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

 

8 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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