Dr. Steve Kates critiqued part of the very kind review which professor Philipp Bagus wrote about my book ‘Los errores de la vieja Economía: una refutación de La Teoría General de Keynes’ [The errors of the old Economics: a rebuttal of Keynes’ General Theory]. In particular, Dr. Kates claims that I concede too much to the Brithish economist when analyzing his theoretical understanding of Say’s law: “Rallo thus attempts to controvert Keynes by confirming everything he wrote”.
It is certainly a risky business to criticize a book without having read it first (an excusable fault, since unfortunately the book has not yet been translated into English). For instance, Dr. Kates criticizes me for treating aggregate supply and aggregate demand as separate entities, when both magnitudes are in fact the same. But one can find exactly that statement in the first chapter of my book (here available for free in Spanish): “Any economist previous to Keynes who had properly understood Say’s Law would have been surprised by that separation between supply and demand at an aggregate level. As we have said, demand is nothing more than supply and supply is nothing more than demand, but both looked at from a different angle. What can be supplied either in the present or in the future is precisely what can be demanded either in the present or in the future, and vice versa, what can be demanded either in the present or in the future is nothing more than what can be offered in the present and in the future”.
The point, of course, is that the specific composition of goods both in the present or in the future does not need to coincide with those goods demanded by consumers and savers, but not because of a deficiency of aggregate demand, but because the composition of the actual supply does not match the desired supply: either desired goods are not being produced or they are not being produced quickly enough. In both cases, one of the best mechanisms to push a fast readjustment of private malinvestments is hoarding: as entrepreneurs fall short of cash inflows to maintain either their operative business structure or its financial business structure, they may be forced to liquidate part of their capital assets or to find new investors to widen their financial basis. In the former case, other goods will be produced (capital assets will find accommodation inside other business plans); in the latter, new savers will provide more time and resources to accelerate the current production processes. But that readjustment is not an instantaneous thing: the structure of production is a quite rigid and non-convertible network of heterogeneous capital goods which cannot be transformed at pleasure, as Keynes seemed to have believed.
This last reasoning is, however, also misrepresented by Dr. Kates. He initially states that I should not speak about ‘aggregate demand’ since aggregate demand expenditure does have a structure and it is the structure that determines the structure of production: “To use ‘aggregate demand’ in the same sentence as “structure of production” must leave the argument confused”. Certainly, I do not have any problem with the term aggregate demand or aggregate expenditure when it is properly understood: it is just the sum of all individual spending at any given moment. Neither Austrians have traditionally had any problem with the term: Hayek’s stages of production are aggregate (sectorial) spending and Rothbard even developed a way to measure Gross Private Production. To speak about aggregate expenditure does not necessarily imply forgetting that the aggregate expenditure does have a structure: it merely means that you can observe reality using different levels of aggregation (of course, some are much more useful than others: economic individualism, for instance, is based on the correct hypothesis that the optimum level of aggregation is the human body, and not a single cell or tissue).
I think I have been pretty clear in the previous lines about the essential importance of the structure and the interrelations inside those aggregates, something that of course is omnipresent in my book. Just to quote again some passages of my first chapter: “Economic agents increase their hoarding (i.e. their demand for money) because they do not want to exchange that money for any other good which is currently being supplied in the market, but that does not imply the existence of general deficiency of demand, but that the composition of specific goods currently available in the market is not the one which satisfies the desires of money holders (…) The funny thing is that Keynes intended to caricature Say’s law by claiming the absurd doctrine that “supply creates its own demand”, but after all what we have seen we could certainly summarize Keynes’ views by the not least absurd motto that “demand generates its own supply”; i.e., that by stabilizing or increasing the level of total expenditure –independently of its composition– it will always be possible to stabilize or increase total production up to the point of full employment, even when current structure of supply cannot fulfill that particular demand”.
In this point, I am afraid that Dr. Kates concedes too much to Keynes when criticizing my criticisms. In describing my opinions about the essential role played by hoarding inside a capitalistic system, he says:
Rallo thus attempts to controvert Keynes by confirming everything he wrote. People really do hoard, Rallo argues, and store money rather than spend. There really is a deficiency of demand in the short-to-medium term that may finally work itself out in the long run, in three-to-five years perhaps. Overproduction is impossible, but only “ultimately,” and in the meantime it can occur. Involuntary unemployment does apparently occur because of some problem on the demand side of the economy due to hoarding. However, rather than this deficiency of demand being a bad thing, it’s a good thing, since the hoarding allows business to think about what to do next. But if you are Keynesian such as Krugman, it also licenses the government to come to the rescue with a stimulus package that will short-circuit this delay.
Dr. Kates falls into the Keynesian trap when thinking hoarding is akin to demanding nothing. This is probably the most important point in my whole book: hoarding is not a sterile demand without immediate implications on the structure of supply. To hoard is obviously to demand a certain long run change in the patterns of supply: it shows that some goods are oversupplied while others are undersupplied (i.e. some goods are underdemanded while other are overdemanded, so there cannot be a general deficient demand through hoarding!). However, it is true that, as Dr. Kates states, this long run identity between aggregate demand and supply may not satisfy many Keynesians who could defend that, in the short run and while people continue hoarding, other production process should be started by government.
But hoarding is also to demand some instant restructuring (some instant supply) in the current structure of production. As professor Hülsmann has properly shown, demand for money (hoarding) has real implications over the structure of production. Specifically, raising the value of money through hoarding stimulates the production of money and thus flattens and shortens the structure of production. I would add to professor Hülsmann deep insights that demand for money also stimulates the production of other goods which can be used as collateral for temporary substitutes of money (such as highly liquid consumption goods) without compromising the ability of the structure of production to readjust itself to its long-term desired pattern (just as gold production does not either). The key difference between this market-driven temporary production and Government ‘stimulus’ plans is that the corrections in relative prices are not interrupted and idle resources are not frozen in undesired projects. In short, the key difference is that new malinvestments are not added to previous malinvestments and thus scarce capital is not absurdly consumed.
Keynes assumed in The General Theory that neither money nor its substitutes could be produced, thus concluding that a general glut was possible when agents increased their demand for money. Unfortunately, Dr. Kates failing to consider the real short-run healthy effects of hoarding makes him embrace Keynes’ unfounded fears unintentionally.
Despite the obvious problems involved in criticizing the analysis of a book through a short review of it, I have to sincerely thank Dr. Kates for giving me the opportunity to clarify some of the presumable errors he chooses to highlight and which many other readers might have misinterpreted too.