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

 

Savings Is Not A Cost

Don Boudreaux draws my attention to an opinion piece at the Washington Post written by Robert Samuelson.  Don addresses one concern Samuelson has, but I want to address another, more fundamental point.

Samuelson writes (emphasis added):

A simple example shows why the theory works. Consider (hypothetically) widgets. Assume that new technologies cut widget production costs by 20%. These savings must go somewhere, and the chances are that they will be spent, thereby creating new jobs. The major candidates to receive the windfall are: (a) consumers, who could benefit from lower widget prices; (b) widget workers, whose salaries might be boosted; or (c) the shareholders of widget makers, which might raise dividends or build factories.

This logic could be thwarted if the windfall were saved and not spent.

Strictly speaking, this is not true.  If the windfall were saved and not spent, that does not mean that benefits do not occur.  Savings are economically productive, too.  Even if 100% of the windfall were saved, that would mean there are more funds for investment: housing loans, car loans, retirement, business loans, etc.  An increase in savings would help boost the economy, too.

Let’s do some thinking on the margin.  Let’s say that the windfall results in $1m saved.  Taking Samuelson’s argument above at face value, it’d mean that the $1m saved was a loss for the economy.  However, that $1m is loaned out to a new business owner who uses it to build his building, stock his store, and, once up and running hires more workers and produces more wealth for his community and the world.  The economy certainly has benefited.  I would suggest the following edit to Dr. Samuelson’s paragraph (bold and italicized part is my writing):

A simple example shows why the theory works. Consider (hypothetically) widgets. Assume that new technologies cut widget production costs by 20%. These savings must go somewhere, and the chances are that they will be spent, thereby creating new jobs. The major candidates to receive the windfall are: (a) consumers, who could benefit from lower widget prices; (b) widget workers, whose salaries might be boosted; (c) the shareholders of widget makers, which might raise dividends or build factories; or (d) borrowers/investors who now have a larger pool of loanable funds from which to draw, if some of the windfall is saved.

This logic could be thwarted if the windfall were saved and not spent.