1.4 Lord Keynes and Say’s law

• Product Market: There is no demand without supply!

• Recessions do not happen for a lack of demand

• The more goods produced, the more there will be a demand for others

• Prosperity on the supply side NON interventionism

• Keynes about Say: “Supply creates its demand”

1.4 Lord Keynes and Say’s law

• Therefore: “Demand creates supply” (Keynes)

• Prosperity on the demand side interventionism

• Keynes implied the scientific justification for all that took place in US then Wilson (D), Hoover (R), Roosevelt (D)

• New Deal

• General theory: classic case is but one among many

1.4 Lord Keynes and Say’s law

• Keynes: nothing new, other than escaping older ideas “refutation” of Say’s law

• Say: refutation of previous ideas (e.g. mercantilism)

• In Say’s time crises were explained by: scarcity of money or aggregate demand deficiency (overproduction)

• Adam Smith explained why the former was NOT possible, Say offered an explanation for the latter

1.4 Lord Keynes and Say’s law

• Overproduction is always relative, NOT absolute

• Supply is never abundant in absolute terms

• Change in the “rate of exchange” of goods

• Goods are paid with other goods (money: means of exchange)

• Say: the problem of entrepreneurs is to "predict" what goods to produce as cheaply as possible, so as to meet the urgent needs of the public

1.4 Lord Keynes and Say’s law

• Smith and Say were the first to present the problem

• Classic economics “under attack” (Malthus, Marx, Keynes)

• Thus, Keynes provided a rationalization for the policies already implemented (e.g. year 1913: inception of the Fed)

• von Mises: “Emotional refutation, not rational”

Miscellany (I)

• Great depression (1929). Different approaches:

Keynes: Lack of aggregate demand public spending

Monetarism (Friedman): people’s expectations (bank runs and lack of liquidity) monetary shock

Austrian School: economic cycles (Fed)

• Does the system have an inherent economic failure?

• What happened? FDR 1º New Deal (1933) & 2º (1935)

Miscellany (II)

The aftermath of the “New Deal”:• Prolongation of the (natural) adjustment by markets• Public debt increase (1500% from 1910 to 1940)• Unemployment did not drop until after WWII (25% in 1933,

17% in 1935, 20% in 1937, 15% in 1940)• Destruction of capital + war• On a philosophical level: attack on individual liberties• Keynesianism-New Deal inheritance: welfare state• “Phillips curve”

Miscellany (III)Systems of socioeconomic organization:• Capitalism private property Liberalism (classical)• Communism public property Socialism

• Interventionism (?)

International division of labor starting point for the organization of societies Capitalism

Miscellany (IV)A bit of history on economics:

• Aristotle (proto-liberal) vs. Plato (proto-communist)

• Classical liberalism was born in Anglo-Saxon countries: Hume, Bentham, Lock (UK), Paine, Jefferson, Franklin (US)

• Classics: Smith, Say, Ricardo, Malthus, J. S. Mill, Marx (?)

• Socialism was German-made: Hegel, Feuerbach, Rodbertus, Marx & Engels, Kautsky, Lasalle, Bismarck

Miscellany (V)• Adam Smith: “the invisible hand” and the “animal spirits”

• J. B. Say: goods are traded for other goods

• David Ricardo: (relative) comparative advantages

• Division among the different factors of production (Ricardo) labor(wage), capital (profit), land (rent)

• Marx’s critique Exploitation theories

• Labor theory of value and the concept of “surplus value”

Miscellany (VI)Some “gaps” in Marx’s exploitation theory:• Labor is NOT the one and only factor of production• LTV v. Marginal Revolution (Jevons, Walras, Menger)• C-M-C’: NO exploitation, all wages, surplus value comes

with capitalism, M-C-M’: profits (deducted from wages) LTV + Iron law of wages = exploitation…but, wages are NOT the original form of income• Moreover, present value is more valuable than the future

(Böhm Bawerk) workers receive a discounted present value in money for the future commodity

Miscellany (VII)• If we define profits as the excess money from the sale of

products on the monetary cost of producing them; capitalist as the agent who buys-sells seeking profits; wages as the compensation for the services rendered (and NOT for the products of labor) in C-M-C’ income is NOT wages but profit!• All proceeds from a pre-capitalist economy are profits or

surplus value. For there to be wages there must be capitalists!• Profits are prior to capitalism, and the latter brings with it the

phenomenon of wages• Capitalism allows people to live from the sale of their labor

and NOT from the sale of the product of that labor

Miscellany (VIII)• Therefore, between capitalists and workers there are

reasons for the harmony of interests, so people can live as "wage-earners" (at the expense of lower relative profits)• Workers thus receive, under capitalism, the total present

value of their work, yet Marx’s idea was that they get the total future value NOW• Other criticisms:

Social classes (“class consciousness”) Destructionism (Mises) Economic calculation debate (Mises & Hayek) Altruism is immoral (Ayn Rand’s critique / Kant)

Miscellany (IX)Classical liberalism: private propertySocialism = “Destructionism” Communism (final stage)

Incentives to work (von Mises):1. Boss others around2. Feeling of getting your job done3. Being fairly remunerated

Socialism only entertains 1.; while 2. is NOT possible because of bureaucracy nor 3. because there are NO prices under socialism

Summary of Unit 1

• Why labor economics?

• Division of labor comparative advantage

• Positive and normative economics

• Efficiency and equity

• Say’s law

• A bit of history