In macroeconomics, a general glut is when supply exceeds demand: specifically, when there is more production in all fields of production in comparison with what resources are available to consume (to purchase) said production. This exhibits itself in a general recession or depression, with high and persistent underutilization of resources, notably unemployment and idle factories. The Great Depression is often cited as an archetypal example of a general glut.
The term dates to the begins of classical economics in the late 18th century, and there is a long-running debate on the existence, causes, and solutions of a general glut. Some classical and neoclassical economists argue that there are no general gluts, advocating a form of Say's law ("supply creates its own demand"), and that any idling is due to misallocation of resources between sectors, not overall – unemployment is seen as voluntary, or a transient phenomenon as the economy adjusts. Others cite the frequent and recurrent economic crises of the economic cycle as examples of a general glut, propose various causes and advocate various solutions, most commonly fiscal stimulus (government deficit spending), a view advocated in the 19th and early 20th century by underconsumptionist economists, and in the mid to late 20th and 21st century by Keynesian economics and related schools of economic thought. One can distinguish between those who see a general glut (greater supply than demand) as a supply-side issue, calling it overproduction (excess production), and those who see it as a demand-side issue, calling it underconsumption (deficient consumption).
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Classical economic theory
Introduction
The general glut problem is a problem identified within the classical political economy of the era of Adam Smith and David Ricardo.[1] The problem is that, as labor becomes specialized, if people want a higher standard of living, they must produce more. However, producing more lowers prices and leads to the need to produce yet more in response. If those who have money choose not to spend it, then it is possible for a national economy to become glutted with all of the goods it produces, and still be producing more in hopes of overcoming the deficit. While Say's Law supposedly dealt with this problem, successive economists came up with new scenarios which could throw an economy out of General equilibrium, or require expansion through conquest, which became termed imperialism.
The nature of the General Glut
In Classical Economics, the basic case is of maximizing return on investment whereas only as a secondary consideration would be the contribution of private personal spending apart from investment consideration. As such, following Classical Economics, a general glut is, in the basic case, over time, inevitable except in so far as Say's Law, that savings always equals investment, is proved.
Say's law
According to French economist Jean-Baptiste Say, the concentration of wealth into resources dedicated to savings and re-investment simply adds to the ability of consumption to consume more. And so, he states, there can be no general glut.
The General Glut
See (Fonseca) for background.
An untaxed series of market trades, in the case where need is finally met and useful future savings are stored up, moves resources from the current spending "account" to the savings and investment account. In the abstract, savings and investment is not a static process but one in which previous gains utilize previous savings and investment to reach a greater rate of increase. But consumption is important too. Consumption, for example, is the ultimate measure of utility. In the (hypothetical) situation that consumption is in decline due to an increased share of production being dedicated only to further production, the question is asked, what do the managers of such productive capacity likely think.[2] At first, it is that consumption is declining in the short term. In the short term, methods of maximizing returns through selling produce to the public will likely be cut back and turned toward capital investment leading to increased future production.[2] In the case where the scale of such capital investment is itself the cause of the short term drop in consumption, such a strategy may or may not work as expected. In so far as it absorbs the gap in consumption over distribution by consuming resources dedicated to distribution, the strategy will have corrected the (hypothetical) general glut and incidentally added to resources available for both future consumption and future growth. In so far as the decrease in consumption reflects a longer term trend of consumption failing to balance production, further investment would likely only aggravate the imbalance, leading capital managers to further cut short term distribution in favor of other capital uses.[2] Capital managers seeking other, non consumptive, ways might be to attempt growth through market share, mergers and acquisitions and including significant market churn, many of which activities seem to signal the height of an economic boom. Sismondi's theory would explain why the great crash that starts the long trough of each major world economic crisis immediately follows the height of economic boom. For instance: this year, 2009, is an un-rivaled economic crisis, though still, world wide, an unrivaled time of prosperity; last year, many companies recorded record profits; Sismondi's theory would seem to adequately explain such phenomenon. Except Say's law states that there can be no general glut because savings always equals investment is a basic pillar of modern economics. So Sismondi's theory needed, to make it work, a re-explanation; this was done by Malthus a re-explanation re-explained again to the modern world by Keynes.
Malthus's Solution
Thomas Malthus proposed that a glut of production localised in time rather than by industry or field of production would meet the requirement of Say's Law that general gluts cannot exist and yet would constitute just such a general glut.[2] The consequences then are worked out by Malthus, although Simond de Sismondi first proposed this problem before him. Ironically, Malthus is more famous for his earlier writings which tried to prove the opposite problem, a general over-consumption, as an inevitability to be lived with rather than solved.
Keynesian
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Keynesian economics, and underconsumptionism before it, argue that fiscal stimulus in the form of government deficit spending can solve general gluts.
This is a demand side theory, rather than the supply-side theory of classical economics; the fundamental ideas are that savings in a recession or depression causes the paradox of thrift (excess saving, or more pejoratively, "hoarding"), causing a deficit of effective demand, yielding a general glut. Keynes locates the cause in sticky wages and liquidity preference.
Marxian
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Post-Keynesian
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Some Post-Keynesian economists see the cause of general gluts in the bursting of credit bubbles, particularly speculative bubbles. In this view, the cause of a general glut is the shift from private sector deficit spending to private sector savings, as in the debt-deflation hypothesis of Irving Fisher and the Financial Instability Hypothesis of Hyman Minsky, and locate the paradox of thrift in paying down debt. The shift from spending more than one earns to spending less than one earns (in the aggregate) causes a sustained drop in effective demand, and hence a general glut.
Austrian
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Austrian economics see general gluts as caused by misallocation of resources in the years leading up to the crisis, and the ensuing depression as necessary cleansing or purging of the excesses as the economy adjusts.
See also
References
- ^ Steven Kates, ed., "8. The Historical Context of the General Glut Controversy", Two Hundred Years of Say's Law: Essays on Economic Theory's Most Controversial Principle, ISBN 978-1-84064866-9, http://books.google.co.uk/books?id=ISowzraNmrkC&pg=PA133&dq=%22General+glut%22
- ^ a b c d (Fonseca)
- Fonseca, Gonçalo L., The General Glut Controversy, The New School, http://homepage.newschool.edu/het//essays/classic/glut.htm
External links
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