Here is my recent comment post at the Angrybearblog (a Keynesian-liberal economics blog)…..
You are partially correct, Marko, that “We have massive over-capacity , locally and globally, relative to the demand capacity of average consumers.”
In other words, consumers don’t have enough money to buy, at a high enough price to ensure profitability, all of the products that have been produced.
Where is all of that money? Some of it is sitting in the hands of the wealthy, for sure. And yes, a very small part of the problem is that the wealthy have a much lower propensity to consume AS CONSUMERS.
But the wealthy are not just consumers. They are producers too. That’s what having wealth beyond their needs for personal consumption allows them to do. What the wealthy do not buy as CONSUMERS, they “should” (in theory) buy as producers. It will be a different basket of goods (fewer consumption goods, and more things that can be used as means of production), but the wealthy “should” in theory be using this money at all times for SOMETHING. Money sitting in a vault does nothing, and any rational capitalist avoids hoarding money for too long in this state.
Money loaned out to a business (whether through a bond or equity purchase) or to the government (through a treasury bond) just pushes the question back one step: now it is those entities (businesses and government) that “should” in theory be using what money they have at all times for SOMETHING: either to buy production goods (in the case of business) or consumption goods (in the case of government).
So, according to this line of thought, there is no reason ever why all of society’s products should ever fail to get completely bought up. There “should” never be any overcapacity or “overproduction” that is contingent on inequality. It “shouldn’t” matter whether working-class consumers are spending the money on consumption goods, or whether wealthy entrepreneurs are spending the money on production goods. Someone should be buying the goods.
Now, maybe there could be a disproportion of too many consumption or production goods produced relative to the other. If income shifted suddenly in favor of workers at the expense of the wealthy, then there would be a shortage of consumption goods and a surplus of production goods. But prices would adjust, profit incentives would adjust, and capitalists would start producing more consumption goods and fewer production goods. That particular problem of disproportion should fix itself quite quickly without the need for crisis and stagnation.
If the wealthy ever have to rely on credit to finance expansion of the means of production, then that is a sign that EVEN THEY do not have enough money to buy the goods that society has produced that they could use for expanding their production. In this sense, they have the same problem as consumers do when consumers cannot finance their consumption except through credit. If both producers and consumers are systematically going into debt, then that is a sign that there has *somehow* been an absolute overproduction of both types of goods (consumption and production goods) at the same time, relative to society’s ability to buy those goods at profit-yielding prices.
In the run up to the Great Recession, the use of credit among producers and consumers to purchase production and consumption goods (respectively) expanded enormously. Increasingly, there was not enough real money to purchase all of the goods that were produced, so credit had to be introduced to fill in the gap.
An expansion of credit cannot go on forever. Not only does it get riskier and riskier the more the chain of payments is balanced on top of a pyramid of credit, but there is also the problem that the interest rate that money-lending capitalists charge industrial (entrepreneurial) capitalists increases. Money-lending capitalists can get away with charging the entrepreneurial capitalists higher rates in these circumstances because money is in much higher demand, and interest is the “price” that one can charge another for the use of the money’s services. Soon, the interest rate that entrepreneurial capitalists have to pay starts cutting into their rate of profit too much to make production profitable.
You might ask: “But, if producers and consumers simply needed more money to purchase all of the goods that had been produced, then why was an expansion of credit needed? Why did the Federal Reserve let money become scarce, and thus let interest rates rise? Why didn’t the Federal Reserve print more money so that: 1. interest rates wouldn’t rise as much, and 2. producers and consumers could buy all of the products that society had produced?”
Unfortunately, the Federal Reserve cannot print money, because real money is commodity-money. This is a point that is going to go right over the heads of neoclassical economists, but it is unfortunately true.
But let me repeat that one more time: THE FEDERAL RESERVE CANNOT PRINT MONEY.
What the Federal Reserve can print is monetary tokens (dollars). Dollars are token-money, not commodity-money. Token-money in circulation represents commodity-money, and promises to be redeemable for commodity-money at whatever the going ratio is between the token-money and the commodity-money.
This ratio used to be one that was fixed and held stable by governments who would only issue a certain amount of token-money for every increment of commodity-money (gold) that those governments had in their vaults, ready for people to come in and redeem their token-money for commodity-money. It used to be that the Federal Reserve would issue only 20 dollars of circulating tokens for every ounce of gold it had in its vaults, ready to redeem those ounces of gold for those 20-dollar bills to consumers who wanted to come in and exchange their token-dollar-money for real-commodity-money—that is, gold. Now, governments allow the ratio between token-money and commodity-money to float all over the place, and instead it is now the token-money price of consumer goods that Central Banks try to keep stable.
Token-money behaves differently than commodity-money. Token-money adheres to the “quantity theory of money,” which states that, as the amount of tokens in circulation increases, the purchasing power of each token will decrease proportionally. There being more tokens in circulation, and no change in the amount of real commodity-money that those tokens represent, the amount of real commodity-money that each token represents will decrease. Each token will be worth less. In other words, there will be inflation of prices if prices are measured in terms of that token money (whereas prices will not be inflating as measured in terms of the real commodity-money. Another way of saying this is, dollars will depreciate against the commodity-money, and the commodity-money will cost more in dollar terms).
This is why the Federal Reserve could not, in the run up to the Great Recession, service society’s need for more money to buy the products that had been produced. Trying to print more dollars in order to drive down the rate of interest would have sparked massive inflation, as in the 1970s. Printing more dollars does not actually increase society’s purchasing power of goods because the dollar-prices of all of those goods will inflate proportionally, thus requiring even more dollars for society to purchase all of them, and so on….
But why has the Federal Reserve been able to print dollars since the Great Recession with abandon and not cause inflation? (And by the way, I know that the Federal Reserve is not actually the one physically in charge of printing the dollars (rather, it is the Treasury Dept). But the Federal Reserve basically decides how many dollars are to be printed and injected into the economy).
Who says there hasn’t been inflation? The prices of goods should naturally fall as production becomes more efficient. Consumers have seen this effect in home electronics over the past 20 years. As the production of computers became more efficient, their prices went down, even in dollar terms (but even more in terms of commodity-money prices—the gold prices of computers).
The prices of goods have fallen substantially over the last 8 years in terms of commodity-money prices. It takes much less commodity-money—much less gold—to buy, for example, an automobile now than it did in 2007. The production process of building an automobile has continued to get more and more efficient in those years, partly thanks to better and better automation, and partly due to layoffs during the Great Recession leaving only the most productive workers behind.
And yet, as the prices of goods have fallen in terms of commodity-money, those prices have not fallen, but instead continued to rise in terms of dollars. There is your inflation.
The Federal Reserve cannot print even more token-money, or else inflation will start showing up even in terms of dollar prices (not to mention in terms of commodity-money prices!)
And the Federal Reserve cannot print (real) commodity-money because commodity-money must be mined out of the ground and sold on the market as a commodity to function as commodity-money.
And so, what society ends up with is too many goods produced, and not enough real commodity-money (gold) to purchase all of those goods. The commodity-money (currently gold) is “scarce” relative to other commodities. (Actually, this held true for the economy leading up to the Great Recession and is what caused the Great Recession, but technically it does not hold true at the moment. At this moment (2015), commodity-money is NOT scarce relative to the goods that it needs to be able to purchase in society. You can tell because interest rates are very low. There is plenty of commodity-money at present to purchase society’s goods, such that people are NOT desperate to pay high interest rates to get their hands on whatever money they can in order to make those purchases.)
But unfortunately, commodity-money DOES NOT adhere to the “quantity theory of money” like token-money does. When commodity-money is scarce relative to the goods that this commodity-money needs to purchase, the “price” of commodity-money does not go up. Goods do not decrease in commodity-money-price down to the level where there is once again enough commodity-money to purchase all of the goods.
Instead, the interest rate goes up, as people (businesses and consumers) become desperate to pay any high interest rate in order to get their hands on this commodity-money in order to purchase the goods that society has produced.
As the interest rate goes up, it becomes harder and harder for entrepreneurs to operate businesses successfully on the basis of loaned capital. Businesses must close down. The supply of produced goods goes down. In this way, the imbalance between too little commodity-money to purchase goods, and too much of those goods, is corrected.
But, instead of the supply of commodity-money being RAISED to the level where there is enough commodity-money to buy the existing output of goods, the output of goods has to be LOWERED to the point where there is once again enough commodity-money to purchase all of those goods.
This is how society under capitalism deals with the problem that Marko pointed out—that “we have massive over-capacity, locally and globally, relative to the demand capacity of average consumers.”
That demand capacity simply CANNOT BE INCREASED, whether by printing more token-money, or by government deficit spending (which is just another type of unsustainable spending on credit). Instead, the over-capacity must be reduced—by layoffs, idled machinery, and/or forced destruction of that machinery (war). Then the production of goods will once again be lowered so that there is enough “demand capacity” (commodity-money) available to purchase those goods.
If that sounds ridiculous and absurd, then don’t blame me. Blame capitalism for being a ridiculous and absurd system that hamstrings our ability to buy goods that have already been produced by pegging that “demand capacity” of ours to the level of commodity-money (gold) that is being produced.
For more explanation of this line of thinking, see Sam Williams’ blog post on commodity-money at: