; or one in which the whole gain compensated the whole loss; because the undertaker could make nothing by it. In the state lotteries the tickets are really not worth the price which is paid by the original subscribers, and yet commonly sell in the market for twenty, thirty, and sometimes forty per cent. advance. The vain hope of gaining some of the great prizes is the sole cause of this demand. The soberest people scarce look upon it as a folly to pay a small sum for the chance of gaining ten or twenty thousand pounds; though they know that even that small sum is perhaps twenty or thirty per cent. more than the chance is worth. In a lottery in which no prize exceeded twenty pounds, though in other respects it approached much nearer to a perfectly fair one than the common state lotteries, there would not be the same demand for tickets. In order to have a better chance for some of the great prizes, some people purchase several tickets, and others, small shares in a still greater number. There is not, however, a more certain proposition in mathematics, than that the more tickets you adventure upon, the more likely you are to be a loser. Adventure upon all the tickets in the lottery, and you lose for certain; and the greater the number of your tickets the nearer you approach to this certainty.

Smith is quite definitely opposed to lotteries. But in this paragraph and others, he uses the lottery to observe human behavior, and as a metaphor to describe aspects of other economic activity. By contrast, J.B. Say took the opportunity of a footnote to say the most unkind things about lotteries, as we saw in the previous post.

J.B. Say did NOT like lotteries

In Jean-Baptiste Say's A Treatise on Political Economy, paragraph III.VIII.55 refers the reader to footnote 88:

Lotteries and games of hazard, besides occupying capital unprofitably, involve the waste of a vast deal of time, that might be turned to useful account, and this item of expenditure can never redound to the profit of the exchequer. They have the further mischievous effect of accustoming mankind to look to chance alone for what their own talents or enterprise might attain; and to seek for personal gain, rather in the loss of others, than in the original sources of wealth. The reward of active energy appears paltry beside the bait of a capital prize. Moreover, lotteries are a sort of tax, that, however voluntarily incurred, falls almost wholly upon the necessitous; for nothing, but the pressure of want can drive mankind to adventure, with the chances manifestly against them.

Good grief! And today's winning numbers are ...