Is deflation truly that bad for an economy?

[dinofelis]

Uh no.  If Say's Law is correct then we shouldn't see things like The Great Depression or deflationary spirals.

That's an extension of the "bookkeeping" version of Say's law which is, as I outlined above, obviously correct.

You are referring to the version of Say's law that says that all production WILL be bought, and that economy will always work at maximum output.  THAT version is of course wrong, because it goes one step further.

The "bookkeeping" version of Say's law tells us that all production CAN be bought.  However, a stronger version (in fact, the original version) of Say's law states that it WILL be bought.  Now, *that* is not necessarily true.  You might very well decide, even though you have the money, NOT to buy the production that remains to be bought, simply because you're not INTERESTED in buying it.  In other words, one can produce goods which are not in demand.  The earnings to buy them are available, but nobody wants to buy them.

I use Say's law in its more restricted version, which simply states that it is impossible to have, *by lack of earnings*, overproduction that CANNOT be bought.  I'm not using Say's original version of the law, that deduces (erroneously) from this, that it WILL be bought.

So, yes, I agree with Keynes' rejection of the strong version of it, exactly because of lack of demand.  But that was not what was discussed here.  I mentioned (the restricted version of) Say's law to contradict the statement that if wages are not high enough, there is simply not enough EARNINGS to be ABLE to buy the production. That is obviously wrong.

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[twiifm]

Uh no.  If Say's Law is correct then we shouldn't see things like The Great Depression or deflationary spirals.

That's an extension of the "bookkeeping" version of Say's law which is, as I outlined above, obviously correct.

You are referring to the version of Say's law that says that all production WILL be bought, and that economy will always work at maximum output.  THAT version is of course wrong, because it goes one step further.

The "bookkeeping" version of Say's law tells us that all production CAN be bought.  However, a stronger version (in fact, the original version) of Say's law states that it WILL be bought.  Now, *that* is not necessarily true.  You might very well decide, even though you have the money, NOT to buy the production that remains to be bought, simply because you're not INTERESTED in buying it.  In other words, one can produce goods which are not in demand.  The earnings to buy them are available, but nobody wants to buy them.

I use Say's law in its more restricted version, which simply states that it is impossible to have, *by lack of earnings*, overproduction that CANNOT be bought.  I'm not using Say's original version of the law, that deduces (erroneously) from this, that it WILL be bought.

So, yes, I agree with Keynes' rejection of the strong version of it, exactly because of lack of demand.  But that was not what was discussed here.  I mentioned (the restricted version of) Say's law to contradict the statement that if wages are not high enough, there is simply not enough EARNINGS to be ABLE to buy the production. That is obviously wrong.

Sorry I have trouble following your argument.  Originally you argue that by lowering wages, the workers benefit because as a result lower prices will follow.  Where is evidence of that?  I don't know what Says Law has to do w your argument.

Lower prices can result from outsourcing labor to cheaper labor markets.  However, only things that are possible be outsourced get benefit from cheaper foreign labor markets.  Things like energy, housing & services (including education & healthcare) don't have that benefit.  So even though you can buy cheaper TVs, your housing and utilities cost don't necessarily get cheaper.  That means lower wages in likelihood hurt the workers more than benefit them.

In any case, outsourcing will happen no matter what so we have displacement of labor.  If the manufacturing sector gets displaced into other sectors their wages still should be maintained and if wages rise the entire economy should benefit because of increased consumption (aggregate demand).

IDK if you work for a living but most people today complain about making ends meet compared to 20-30 years ago despite having more abundance of cheaper consumer goods manufacutred abroad

[dinofelis]

Sorry I have trouble following your argument.  Originally you argue that by lowering wages, the workers benefit because as a result lower prices will follow. 

It seems that in this thread, people have difficulty following a somewhat involved argument.  The point I argued AGAINST, was:

- "industrials should pay high wages to their personnel, because otherwise they don't have customers that can buy their products".

I argued against it by providing a similarly erroneous statement which applied this time not to entrepreneurs that make goods, but to workers that produce labor (call it reductio ad absurdum):

"workers should pay more labour to their employers so that these can sell cheaper products, and so that employers can buy more labour"

and I argued ALSO against it with my "weak" form of Say's law.

My point is that there is no need that it are LABORERS that buy products.  It can just as well be share holders.  The more you pay to laborers, the less you pay to your share holders.  So the more your laborers can buy your products, the less your shareholders can buy your products.

I gave an ultimate example of a hypothetical totally automatic production, where there is NO labor any more.  Then all the income goes to share holders.  They can just as well buy the products, while according to the theorem I am arguing against, if there are no wages, there would not be any consumption.  That's simply not true, because what is not paid as wages, can be paid as dividends.

That's the contents of my "weak" version of Say's law.

[twiifm]

Sorry I have trouble following your argument.  Originally you argue that by lowering wages, the workers benefit because as a result lower prices will follow. 

It seems that in this thread, people have difficulty following a somewhat involved argument.  The point I argued AGAINST, was:

- "industrials should pay high wages to their personnel, because otherwise they don't have customers that can buy their products".

I argued against it by providing a similarly erroneous statement which applied this time not to entrepreneurs that make goods, but to workers that produce labor (call it reductio ad absurdum):

"workers should pay more labour to their employers so that these can sell cheaper products, and so that employers can buy more labour"

and I argued ALSO against it with my "weak" form of Say's law.

My point is that there is no need that it are LABORERS that buy products.  It can just as well be share holders.  The more you pay to laborers, the less you pay to your share holders.  So the more your laborers can buy your products, the less your shareholders can buy your products.

I gave an ultimate example of a hypothetical totally automatic production, where there is NO labor any more.  Then all the income goes to share holders.  They can just as well buy the products, while according to the theorem I am arguing against, if there are no wages, there would not be any consumption.  That's simply not true, because what is not paid as wages, can be paid as dividends.

That's the contents of my "weak" version of Say's law.

I made that argument that increased wages would in turn increase aggregate demand.  Its a macro argument not micro.  When people have nore money they buy more stuff.  Simple as that

Your example is pointless because its science fiction. 

Shareholders cant do all the consumption for all of society.  You need a wide consumer base.  One guy buying a $10mm yatch fromnone business is not same as 1mm people buying various $10 items from many business

Shareholders can enjoy capital gains without any increase in dividends.  Its not zero sum between shareholder vs worker

[dinofelis]

I made that argument that increased wages would in turn increase aggregate demand.  Its a macro argument not micro.  When people have nore money they buy more stuff.  Simple as that

It doesn't of course, because the amount by which wages increase, the dividends decrease.  The same amount of money is set in circulation, it only targets different people (because different production factors).  As such, of course, demand will be different in quality.

Shareholders cant do all the consumption for all of society.  You need a wide consumer base.  One guy buying a $10mm yatch fromnone business is not same as 1mm people buying various $10 items from many business

It is a different demand, and there will be different products.

Consider a totally automatic economy, completely robotized, that produces luxury sports cars, palaces, kaviar and champagne.  With robotized high-level medecine, and every other thing a rich person may need or desire.  And of course robots.  You could think of an economy that is totally run automatically, and where all the profits go to their shareholders, which are also the consumers of these luxury products.  The economic circle is closed, and not a single wage is paid, and not a single amount of labour is sold.  In this case, the share holders are the sole consumers, and generate the total agregate demand for the goods they produce.

This is an extreme case, but it illustrates that "wages" do not play a specific role in the circulation of money.  It only plays an important role when labour is important, but it has no fundamental role.

When labour is important (when it is needed in large quantities in industry), then of course industry needs to answer the demand of the potential labourers to a sufficient extend to buy their labour.  And that's what wages are, and that's why the industry is mass-consumption oriented.

But that doesn't have to be so.  Industry can be luxury oriented if labour is not needed in large quantities, or, as in my gedanken experiment, at all.

[twiifm]

I made that argument that increased wages would in turn increase aggregate demand.  Its a macro argument not micro.  When people have nore money they buy more stuff.  Simple as that

It doesn't of course, because the amount by which wages increase, the dividends decrease.  The same amount of money is set in circulation, it only targets different people (because different production factors).  As such, of course, demand will be different in quality.

Shareholders cant do all the consumption for all of society.  You need a wide consumer base.  One guy buying a $10mm yatch fromnone business is not same as 1mm people buying various $10 items from many business

It is a different demand, and there will be different products.

Consider a totally automatic economy, completely robotized, that produces luxury sports cars, palaces, kaviar and champagne.  With robotized high-level medecine, and every other thing a rich person may need or desire.  And of course robots.  You could think of an economy that is totally run automatically, and where all the profits go to their shareholders, which are also the consumers of these luxury products.  The economic circle is closed, and not a single wage is paid, and not a single amount of labour is sold.  In this case, the share holders are the sole consumers, and generate the total agregate demand for the goods they produce.

This is an extreme case, but it illustrates that "wages" do not play a specific role in the circulation of money.  It only plays an important role when labour is important, but it has no fundamental role.

When labour is important (when it is needed in large quantities in industry), then of course industry needs to answer the demand of the potential labourers to a sufficient extend to buy their labour.  And that's what wages are, and that's why the industry is mass-consumption oriented.

But that doesn't have to be so.  Industry can be luxury oriented if labour is not needed in large quantities, or, as in my gedanken experiment, at all.

You make too many assumptions about static earnings.  If revenues increase then theres money to increase both dividends and wages.  There's no inverse relationship between wages and dividends.  I dont know why you think there is. 

There is no point in entertaining examples w no basis in reality.  Robots doing work for free making stuff for rich people?   

[dinofelis]

You make too many assumptions about static earnings.  If revenues increase then theres money to increase both dividends and wages.  There's no inverse relationship between wages and dividends.  I dont know why you think there is.  

We're not talking about the same thing.  The production is the same, the sales price is the same, the costs of supplies is the same.

The argument was: a producer should INCREASE the wages (for the same labour) in order to get MORE CONSUMPTION.  Now that's crazy, because if, all else equal, the producer increases wages, he has to take it from the profit he makes, and hence reduce dividends by exactly the same amount.  So what his labourers will consume more with their increased wages for the same amount of labour, the share holders will consume less with their reduced dividends.

(yes, yes, their demands will be DIFFERENT IN NATURE, but we said that already).

Suppose you make tablets.  You make 500 of them, each costs $150.-  Suppose your labourers buy 100 of them, and your share holders also buy 100 of them.  300 are sold to the rest of the economy.  Now, if you increase the wages of your labourers, maybe they will buy 150 of them now.  But you had to diminish the dividends to your shareholders, which only buy 50 of them.

You've shifted simply the consumption from your share holders to your labourers by increasing their wages (and by decreasing by the same amount the dividends).

There is no point in entertaining examples w no basis in reality.  Robots doing work for free making stuff for rich people?  

It is called a gedanken experiment, to test the logic.  

[twiifm]

You make too many assumptions about static earnings.  If revenues increase then theres money to increase both dividends and wages.  There's no inverse relationship between wages and dividends.  I dont know why you think there is.  

We're not talking about the same thing.  The production is the same, the sales price is the same, the costs of supplies is the same.

The argument was: a producer should INCREASE the wages (for the same labour) in order to get MORE CONSUMPTION.  Now that's crazy, because if, all else equal, the producer increases wages, he has to take it from the profit he makes, and hence reduce dividends by exactly the same amount.  So what his labourers will consume more with their increased wages for the same amount of labour, the share holders will consume less with their reduced dividends.

(yes, yes, their demands will be DIFFERENT IN NATURE, but we said that already).

Suppose you make tablets.  You make 500 of them, each costs $150.-  Suppose your labourers buy 100 of them, and your share holders also buy 100 of them.  300 are sold to the rest of the economy.  Now, if you increase the wages of your labourers, maybe they will buy 150 of them now.  But you had to diminish the dividends to your shareholders, which only buy 50 of them.

You've shifted simply the consumption from your share holders to your labourers by increasing their wages (and by decreasing by the same amount the dividends).

There is no point in entertaining examples w no basis in reality.  Robots doing work for free making stuff for rich people?  

It is called a gedanken experiment, to test the logic.  

You don't understand my argument.  I'm making the Old Keynesian argument.  That economy is driven by aggregate demand.  One way to boost aggregate demand is to boost wages.  Again I'm talking about macro not micro.

The people who build tables don't need to buy tables.  But if their wages increase they'll increase consumption <overall>, thereby increasing GDP.  Which benefit the table factory.  There's many policy that can have the same effect of boosting wages besides giving them a raise.  For example, lowering their taxes and compensate by raising tax on capital.

[JayCoDon]

The other problem here (and sorry for jumping in the middle) is the % of total money spent for the shareholders and the laborers. In this case, I imagine the latter spends a far greater % of their money than the former. Therefore, increasing the amount to the laborers ensures that a greater % of that gets funneled back into the economy via consumption than if shareholders saw an increase.

[Gyfts]

If we see a huge deflation, we pretty much see a slowing economy which isn't something retailers would want to see. Banks usually try to stop things like this from happening, so with more centralization and a false sense of USD's value, yeah retailers would probably take Bitcoin. Dell started, Overstock, Dish, ect. More and more will hop on.

[twiifm]

The other problem here (and sorry for jumping in the middle) is the % of total money spent for the shareholders and the laborers. In this case, I imagine the latter spends a far greater % of their money than the former. Therefore, increasing the amount to the laborers ensures that a greater % of that gets funneled back into the economy via consumption than if shareholders saw an increase.

Yes exactly.  You want wealth distributed amongst a robust middle class that does most of the consumption.  If capital has too much wealth you have inequality and that's not good for anyone

[tyz]

If there would be no or less debt, deflation wouldn't be a problem at all. Inflation is needed to devalue debt which is the basis to make new debt. Since today's economic growth is build on massive debt, deflation is dangerous indeed.

[dinofelis]

The other problem here (and sorry for jumping in the middle) is the % of total money spent for the shareholders and the laborers. In this case, I imagine the latter spends a far greater % of their money than the former. Therefore, increasing the amount to the laborers ensures that a greater % of that gets funneled back into the economy via consumption than if shareholders saw an increase.

This is again not a matter of spending or not spending, but of spending *on what*.  If you think of share holders as wealthier than labourers, which must be your assumption to think of a different spending profile, then share holders probably spend more on investment goods and less on consumption goods, and spend more on luxury items and less on mass items.

Offer will adapt to demand.  So if share holders spend more on investment goods, then that is simply as if the savings rate is larger in the economy.  The amount of increase in capital goods will be larger.  If share holders spend more on luxury goods, that means that production will orient more on luxury goods.

So the only thing you do by shifting rewards from share holders to labourers, in as much as their demand profiles are different, is that you will produce less luxury goods and less capital goods, and that you will produce more mass goods.

Instead of building private launching rigs that send private spaceships to the moon, you will sell mobile phones and coca cola.
Instead of companies that build private jets, you will have Boeing and Airbus building aircrafts for mass transportation.  Instead of having companies that build luxury castles, you will have companies that build apartment buildings.

[dinofelis]

If there would be no or less debt, deflation wouldn't be a problem at all. Inflation is needed to devalue debt which is the basis to make new debt. Since today's economic growth is build on massive debt, deflation is dangerous indeed.

Yes.  But economic growth is not based upon massive debt.  That's about like saying that your wealth is based upon a loan.
If you bought a luxury car, and you smoke expensive sigars, on credit, you can't really say that you're a rich man or woman can't you ?
So if you have "economic growth" based on a Mount Everest of debt, do you really have economic growth ?  Or are you living off future wealth ?

[deisik]

If there would be no or less debt, deflation wouldn't be a problem at all. Inflation is needed to devalue debt which is the basis to make new debt. Since today's economic growth is build on massive debt, deflation is dangerous indeed.

Yes.  But economic growth is not based upon massive debt.  That's about like saying that your wealth is based upon a loan.
If you bought a luxury car, and you smoke expensive sigars, on credit, you can't really say that you're a rich man or woman can't you ?
So if you have "economic growth" based on a Mount Everest of debt, do you really have economic growth ?  Or are you living off future wealth ?

Nevertheless, this has unforeseen consequences. Say, you happily live (or someone else lives, for that matter) off debt all your life and then one day you die. What happens to debt? Could we draw an analogy here with the debt being written off in the end on a global scale?

What is debt then actually?

[twiifm]

If there would be no or less debt, deflation wouldn't be a problem at all. Inflation is needed to devalue debt which is the basis to make new debt. Since today's economic growth is build on massive debt, deflation is dangerous indeed.

Yes.  But economic growth is not based upon massive debt.  That's about like saying that your wealth is based upon a loan.
If you bought a luxury car, and you smoke expensive sigars, on credit, you can't really say that you're a rich man or woman can't you ?
So if you have "economic growth" based on a Mount Everest of debt, do you really have economic growth ?  Or are you living off future wealth ?

That's how Capitalism works.  Capital drives growth.  When credit market expands you have growth.  Then it reaches an upper bound and theres reversion, and credit market contracts.

The key is to keep inflation constant so the the credit contractions don't push us into recessions, then deflationary spiral.  Nothing new here, everybody knows this

[twiifm]

The other problem here (and sorry for jumping in the middle) is the % of total money spent for the shareholders and the laborers. In this case, I imagine the latter spends a far greater % of their money than the former. Therefore, increasing the amount to the laborers ensures that a greater % of that gets funneled back into the economy via consumption than if shareholders saw an increase.

This is again not a matter of spending or not spending, but of spending *on what*.  If you think of share holders as wealthier than labourers, which must be your assumption to think of a different spending profile, then share holders probably spend more on investment goods and less on consumption goods, and spend more on luxury items and less on mass items.

Offer will adapt to demand.  So if share holders spend more on investment goods, then that is simply as if the savings rate is larger in the economy.  The amount of increase in capital goods will be larger.  If share holders spend more on luxury goods, that means that production will orient more on luxury goods.

So the only thing you do by shifting rewards from share holders to labourers, in as much as their demand profiles are different, is that you will produce less luxury goods and less capital goods, and that you will produce more mass goods.

Instead of building private launching rigs that send private spaceships to the moon, you will sell mobile phones and coca cola.
Instead of companies that build private jets, you will have Boeing and Airbus building aircrafts for mass transportation.  Instead of having companies that build luxury castles, you will have companies that build apartment buildings.

In other words inequality.  And inequality goes to extreme, you have social unrest.

[dinofelis]

In other words inequality.  And inequality goes to extreme, you have social unrest.

And then you put them in camps, exterminate them, and the world becomes a better place

[dinofelis]

That's how Capitalism works.  Capital drives growth.  When credit market expands you have growth.  Then it reaches an upper bound and theres reversion, and credit market contracts.

The key is to keep inflation constant so the the credit contractions don't push us into recessions, then deflationary spiral.  Nothing new here, everybody knows this

The point is simply that credits that stand for capital, are good.  Credits that stand for consumption, are a burden on the future.
Nobody is saying that credit that is backed up by capital is bad, on the contrary.  As you say, that's the source of growth.  but a mountain of debt, not backed by capital, is a recipe for disaster. 

Normally, the interest rate on credit is the lower bound of ROI of capital.  Indeed, no person in his right mind is going to take a credit to invest in capital on which the expected ROI is lower than the interest on the credit.  As such, the interest rate for credit is approximately the ROI on capital, which is then by itself the economic growth.  The funny thing is that by setting artificially the interest rate to near-zero, you are inviting people to invest in capital with an ROI of near-zero.  You shouldn't be surprised then to get an economic growth of near-zero !

Being generous on the credit market has the perverse effect of allowing people to invest in low-ROI capital.  That low-ROI capital will then, well, generate low ROI, which will imply a low growth.  As a reaction to that, Keynesians will lower even more interest rate !
To invite people even more to do bad investments...

[twiifm]

That's how Capitalism works.  Capital drives growth.  When credit market expands you have growth.  Then it reaches an upper bound and theres reversion, and credit market contracts.

The key is to keep inflation constant so the the credit contractions don't push us into recessions, then deflationary spiral.  Nothing new here, everybody knows this

The point is simply that credits that stand for capital, are good.  Credits that stand for consumption, are a burden on the future.
Nobody is saying that credit that is backed up by capital is bad, on the contrary.  As you say, that's the source of growth.  but a mountain of debt, not backed by capital, is a recipe for disaster. 

Normally, the interest rate on credit is the lower bound of ROI of capital.  Indeed, no person in his right mind is going to take a credit to invest in capital on which the expected ROI is lower than the interest on the credit.  As such, the interest rate for credit is approximately the ROI on capital, which is then by itself the economic growth.  The funny thing is that by setting artificially the interest rate to near-zero, you are inviting people to invest in capital with an ROI of near-zero.  You shouldn't be surprised then to get an economic growth of near-zero !

Being generous on the credit market has the perverse effect of allowing people to invest in low-ROI capital.  That low-ROI capital will then, well, generate low ROI, which will imply a low growth.  As a reaction to that, Keynesians will lower even more interest rate !
To invite people even more to do bad investments...

You don't know if investments are good or bad until hindsight.  Whether people borrow money to start business or buy houses and cars.  It doesn't matter.  What matters is aggregate demand drives production and jobs. 

The problem w deflation is you don't have that driver.  Falling prices don't make people consume more.  The rate of consumption is based on their income and confidence on future earnings