1.0 INTRODUCTION On 1st January 1999, 11 European countries decided to denominate their home country currencies into a single currency, known as the Euro. The European Monetary Union (EMU) was considered as a committee consisting mostly of central bankers which led to the Maastricht Treaty in year 1991. The Maastricht Treaty was established to set budgetary and monetary rules which called as “convergence criteria” for countries wishing to join the EMU. The criterion set was pertaining to the size of national debt, budget deficits, interest rates, inflation rates, and exchange rates. Denmark, Sweden, and the United Kingdom were qualified but chose not to join the union. (Anand, M. R., Gupta, G. L.,
Is a general glut possible?
Introduction In macroeconomics, general glut refers to there is a supply excess in all industries. There is a long time running debate on the general glut from the late 18th century. Many economists try to figure out if there is a general glut in reality. Normally, glut could be exhibited in a economic depression or recession with high unemployment rate and idle manufactures. However, Jean-Baptiste Say(1803) established his theory “Law of markets” which advocates that there is no general glut . Say said products are paid for with products. In the other words, supply creates demand. Many classical and neoclassical economists support Say’s Law. Say brought up his theory after industrial revolution. Under that background, Say’s law might be right, because market was completely controlled by suppliers. It means suppliers are consumers. Therefore, Say’s law seems right. On the other hand, Say’s Law can be proved with one simple example: if firms cannot sell goods, then goods prices will be decreased until consumers accept it. The only problem is time. In the long run, Say’s law seems correct.
Ricardo (1851) extended this notion to saving and investment. If manufacture produces more than one consumes, then the surplus is saved and, by definition of terms, invested. No one would produce in excess of consumption needs if one does not have a desire to either exchange it or invest it. Supply, therefore, is demand. This virtually all the Classical economists held to be an irrefutable truth.
However, some economists denied Say’s law concluding there is a general glut in economy. Keynesian argues that some microeconomic-level actions can lead to a general glut. Next, unnecessarily high unemployment rate is the evidence of a general glut. Austrian school economists argue that misallocation of resource causes the gneral glut. Some post-Keynesian economists think credit bubbles or speculative bubbles is the cause of general glut.
In my opinion, general glut exists in the modern society. The severe worldwide economic depression in the 1930s and financial crisis in 2007 prove that there is a general glut in reality. Especially, the global financial crisis in 2007 makes me to believe that Keynesian is correct and general glut is possible.
It is controversial that government should adopt laissez-fair or Keynesian policy to exit finaical crisis. From laissez-fair side, economists suggest government should stimulate production and this is the only way to control crisis. On the other hand, Keynesian’s supporters argue that government should stimulate demand. Because they think insufficient aggregate damand causes the fiancial crisis.
Say’s law This part I will discuss Say’s law more detail and analyse why Say’s law is inconsistent with other economists’s theories. Say is the first economists to advocate that the price of a product is dominated by its supply and demand. Say(1803) established “Law of markets” theory which argues that the total supply in an economy can never fall below or exceed the amount of total demand. Therefore, there is no general glut in a economy. On the other hand, Say argues that money is neutral.
Personally, I think Say’s thought about money’s purpose is inconsistent with most economists arguments. It is the one reason why his theory is inconsistent with most economists’ theories. Say(1983) contended trader is interested in other products, not money. He thinks there is no reason to hoard money and money’s purpose is buying other goods. In contrast, I think many people are engaging to hoard money for various reasons. For example, one’s salary is 2000 dollars per month, it is impossible for him to use 2000 dollars every month. One will make a financial plan and save one small proportion in the bank purposely.
Many classical and neoclassical theory supports Say’s law. I read the story like shoe-hat world or some two things world in their articles. In the shoe-hat world, they exchange one good for another good . According to their explanations, there could be three possible circumstances in the shoe hat world. I got this idea from a on-line article called ” the general glut controversy”. First of all, shoes makers and hat makers have enough quantities to satisfy all demand. Then, there is a overproduction of hats, meaning too great a demand for hats. Next, there may be too many shoes in the market. However, there never be a overproduction of both goods. Because a shoes maker would not produce one more if he or she did not need more hats. On the other hand, there could be a glut for one good, but there could not be a general glut. It seems plausible that general glut does not exist. However, they overlooked a important stuff, of course, money.
In the current society, we are not in the barter economy. Money plays a important role in capitalize economy. If i introduce money in the two person economy, there is a little change. Mill, John Stuart (1844)argues that in the simple exchange economy, supply creats demand. However, when money is the exchange medium, people can hoard the sales profit. Therefore, supply do not always create demand and general confidence can change the balance between supply and demand.
Joseph Clark(2010) argues that there still cannot be a general glut after we introduce money. He said there could be surplus in all goods relative to money. From the long term side, I think there is no general glut, however, in the short term, definitely supply does not equal to demand due to price is not flexible. It means there is overproduction or underproduction. Say’s law just messed up by the exchange medium, money.
Great depression and global financial crisis It is important to discuss the economic depression in the 1930s and global financial crisis in 2007. From these two events, I firmly believe general glut exists. Many economists argued that government interventions is the main reason for financial crisis. Robert ( 2009) asserts that one cause of financial crisis is the unregulated financial market. Some researchers thought the main reason for financial crisis is human’s greed. Adrian(2008) concluded one cause of the crisis is a change in the model of banking, mixing credit with equity culture. Nevertheless, I think general glut is the main reason. After doc.com bubble bursting, American government decreased interest rate to prevent economic recession. Between 2001 and 2004, interest rate even reached the lowest point of 50 years, 1%. I think real estate glut is the fuse of the crisis. After real estate bubble bursting, the general glut came up. For example, the Big three(GE,FORD,CLESLER) asked for $50 billion to avoid bankruptcy and ensuing layoffs, then Congress worked out a 25$ billion loan. From a more widen scope, looking at the data from Wikipedia, the annulized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 9.8% in the Euro.
Looking at the unemployment rate of economic downturn in the 1930s: unemployment in the United states arose to 25% and some other countries reached 33%(frank, 2007).If Say’s law is correct and general glut is invisible, there is no unemployment. I will explain why unemployment rate is related with Say’s law and general glut in the next part. Say and other nineteenth-century economists argued that products can find buyers eventually if prices are sufficiently attractive. I admit this argument is correct. If Airbus sells A380 as car’s price, I think there is no overproduction problem for Airbus. I think many theories are established in a perfect and simple world. Actually many theories cannot apply to reality because of imperfect economy system.
Some other theories Keynes (1936) argued that unnecessarily high unemployment rate was the evidence of the general glut. Aggregate demand for products is less than aggregate supply, causing economic recession and losses of potential output. There are three important concepts in Keynes paper. The first one is propensity to consume. The marginal propensity to consumer is the relative increase in personal consumption, that comes with an increase in disposable income. The marginal propensity is less than one. In the other words, the actual production level is lower than the full employment production level. Therefore, there is a gap between total income and total consumption. This gap would not be eliminated which conflicts Say’s law. Now, someone maybe ask if investments can close this gap. Many economists believe that saving is equal to investment. Keynes(1963) argues that investment cannot close this gap because there is no evidence showing that investment is equal to saving. Keynes contend that saving depends on the household’s income level. It means one earns more and one saves more. However, investments depends on the marginal efficiency of capital. Keynes thinks saving and investment are totally different terms and have no autocorrelation.
Austrian school economists argue that misallocation of resource causes the depression, even general glut. They also contend the depression is a tool to wipe out the excessive supply.(wiki)
Austrian school economists focus on the credit cycle when they see the business cycle. they think depression is inevitable after credit bubble burst. Artificially low interest rate could lead speculative economic bubbles. Then, recession comes up to adjust the balance of saving and investment(Thorsten Polleit,2007). I think Austrian school theory is similar to post-Ksynesian. They both think general glut cause as one spends more than one earns. Personally, I think greed is another way to interpret this problem.
some post-Keynesian economists think credit bubbles or speculative bubbles is the cause of general glut. From Irving Fishing¼ˆ1933¼‰ view, debt bubble busrting leads general glut. According to his debt deflation theory, a series of bad things occur after bubble bursting. First of all, distress selling and debt liquidation lead contraction of the money supply. Then, decrease of asset value and fall in firms’ profits. Afterwards, unemployment rate increase leads pessimism. Finally, people will hoard money. Therefore, a general glut comes up due to the shift from using more than one earns to spending less than one earns leads a sustained decrease in aggregate demand(wiki).
It is necessary to talk about Marxian in the general glut debate. Marx(1864) contend that there are two types of goods, one is capital goods like machines and another one is consumer goods that are not durable. According to Marx, I think capitalist economy target is capital goods accumulation. On the other hand, firms goal is profit maximum. Looking back to our reality, many developed countries companies are using outsource strategy. They are reaching the maximum marginal profit. So there will be more and more goods but unchanged demand power even lower. Therefore, general glut is possible in the capitalist economy. Sismondi(1861) and Karl Marx have a same idea about time lag in the products transaction. I think this idea exists in the reality, for example, one produced a good and sell it. However, he would hoard money for a while before he buy other goods with money he earned. Therefore, there is a breakdown in the transaction and overproduction crisis can occur.
Actually some economists oppose to Say’s law before Keyne and Marx. Malthus(1820) argues that producers do not always exchange their goods for other goods. Some goods are exchanged for labour. However, Say’s law does not concerns about employment and unemployment. Therefore the entire goods can lose value due to unproductive labour,meanwhile, general glut can exist.
From the money side, Say and his supporters think is completely neutral. However, Malthus(1820) contend that producer wants money not other goods. He think it is so abstract that people want goods and not money. I persist Malthus’s thought is correct. For example, I want to buy a house or a luxury car, so I will to save my money within five even ten years. Before I buy a house, money is preferable for me. Eventually, I admit my saving is for goods, however, I do not immediately change goods when I get money. There is a gap, even for a while, this gap will cause a general glut.
conclusion I think it is impossible to avoid the crisis of general glut. Theoretically, general glut is a issue of income distribution. Profit is distributed to minority. This could leads social savings and investments too high as well as low consumption, hence the scale of production and consumption is asymmetry. Then, general glut comes up. Therefore, I support that government should stimulate aggregate demand side to exist crisis.
Then, I disagree Say’s standpoint that supply creates demand. Just a simple example, manufactures always increase their investments when economy is booming. They think there will be more demand in the future , so they build more factories and buy more raw materials in advance. However, economic crisis may be happen suddenly leading to less consumption. Therefore, there will be many idle factories and high unemployment rate as well as unsold goods. Under this condition, I can barely believe that supply creates demand. I think general glut exists due to firms managers overestimate the demand quantities and misjudge macroeconomic situation. I think greedy soul is the main cause of overestimation and misjudgement. It is also the deep reason for the general glut.
Many people debate on the term “general” and think there could be overproduction for one good or two goods or one thousand goods, however, no general glut. I think once money exists in our economy as a exchange tool, there could be general glut. Maybe money is not overproduction,but money is not good. There is no industry called money industry. On the other hand, I pretty sure government policies would solve the general glut issue. For example, FED injected money supply after 2007 financial crisis. This topic is so profound and tricky. My essay is not a statistics based paper, so I cannot provide enough data to prove my notion. Money is a critical variable in this debate. Some economists argue that money is neutral and give so little importance to money. Actually money has a meaning of value store rather than exchange.
However, I still persist that general glut exists in the short run and supply seemingly create demand in the long run. in the other words, overproduction crisis is the situation that supplier cannot sell their goods at meanwhile. Is it possible? Obviously, the answer is yes. 1930 depression and 2007 financial crisis tell us the answer is yes. However, market itself adjusts and heals general gluts crisis eventually. I agree Keynes’s critique of Say’s law. But I am still confused his thought about saving and investment. I do not agree saving rate depends on income level rather than interest rate. For example, Chinese saving rate is higher than some western countries, however, Chinese income level is lower than western countries. Personally, I think interest rate has a strong relationship with saving.
Finally, if Say’s law is acceptable, it means government should adopt laissez-fair policies. However, I think Keynesian is more rational and acceptable than laissez-fair. Global financial crisis and 30th great depression give a strong evidence for this debate. I pretty sure market is rational, however, overlooking one variable, of course, people. Human control the market and price and I have to say people are not rational sometimes.
However, there is no general glut in the barter economy. In the other words, all goods are exchange for other goods. Plus, sellers buy other goods immediately after they sell goods. This circumstance seems so abstract and unrealistic. I cannot deny Say’s law influence and implications. Say’s law is a pillar of classical economic theory. Understanding the inner implication of Say’s law is important for government to control a crisis or avoid a crisis.