General glut
Encyclopedia
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 (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 beginnings 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
(conventionally but controversially phrased as "supply creates its own demand
"), and that any idling is due to misallocation of resources between sectors, not overall because overproduction in one sector necessitates underproduction in others as is demonstrable in severe price falls when such alleged 'malinvestment' in gluts clear–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). Some believe that both of these occur, such as Jean Charles Léonard de Sismondi
, one of the earliest modern theorists of the economic cycle.
of the era of Adam Smith
and David Ricardo
. 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 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.
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 grbjn,n,mneater 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. 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. 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. 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.
, 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
.
For Marx, since investment is part of aggregate demand, and the stimulus for investment is profitability, accumulation will continue unhindered as far as profitability is high. However, Marx saw that profitability had a tendency to fall, which would lead to a crisis in which insufficient investment generates an insufficiency of demand and a glut of markets. The crisis itself would operate to raise profitability, which would start a new period of accumulation. This would be the mechanism for crisis occurring repeatedly.
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.
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
, 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 (purchase) said production.
This exhibits itself in a general recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
or depression
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....
, with high and persistent underutilization of resources, notably unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
and idle factories.
The Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
is often cited as an archetypal example of a general glut.
The term dates to the beginnings of classical economics
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
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
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
argue that there are no general gluts, advocating a form of Say's law
Say's law
Say's law, or the law of market, is an economic principle of classical economics named after the French businessman and economist Jean-Baptiste Say , who stated that "products are paid for with products" and "a glut can take place only when there are too many means of production applied to one kind...
(conventionally but controversially phrased as "supply creates its own demand
Supply creates its own demand
"Supply creates its own demand" is the formulation of Say's law by John Maynard Keynes, and is considered by him one of the defining characteristics of classical economics...
"), and that any idling is due to misallocation of resources between sectors, not overall because overproduction in one sector necessitates underproduction in others as is demonstrable in severe price falls when such alleged 'malinvestment' in gluts clear–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
Deficit spending
Deficit spending is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of budget surplus....
), 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
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
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
Overproduction
In economics, overproduction, oversupply or excess of supply refers to excess of supply over demand of products being offered to the market...
(excess production), and those who see it as a demand-side issue, calling it underconsumption
Underconsumption
In underconsumption theory in economics, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. The theory has been replaced since the 1930s by Keynesian economics and the theory of aggregate demand, both of which were influenced by...
(deficient consumption). Some believe that both of these occur, such as Jean Charles Léonard de Sismondi
Jean Charles Léonard de Sismondi
Jean Charles Léonard de Sismondi , whose real name was Simonde, was a writer born at Geneva. He is best known for his works on French and Italian history, and his economic ideas.-Early life:...
, one of the earliest modern theorists of the economic cycle.
Introduction
The general glut problem is identified within the classical political economyPolitical economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
of the era of Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
and David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
. 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
Say's law
Say's law, or the law of market, is an economic principle of classical economics named after the French businessman and economist Jean-Baptiste Say , who stated that "products are paid for with products" and "a glut can take place only when there are too many means of production applied to one kind...
supposedly dealt with this problem, successive economists came up with new scenarios which could throw an economy out of General equilibrium
General equilibrium
General equilibrium theory is a branch of theoretical economics. It seeks to explain the behavior of supply, demand and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall equilibrium, hence general...
, or require expansion through conquest, which became termed imperialism
Imperialism
Imperialism, as defined by Dictionary of Human Geography, is "the creation and/or maintenance of an unequal economic, cultural, and territorial relationships, usually between states and often in the form of an empire, based on domination and subordination." The imperialism of the last 500 years,...
.
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 SayJean-Baptiste Say
Jean-Baptiste Say was a French economist and businessman. He had classically liberal views and argued in favor of competition, free trade, and lifting restraints on business...
, 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 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 grbjn,n,mneater 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. 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. 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. 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. 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
Keynesian economicsKeynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
, 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
Paradox of thrift
The paradox of thrift is a paradox of economics, popularized by John Maynard Keynes, though it had been stated as early as 1714 in The Fable of the Bees, and similar sentiments date to antiquity...
(excess saving, or more pejoratively, "hoarding"), causing a deficit of effective demand
Effective demand
In economics, effective demand in a market is the demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not constrained in any other market...
, yielding a general glut. Keynes locates the cause in sticky wages and liquidity preference
Liquidity preference
In macroeconomic theory, Liquidity preference refers to the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money to explain determination of the interest rate by the supply and demand...
.
Marxian
Karl Marx's(1910) critique of Malthus started from a position of agreement. Marx's idea of capitalist production, however, is characterized by his concentration on the division of labor and his notion that goods are produced for sale and not for consumption or exchange. In other words, goods are produced simply for the intention of transforming output into money to purchase other commodities. The possibility of a lack of effective demand, therefore, is held only in the possibility that there might be a time lag between the sale of a commodity (the acquisition of money) and the purchase of another (its disbursement). This possibility, also originally crafted by Sismondi (1819), endorsed the idea that the circularity of transactions was not always complete and immediate. If money is held, Marx contended, even if for a little while, there is a breakdown in the exchange process and a general glut can occur.For Marx, since investment is part of aggregate demand, and the stimulus for investment is profitability, accumulation will continue unhindered as far as profitability is high. However, Marx saw that profitability had a tendency to fall, which would lead to a crisis in which insufficient investment generates an insufficiency of demand and a glut of markets. The crisis itself would operate to raise profitability, which would start a new period of accumulation. This would be the mechanism for crisis occurring repeatedly.
Post-Keynesian
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 FisherIrving Fisher
Irving Fisher was an American economist, inventor, and health campaigner, and one of the earliest American neoclassical economists, though his later work on debt deflation often regarded as belonging instead to the Post-Keynesian school.Fisher made important contributions to utility theory and...
and the Financial Instability Hypothesis of Hyman Minsky
Hyman Minsky
Hyman Philip Minsky was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises...
, 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
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
- Deflation
- Depression (economics)Depression (economics)In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....
- OverproductionOverproductionIn economics, overproduction, oversupply or excess of supply refers to excess of supply over demand of products being offered to the market...
- UnderconsumptionUnderconsumptionIn underconsumption theory in economics, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. The theory has been replaced since the 1930s by Keynesian economics and the theory of aggregate demand, both of which were influenced by...