Sorry Scarcityists: Demand Curves Still Slope Downward

At Cafe Hayek, Don Boudreaux writes a response to the scarcityist argument, as he puts it:

[P]rotectionism is justified if enough consumers or voters are willing to pay higher prices in order to help workers.

Don lists three reasons why the scarcityists’ reasoning is incorrect.  Below is my addition of a fourth reason from the comments section of that post:

I’d add a fourth one, one which shows that this scarcityist’s plan to save jobs though higher prices cannot work:

When the relative prices of protected domestic goods rises, then some sacrifices must be made. Scarcityists assume, incorrectly, that all the goods where quantity demanded falls is from the importers rather than the domestic producers, and thus only foreigners’ jobs are harmed. But this is not so; we only import a fraction of our goods. If the relative prices of domestic protected goods X, Y, and Z rise, and if the scarcityists do not change their purchases of X, Y, and Z, then necessarily other purchases of domestic goods that were not subject to import competition (say, goods A, B, and C) will be cut back. For instance: if one has to spend more on sugar, steel, and toys, one has less to spend on dinner out, movies, and baseball games.

The scarcityist may respond by saying “But wait! I am not on my budget constraint. I don’t spend every penny I have. I can afford to spend more.” I have two responses to this: 1) Good for you, but for many of us, we are not that wealthy, and 2) Then that necessarily means you are saving less. By saving less, there are less loanable funds, which means less money for people to borrow to build homes and businesses, persue education, buy cars, etc. So, you’re taking jobs away from people in construction, business, education, automaking, etc. In short, as long as relative prices rise, quantity demanded of something has to fall. Why? Scarcity is still a thing.

In his 1971 book “Economic Theory,” Gary Becker has a neat little proof of this (see pages 21-23 of the 2007 edition). A more detailed proof and discussion can be found here: http://www.jstor.org/stable/1827018

 

14 thoughts on “Sorry Scarcityists: Demand Curves Still Slope Downward

  1. Jon,

    I generally agree with you on issues of free trade but I guess I’m not sure I understand why the “scarcitiyistyist” insult is considered to be such an awesome burn among the Austrians. Certainly we agree that resources are limited, and in that sense “scarce,” and that some laymen fail to recognize that in their economic views.

    And we agree that viewing economics as a zero sum game is another common mistake among people with little understanding of economics. I assume that’s why “scarcityist” is considered to work as an insult.

    >—-“By saving less, there are less loanable funds, which means less money for people to borrow to build homes and businesses, persue education, buy cars, etc.”

    That is not necessarily true in a fiat money regime. I understand that Austrians feel we should not have fiat money.

    But we do.

    Now I understand that Austrians will want to point out that an expansion of fiat money will likely cause cause inflation. But that inflation will not affect everyone equally. It will benefit those who have borrowed money for productive purposes and it will hurt those who have borrowed money for failed projects. It’s not obvious that that is bad. That sounds like the kind of competition in the marketplace creative destruction that Austrians usually like.

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    • So far as I can tell, only Don Boudreaux, Mark Perry, and I use the term “scarcityist” with any regularity. I coined the term to properly describe protectionism since protectionism relies on increasing the relative scarcity of a good/service; abundance in the eyes of the protectionist (scarcityist) is a bad thing.

      “That is not necessarily true in a fiat money regime.”

      It is true in a fiat monetary regime. Money is just a scalar. A ‘fluttering veil” to use Leland Yeagar’s term. If there’s a shortfall in savings, you cannot just print more money to make up for it; it’d not change the real quantity of either savings or investment. I hasten to add this is not an Austrian thing: this just standard monetary economics. Keynesians, Austrians, Monetarists, RBC, etc., all argue the same thing.

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      • Jon,

        Thanks for the explanation. I see your point. You are using the term “scarcityist” to draw attention to the fact that they are arguing for making the supply of an item scarcer by restricting imports.

        >—” Money is just a scalar.”

        As a general rule of thumb I am always suspicious that the word “just” is up to mischief when it is used in debate. This is no exception.

        Money is a scalar but I don’t see how you can possibly say it is “just” a scalar. Wages and prices are sticky enough that changes in the money supply have effects that go well beyond simply changing the way that prices scale to goods and services. Maybe I am misunderstanding you because I know the Austrians believe that an excessive expansion of the money supply is a common cause of boom and bust cycles. That is certainly an effect that goes beyond just scalar.

        I can see why you would want to call the expansion of the fiat money supply something other than savings. But I don’t see how you can deny that it can cause a real increase in investment.

        Dollars are fungible. The dollar you invest from “real” savings is not distinguishable from the dollar you invest from an expansion of the money supply. Both are just as real in purchasing power when you invest them. An investment from either source may turn out well or poorly. The thing that makes the difference is not which source the money came from but whether or not it was invested in a profitable and productive enterprise or a failing one.

        Keynesians believe the you can mange aggregate demand by managing the money supply correctly through fiscal policy. Monetarists attempt the same thing with monetary policy. Market monetarists are even more active tinkerers with the money supply to manage aggregate demand. You may think that all of those are bad ideas but I don’t see how you can deny that THEY think you can expand the money supply and invest that money to add to aggregate demand during an economic depression or recession.

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        • In monetary economics, money is neutral: that is it only affects nominal, not real, variables. For example, if the Fed were to suddenly add 6 zeros to the end of each bill, the nominal values of prices would change, but not the real prices.

          So, playing around with the money supply doesn’t affect savings and investment levels. Those are real. It’d affect nominal things like nominal prices, nominal interest rates, etc.

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    • Remember in the future when everyone and their uncle is using the word “scarcityist” that it was just coined recently by our very own Jon Murphy! 🙂

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    • Greg G

      I don’t know whether it’s just Austrians, but the problem exists with government controlled fiat money, which allows government to inflate the money supply at will to finance government spending such as military adventures around the world. That would be much more difficult with private or commodity based money.

      You are correct that inflation affects different people in different ways. The first users of new money, government and the banking system, benefit from spending the new money at the current prices before they rise significantly. As money flows from hand to hand throughout the economy, prices rise to reflect the less valuable money until it finally reaches the hands of the poorest among us who face generally high prices all around. Inflation rewards borrowers and penalizes savers.

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    • Greg

      Please explain that, if you would, It seems to me that the market (consumers) decide what is a productive purpose and what is not by voting with their dollars. Any interference in price signals caused by inflation and artificial interest rates that cause entrepreneurs to miscalculate the amount of resources actually available for their projects and the amount of income actually available to potential buyers does them a serious disservice, so yes, it IS obviously a bad thing.

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      • Ron,

        As Tyler Cowen points out, the fact that Austrian Business Cycle Theory relies on businessmen being so dumb as to be fooled by inflation every single time is its biggest weakness.

        I think businessmen are smarter than that. I think they mostly know they need to think about inflation and factor that into their analysis. There is a huge amount of data publicly available on inflation trends and predictions, the yield curve, Fed policy etc.

        There is a reason why businessmen have been so much better at predicting inflation than Austrian economists. Businessmen put a lot more stock in what the yield curve is telling them than what Austrian economists are telling them. That’s why so few “miscalculated” based on Austrian predictions of hyperinflation as a response to the Fed’s massive expansion of its balance sheet in the last decade.

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      • Greg

        It’s not just inflation that’s a problem. Yes, businessmen are plenty smart enough to account for inflation in their planning. That is not the primary problem, but it raises a question: if inflation is already baked into all calculations, what is the purpose inflating the money supply? The only way to benefit from inflation is to inflate at an ever increasing rate,

        The primary problem is the expansion of credit that artificially lowers interest rates and destroys the normal price signal that indicates the time preference of consumers. You know, the ABCT. It’s not that investors and business people don’t know what’s happening, but they are all forced to play the game or not play at all. They only hope to get off before the train goes off the rails.

        At any rate, business people aren’t necessarily good economists.

        I’ve never understood why you believe a small number of central planners making macro observations and decisions can do a better job than individuals choosing for themselves (i.e. the market)

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        • Ron,

          >—” if inflation is already baked into all calculations, what is the purpose inflating the money supply?”

          As you yourself pointed out in an earlier comment, inflation is good for borrowers. The purpose is to encourage borrowing and provide funds for investment and consumption at a time when both are declining. When you bake inflation into your calculations borrowing makes more sense.

          >—“The only way to benefit from inflation is to inflate at an ever increasing rate”

          You can’t benefit from money creation indefinitely without limit. That is why Keynes only wanted deficits during depressions and recessions. He wanted surpluses during normal times. Market monetarists want expansionary money creation during economic busts and contractionary monetary policy during booms.

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          • Greg

            As you yourself pointed out in an earlier comment, inflation is good for borrowers.

            And it hurts lenders – and GSEs that buy up loans. .

            The purpose is to encourage borrowing and provide funds for investment and consumption at a time when both are declining. When you bake inflation into your calculations borrowing makes more sense.

            But what are you really borrowing? There isn’t sufficient savings to support the level of borrowing being encouraged. You can’t actually borrow something that doesn’t already exist and eventually the disconnect will cause the you-know-what to hit the fan. This is the crux of the problem. I liken this to spraying starter fluid into your carburetor to start your engine. (I know you’re old enough to understand this archaic reference.) If your real problem is that you are out of fuel, then the engine will only run so long as you continue to spray. You haven’t fixed the real problem. The real problem is lack of savings and investment capital. You can’t spend your way to prosperity.

            Notice that when a recession starts some sectors are predictably affected sooner than others and with greater losses than others.

            You can’t benefit from money creation indefinitely without limit.

            That’s for sure. Just ask those poor people in Zimbabwe.

            That is why Keynes only wanted deficits during depressions and recessions. He wanted surpluses during normal times. Market monetarists want expansionary money creation during economic busts and contractionary monetary policy during booms.

            That’s what they want, all right, Too bad they’re not very good at getting the timing right, and resisting the enormous pressure to continue expansionary policy during a boom. Too many business interests buying political interest, I guess.

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          • Ron,

            >—“And it hurts lenders – and GSEs that buy up loans.

            A counter cyclical monetary policy on inflation should hurt lenders during a bust and help them during a boom. You should want lower interest rates during the bust and higher ones during the boom to smooth out the cycles. That is as it should be. And indeed, the economic cycles have been a lot less violent than they used to be when policy was more pro-cyclical or neutral.

            >—“Notice that when a recession starts some sectors are predictably affected sooner than others and with greater losses than others.”

            If you could really predict this you’d be able to make money off of those predictions. Have you done that?

            >—“That’s what they want, all right, Too bad they’re not very good at getting the timing right, and resisting the enormous pressure to continue expansionary policy during a boom. Too many business interests buying political interest, I guess.”

            Well, it’s easy to get government to run deficits in a recession or depression. It’s just hard to get them to take away the punch bowl when times are good. But not impossible.

            Between 1945 and 1979 the United Stated paid down 2/3 of the massive national debt it built up in WWII and The Great Depression if you look at debt as a percentage of GDP which is how you should look at it. That was a period of spectacular economic growth where there was a generally countercyclical fiscal policy if you view inflation as a tax which is how you should view it. That was an era of very successful Keynesian policy for the most part.

            It was Reagan who blew up the debt and the norms about paying it down with his with Supply Side Economics.

            As for where the political pressure for a continued expansionary policy in a boom comes from I don’t know why you would single out businessmen. Demand for inflation has always been more of a populist thing. William Jennings Bryan got nominated for President three times on an inflation platform as a populist and every High School history student is still taught about his Cross of Gold speech. Trump is rumored to want to replace Yellen with a looser money chairman to satisfy his populist base. It’s the wealthy who fear inflation the most because they are the lenders.

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          • Greg

            If you could really predict this you’d be able to make money off of those predictions. Have you done that?

            That’s easy enough, Construction and building gets hit earliest and hardest followed by durable goods, followed by consumer staples. Check it out. It results from the longest term projects failing first as future resources aren’t available, and those projects being abandoned. Consumer goods and services don’t suffer until unemployment inceases enough tht people start belt tightening. It’s easy peasy if you understand ABCT.

            You should want lower interest rates during the bust and higher ones during the boom to smooth out the cycles. That is as it should be. And indeed, the economic cycles have been a lot less violent than they used to be when policy was more pro-cyclical or neutral.

            You must be laboring under the misconception that consumption drives economic growth. “Aggregate demand” and all that nonsense.

            Well, it’s easy to get government to run deficits in a recession or depression. It’s just hard to get them to take away the punch bowl when times are good. But not impossible.

            It’s possible for those elected officials who don’t want to be reelected.

            If you look at debt as a percentage of GDP which is how you should look at it.

            No, we should look at government spending (including deficit spending) as a dollar amount per capita. The historical view is breathtaking. There is no reason we should spend more on government as we earn more. What government services do we use more of as our income increases? For example my personal need for Dept.of Energy services hasn’t increased since I was born. It’s still zero. Why, again do we need a DOE? And why should their budget increase as we produce more?

            As for where the political pressure for a continued expansionary policy in a boom comes from I don’t know why you would single out businessmen.

            Business-persons like to borrow easy money at low interest rates. It’s not the inflation they crave, that’s just the inevitable byproduct of sustained “printing of money”. Poor people, people on fixed incomes, and those who can’t easily adjust their incomes don’t like inflation.

            William Jennings Bryan got nominated for President three times on an inflation platform as a populist .

            Yes, people can be really silly at times. Us smart people realize that with a government controlled currency, bimetallism requires the fixing of artificial prices of commodities that don’t naturally change price in step with each other.

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