Demand for Commodities Is Not Demand for Labor

10 February 2009 at 9:05 pm 9 comments

| Peter Klein |

Minnesota engineering professor David Levinson (via Mankiw), on the “shovel-ready” criterion for stimulus spending:

In the 1930s, when you were literally building with shovels, that might have made sense. That was largely unskilled labor. Today, it’s blue collar, but it’s not unskilled. . . . The guy brushing the asphalt back and forth is unskilled, but the guy operating the steamroller isn’t. And there’s an assumption out there that construction workers are interchangeable between residential and highway projects. But a carpenter isn’t a whole lot of help in building a road.

Modern Keynesian economics, which retains the Master’s belief in  homogeneous labor and capital and his focus on macroeconomic aggregates, treats a worker as a worker as a worker. Lending and spending — on anything, it doesn’t matter what — brings idle resources into gainful use. Notes Hayek:

John Stuart Mill’s profound insight that demand for commodities is not demand for labor, which Leslie Stephen could in 1878 still describe as the doctrine whose “complete apprehension is, perhaps, the best test of a sound economist,” remained for Keynes an incomprehensible absurdity (Collected Works, vol. 9., p. 249).

And here’s Craig Pirrong:

There is no such thing as “aggregate output.” There are many industries, many goods, many sectors, all of which rely on specialized resources that are not readily redeployable among them. Directing — via coercion — spending to one sector or another is likely to worsen resource misallocations, rather than mitigate them. I find it particularly bizarre that some of the stimulus appears to be directed at supporting industries and sectors that resources should leave (e.g., construction, automobiles). We almost certainly built too many houses (due to perverse monetary policy, as John Taylor explains it), so resources should leave that business. Why stimulate it?

Entry filed under: - Klein -, Austrian Economics, Bailout / Financial Crisis.

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9 Comments Add your own

  • 2. Gary  |  12 February 2009 at 12:18 pm

    In answer to Craig Pirrong’s (rhetorical) question, the answer is that Obamulus is not stimulus but payback for the unions (including public unions) and other special interest groups that sent $750 his way. It’s the Obamian hundredfold payback, which I call Obamulus.

  • […] link: Peter Kein has a very interesting post at Organizations and Markets called, “Demand for Commodities in Not Demand for Labor.” The historian of economic thought will note that this is one of John Stuart Mill’s tests of an […]

  • 4. Recommended Reading « The Everyday Economist  |  17 February 2009 at 10:08 pm

    […] 17, 2009 · No Comments 1. “Demand for Commodities Is Not Demand for Labor” — Peter […]

  • 5. Sheldon Richman  |  18 February 2009 at 4:31 pm

    Peter, was Mill saying that the demand for commodities was not a demand for labor in general, but rather for specific labor? Or: was he saying that machines, rather than labor, may satisfy a particular consumer demand? Or: that saving could boost the demand for labor in earlier stages of production? Or was he saying all these things? I’d like to see an elaboration of Mill’s fourth principle.

  • 6. Peter Klein  |  18 February 2009 at 10:19 pm

    Sheldon, I’m not a Mill scholar, but I can tell you what Hayek thought Mill’s proposition implied. Hayek was thinking primarily in terms of the time-structure of production — namely, that an increase in the demand for present consumption can simply shift resources, labor included, away from the production of higher-order (early-stage) goods and toward the production of lower-order (later-stage) goods. There is no necessary increase in employment. Keynes had in mind a one-period production scheme in which labor is either used to produce consumption goods or is simply idle, hence increasing the demand for consumption goods increases employment. It never occurred to Keynes that this increase in demand — say, for building houses — might bid labor and other factors away from the production of other goods and services, particularly capital goods.

    Garrison has a nice summary in his review of Hayek’s early essays on money:

  • 7. Sheldon Richman  |  19 February 2009 at 7:12 am

    Thanks, Peter!

  • 8. Sheldon Richman  |  19 February 2009 at 10:36 am

    By the way, I was happy to see Garrison describe Mill’s maxim as “cryptic.” It’s not just me!

  • […] The idea that retail sales drive the economy comes from an ancient fallacy. As Hayek wrote: […]

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