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There is a school of economics, sometimes called the "freshwater school" (from the Chicago School and Milton Friedman) which claims you can't run out of demand. This is a classic position. But productivity is now so good that we can run out of demand. Classically, countries ran out of land, labor, capital, or management before they ran out of demand. There were occasional recessions, but that wasn't a permanent condition. That's over in the US. Plenty of land outside NY and SF, lots of workers (some might need retraining, but it's not like the real labor shortage of WWII), oceans of capital, and lots of experienced managers. But nothing to do with it, because the demand isn't there.

This is an alien concept to many people and economic policy makers. See the parent article. They report on a capital glut, but are puzzled that it exists. The Fed keeps pumping capital into the economy in hopes it will fuel growth. But pumping capital into a capital glut doesn't do much.

Look at Japan since 1989. Japan hit this about two decades before the US did. They never really figured out what to do about it. That's discouraging, because if Japan had a solution, we'd have a success to look at.

So nobody really knows what to do about a capital glut and a demand shortage.

View on HN

Not claiming I have a panacea here, but wouldn't either a more aggressive minimum wage or a basic minimum income raise the ability for more people to act on the desire to buy? I assure you the demand for tons of stuff exists, but the means to buy it does not.

Back in 2013, HuffPost ran an article pointing out that had minimum wage kept up with inflation, it would be $10.50/hr and actually more like $21 if it had kept up with productivity growth [0]. That, of course, assumes that the original minimum wage rate was set reasonably, but I can promise you that few people, save some well-educated counter-cutlurists, can live on $7.50/hr these days. And even if they could, they wouldn't really be spurring demand in the greater economy.

[0] http://www.huffingtonpost.com/2013/02/13/minimum-wage-produc...

A basic minimum income is the right answer, but not for the purpose of increasing demand. People demanding to increase demand is utterly silly. We have succeeded as a civilization: we are providing far more than we could ask for. In the big picture, what does increasing demand really do for us?

But there's definitely a need to reduce poverty. And there's a need to allow ourselves to stop working as hard as we do. A basic minimum income would help accomplish these things. Where do we get the money from? It doesn't really matter, there's plenty of it sloshing around. As Charlie Munger said:

“This has basically never happened before in my whole life. I can remember 1½ percent rates. It certainly surprised all the economists. It surprised the people who created the life insurance industry in Japan, who basically all went broke because they guaranteed to pay a 3% interest rate. I think everybody’s been surprised by it, including all the people who are in the economics profession who kind of pretend they knew it all along. But I think practically everybody was flabbergasted. I was flabbergasted when they went low; when they went negative in Europe – I’m really flabbergasted. How many in this room would have predicted negative interest rates in Europe? Raise your hands. [No hands go up]. That’s exactly the way I feel. How can I be an expert in something I never even thought about that seems so unlikely. It’s new territory….

I think something so strange and so important is likely to have consequences. I think it’s highly likely that the people who confidently think they know the consequences – none of whom predicted this – now they know what’s going to happen next? Again, the witch doctors. You ask me what’s going to happen? Hell, I don’t know what’s going to happen. I regard it all as very weird. If interest rates go to zero and all the governments in the world print money like crazy and prices go down – of course I’m confused. Anybody who is intelligent who is not confused doesn’t understand the situation very well. If you find it puzzling, your brain is working correctly.”

We have succeeded as a civilization: we are providing far more than we could ask for.

Really? There is nothing you could improve in the human condition that would make life better?

For those people with an excess of capital, with current knowledge of science, no.

For the people with no excess of capital, though, we can improve the situation.

Of course there is. The point is, we've reached the stage of our advancement when, on aggregate, we produce more than we actually need. Our current issues are with distribution of what is being produced.

Not sure that I would agree there. What if the "excess" production funds a cure for cancer? What if that cure requires additional resources?

The world isn't static.

I'll try by best not to sound like a raging sociopath here.

In pure economic terms, curing cancer has little benefit to society. Cancer is not any one specific disease. It's a class of diseases, of which there are thousands (or more) of variants.

We may stumble on some amazingly technologically advanced cure to some forms of cancer but the more rare the form, the less likely there will ever be a treatment.

Most people get upset when you talk about humans as assets because we're indoctrinated at a very young age to value human life above all else.

If you can, in fact, speak about humans in economic terms of supply/demand. We have an overabundance of people, and nothing useful to give them jobs to do.

It's like the current oil market. Oil was highly valued due to the inelasticity of supply. Now that there is a glut of over supply and inelasticity greatly reduced, the value has dropped dramatically.

The supply of humans capable of doing useful work used to be somewhat constrained. Now, we have more people than can be reasonably assigned to do useful work without essentially paying them to warm a chair. Yet, like the oil market nothing is stopping people from having more kids and increasing the supply. The government even directly subsidizes people for the number of children they have due the persistent belief that GDP is directly dependent on population.

People can increase their value proposition by earning many degrees and racking up huge amounts of debt but, unless you're going to work in the industries that are thriving, it's a buyers market for employers.

Business owners have their choice pick of the herd. They can keep wages as low as possible and skim more cream off the top because there's a line out the door of people waiting the replace a worker who quits.

Who knows, maybe this is just the supply limit (ie in environmental science terms) as it applies to the human population. Poverty and misery is the expected result of making too many people before we can come up with enough useful reasons to sustain them.

I've been thinking along similar lines recently.

One counter to this argument is that as this process of overpopulation (relative to useful jobs) begins to happen, standard of living decreases.* As standard of living decreases on average, people start to have less children. So the imbalance is somewhat self-correcting, it's just that human lives are getting to be longer while the time between inventions that obviate the need for human labor seems to be getting shorter.

Longer average lifespans (with the same legal retirement age for social security, medical benefits) exacerbate this problem.

But there is always one industry that can be fueled by human lives and that looks great on an economic balance sheet - war. It decreases surplus labor, increases nationalism and social cohesion (if people generally see the necessity of the war), and injects a huge stimulus of demand into the economy through gov spending on all sorts of goods for the war effort, as well as investments in R&D that adds to the country's infrastructure base.

If the latency between idle/restless/poor/disenfranchised population and meaningful/useful jobs gets to be too large, then all it takes is a spark to start a protest, rebellion, or war as people have nothing else to really live for.

* I would use GDP/capita to have a more quantifiable benchmark, but I find GDP to be almost completely useless when accounting for things that matter to actual human beings such as quality of social cohesion, potential social mobility, amount of pollution, etc.

> As standard of living decreases on average, people start to have less children

That seems counter to all actual evidence doesn't it? The places with the poorest standards of living have the most children and visa verse.

I think he's talking about people who are at a decent standard of living that becomes reduced, thus the potential parents not "wanting to bring a child into this troubled world."

I believe I fit squarely in to that category. I'm just old enough to have seen the fall of 'corporations who hire for life' in to 'everyone for themselves' employment. It is a disheartening drop in live stability.

You may find that the relationship between birth rate and standard of living is the opposite of what you described.

We actually have some pretty good existing examples to draw from to conclude this. Japan has arguably the highest standard of living, but also a decreaseing birth rate.

Women in Australia and America are having children later in life, and having fewer of them as well.

Meanwhile in developing countries where access to birth control and education are more limited, birth rates are sky high.

"Not sure that I would agree there. What if the "excess" production funds a cure for cancer? What if that cure requires additional resources?"

Production does not fund other things, and disease cures are not something that people willingly buy. Excess production just wastes resources on things people do not want to buy (unsold automobile inventory, etc.) and is enabled by access to too much speculative capital. Redistribution of that capital (in the form of higher taxes) into government-mandated and funded research programs to find cures for cancer is how you find a cure for cancer. Disease research in the United States is not funded by pouring water on your head (http://www.nbcnews.com/health/health-news/ice-bucket-challen...) or Tim Ferriss (https://www.crowdrise.com/timferriss), but by the $30 billion budget of the National Institutes of Health.

The poor would love to have newer cars, consume more services, have nicer homes, etc. So then how are we producing more than we need?

Just because some people can't afford things doesn't mean those things aren't over-produced. Every year there are a large, large number of brand new cars that don't get sold, and are marked down when the next model year comes in. Likewise there are structures that get built and never sell out. A building of condos near my house never got bought, so they turned them into apartments for far, far cheaper than they were priced as condos. We overproduce clothes so much that there are several nation-wide retail stores specializing in overstock merchandise for very cheap (TJ Maxx for example). All of these things are places where we have more than necessary production, so priced get driven down to where they are more affordable for poorer people.

The person you replied to said "production isn't the problem, distribution is", and you seemed to agree with that in your comment. Getting poor people cars and houses and services isn't a production problem, it's a distribution problem. It's a pricing problem. It's an efficiency problem. Producing more cars isn't going to make them easier for poor people to afford.

That doesn't really make a lot of sense. Demand is pretty predictable for stuff like that, and the producers have no reason to waste resources producing more than is necessary.

And even when they do overestimate demand, like you said, it gets marked down. So it all gets consumed in the end, and the producers might not even take that big of a loss depending on how much it was marked down. And the poor people benefit from that too of course.

Unless people start throwing away new cars then they aren't over producing.

Except there isn't one producer, there's many competing ones, so you have overproduction because everyone hopes to get more market share than they actually have. Over that, there's overproduction in many areas (especially food) for a very silly reason - that people will buy more when there's more stuff around it (aka. no one wants to buy the last few carrots). It doesn't get consumed, and poor people don't benefit from it. It gets thrown away.

About throwing away new things - heard of planned obsolescence? That's what companies now do to cope with falling demand. Yes, your car maker does it too.

Large corporations are not stupid. They have decades of sales data. They can definitely predict demand a year in advance, and they do.

I don't actually think they are overproducing. They make a huge markup on new cars, so having to discount a few that don't sell isn't a loss.

Also factories are pretty much large fixed costs. Overproducing actually doesn't cost that much. The car might only cost $500 worth of raw materials, but the cost of the factories and infrastructure necessary to turn that into a car is massive.

>(aka. no one wants to buy the last few carrots)

Which is literally only true for vegetables, not the economy in general. And you only need to sacrifice a handful of vegetables to for it, so it's a fixed cost.

Look at the Cash for Clunkers program a few years back. People were paid to bring in their old, but still functioning cars, and buy new ones. Many of those old cars were still fully functioning, and not that old. We have the production capacity for so much more than we actually make. You're right, they can predict sales so they're not making 1,000,000 units more than they can sell, but they CAN make that many. The thing about overproduction is, like you mentioned, it doesn't last for long. Demand drops, they shut down plants, they close shifts, they fire workers. Believe me, I live in Michigan and have many friends and family workers who work (or worked) in the auto industry. We have the ability to churn out hundreds of millions of more cars every year than we actually do. Like you said, we don't do that because it doesn't make financial sense.

But just because we don't overproduce right now doesn't mean we couldn't if we wanted to. I'm still not seeing where production is the problem. If production was the limiting factor, they would be running the factories 24/7 instead of shutting them down. The only reason to underproduce is to increase demand. But if you lower supply and demand doesn't increase, you've already been overproducing. So if they're closing factories, it means they've been overproducing.

>Look at the Cash for Clunkers program a few years back.

Which was done just after a recession. That's not evidence of overproduction in general, just one year when demand unexpectedly went down.

>But just because we don't overproduce right now doesn't mean we couldn't if we wanted to. I'm still not seeing where production is the problem. If production was the limiting factor, they would be running the factories 24/7 instead of shutting them down.

But if we can produce so many cars, why are cars still expensive? Shouldn't the ability to create massive supply drive the price down a lot?

There are plenty of people that want new cars. And are willing to pay for them. It's not like we have more cars than people actually want. It just costs a lot to make a car. And that cost includes fixed costs like the factory itself. But factories wouldn't be closing down if other costs weren't also very large.

Yes in theory we could make millions more cars than we do. But not for free. It would require buying more materials, hiring more workers, building new production lines, etc. Those costs must be greater than the expected return for selling another car. Otherwise they would already be doing it.

Just because I can't make a product cheaper doesn't mean I can't produce more of it. Why don't we make cheaper and cheaper cars? Because people who can afford new cars would rather spend more money to get nice features and safer cars. People who can't afford new cars would rather buy a used car with nice features and a good safety rating. We've had several sub-$10k on the market. They don't sell well. No one wants to buy a brand new Geo Metro or the original Kia Rio or a Chevy Tracker when they can buy a five year old Ford Taurus that is better equipped for cheaper. The used car market is the reason we don't have cheaper brand new cars, not production. And luckily we have so many used cars because we produce so many new cars every year.

But again, we're talking economics right now. The subject is production. Once again I ask: you said we're limited by our ability to produce, do you have anything to back that up? And no, saying "it costs a lot of money" is not proof of a production bottleneck, it's proof that companies hire accountants.

So at this point I'm going to step away from this conversation because I don't think it's going anywhere. You've made me think a bit about economics, so thanks. Good conversation.

The poor would love to have newer cars, consume more services, have nicer homes, etc. So then how are we producing more than we need?

People regularly die from starvation, but the world produces more than enough food to feed everyone. It is a problem of distribution.

To say this is merely a problem with distribution is absurd.

There are hundreds of thousands of vacant homes in San Bernardino, there are many thousands of homeless that could easily be transported there. If those homeless were to move into those homes they would soon be evicted or arrested and imprisoned. This is an issue with ownership, not distribution. Much food from local restaurants, cafes, and grocery stores is thrown out every day as it nears expiration. Thousands of hungry would love to enjoy this food rather than waste it. This food could be donated or even left out for people to scavenge, yet it ends up in locked dumpsters. Again, this doesn't sound like a distribution problem but instead a problem with ownership.

We do produce more than we need, if need is conditioned on ability to pay.

That's the exact same thing. If we say wealth is not distributed evenly, that's the same thing as saying that only a few people own most things and many people own hardly anything.

Redistributing wealth means spreading out ownership more.

I misunderstood. To say it is a "distribution problem" read to me as if distribution was a verb: that is to say "everyone could have what they want if only the means to move people and things around were available".

The statement "the US is out of demand" is equivalent with the statement "we are producing more than we need". Don't argue with me, argue with the parent.

What I'm arguing for is on how we should look at universal basic income. Some people see UBI as a way to increase aggregate demand. I see UBI as a way to get rid of poverty, so there would be no such thing as what you call "the poor". The difference is that I don't see a lack of aggregate demand as a problem. If we could rid our society of poverty without making a dent in aggregate demand, I see that as a win.

Another way to think about it is in terms of productivity. Do we really need to make everyone more productive? Do we need to be make the poor maximally productive before lifting them out of poverty? Why can't we just lift them out of poverty?

It seems like what you're trying to say is more that we're trying to optimize economic and industrial processes that are already more than optimized enough for what we need, rather than we've "run out of demand" as such.

I should have said that "we are providing the maximum that we possibly can". It just seems like there's no marginal benefit to increased productivity right now. There's lots we could do to hurt the human condition: we could always just put a bunch of people to work building weapons, and have those weapons kill a bunch of unemployed people. But if there could exist some grand new way to improve the human condition right now, the money and the jobs just don't seem to be materializing for that. And there's plenty of money and plenty of workers around.

We haven't "made life better" since we learned how to make fire, seems odd to think we'd start now. Making shit and making life better are two distinct things. Economic production and wealth creation are just fun games.

> Where do we get the money from? It doesn't really matter, there's plenty of it sloshing around.<

That's like saying "Restaurants have food, and there are homeless people in the city, so why can't we distribute the food from the restaurant to hungry homeless people in the city?".

If you were to distribute foods from the restaurant to the hungry people in the city, then these restaurants won't produce that food, because they are not a charity, they are in the business.

Similarly, if you don't figure out where this money would come from, you will soon stop seeing all this money you want to give away.

I used to manage a restaurant. All unmarketable but edible waste went to homeless shelters. Remaining inedible but unspoiled food went to pig farmers. Remaining spoiled food went to composting facilities. Our target market loved all of those policies.

I know someone would talk about the wasted food in a restaurant when I am talking about the non-wasted food.

Wasted food includes what didn't sell. And honestly, it didn't occur to me that you were suggesting that restaurants would be expected to donate marketable food. Markets, restaurants, etc often lock waste containers, to prevent theft.

The economics of this inertia is easy to understand, and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity...The only cure for the world's malaise is an increase in aggregate demand. Far-reaching redistribution of income would help, as would deep reform of our financial system -- not just to prevent it from imposing harm on the rest of us, but also to get banks and other financial institutions to do what they are supposed to do: match long-term savings to long-term investment needs.

Simplified primer by Joseph stiglitz.

http://huffpost.com/us/entry/world-economy-2016_b_8908560.ht...

That often cited minimum wage statistic also just so hapens to start at a time when minimum wage was near it's all time high on an inflation adjusted basis. Why do you suppose that is?

A basic income is a far better solution than our current mess of bureaucratic welfare programs that are both inefficient and rife with harmful unintended consequences for those they intend to support. Milton Friedman's "negative income tax" was intended to be a basic income until it was bastardized into the EITC.

One thing I don't understand about basic income is how to deal with children. If the parents get the basic income of a child, then that will incentivize some people to have more kids simply to get more money.

If you don't give basic income for kids, then people with a lot of kids won't be able to live.

Of course, you can adjust the amount between the too extremes of full basic income and no basic income for kids, but just because you have a target standard of living and give the parents money to meet that for the kids, doesn't mean the parents aren't going to turn around and spend that money on themselves. They might not care that their kids are in poverty as long as they get the drugs/alcohol/new car/fashionable clothes or whatever.

As you already stated, bureaucratic welfare programs don't work, so what is the solution here?

I've never seen this discussed, and it seems like a major oversight of the basic income proponents.

Provide free contraceptives alongside the free money.

I've never bought the idea that welfare recipients would bear children strategically. Surely after the first child, they'd realize that this was a difficult way to increase their top-line income. Not sure where I'd look for data on this, but my gut feeling is that poor people who have a bunch of poorly-cared-for-children get pregnant because they're bad at planning ahead, not because they've been inventivized by a subsidy.

Growing up in Alabama, I met tons of poor people that did exactly that and they'd tell you about it.

Second and third children are not as difficult as they keep each other busy.

I think you're mistakingly assuming the kind of person who would do this would provide a similar (or any kind of) quality of life to their kids that you would.

I know of 3 small children in my own life whose parents collect welfare, and are meth addicted.

There already are tax and welfare benefits to having children, and indeed it does incentivize having them when you really can't afford them. It doesn't seem sustainable long term, but we'll see. I don't think it's a problem with basic income any more than the current system. The bigger issue I find with basic income is that proposals typically don't include any mention of price control on the seller side and purchase control on the buyer side. Poor people are often trapped there because every local actor selling them stuff is trying to maximize rent extraction, and they continually buy things that are expensive and bad for them (case in point the recent cigarette article). Landlords get a lot of money from rent extraction, since they're paid in rent directly. It's even worse with universal, unconditional basic income. If as a landlord I hear everyone in my apartment complex is now getting an unconditional basic income of $20k/yr, guess what, next year rent prices are going up by around $20k, with lowered adjustments to account for other actors (like local food suppliers) also competing for this extra $20k/person/yr. This is basically the same thing that has happened to student loans. Without authoritarian measures to restrict economic freedom, which in addition to being authoritarian must also be good measures so as to not backfire as every other centrally planned economy has, basic income has no real chance at a large scale. In America in particular, authoritarian anything is a no-go.

No one who has children (and raised them without a nanny) would ever think this way. Kids are far too much work. $50k/yr wouldn't be enough

A landlord may try to increase rent knowing that the tenants now have a basic income, however that creates an opportunity for someone else to provide housing at a cheaper price - it's no different from any other market, as long as you don't have massive supply-side restrictions like in some major cities.

Housing has significant switching costs. It's not as if you can simply switch to buying a different brand of bread.

You've got to search for an alternate location, consider schools, work, commutes. Neighbors. Etc.

I can see major arguments for managing rent as a social function.

Though that depends heavily on supply and demand factors as well.

The best way of fixing this is to make sure that there is an over-supply of housing (located NEAR the jobs) and to make it as easy as possible to move.

Economic incentives should encourage local, suitable (even for apartments) housing in an area to be approximately equal to the number of jobs in that area (then pad up slightly for BIG if that's also an 'employer').

Pay people to get IUDs or vascectomies. Some might argue that this is corrosive, but:

1) If a single mother/father only spent 1 hour a week taking care of their kid, they would surely be punished for neglect. So we are willing to literally coerce people who choose to be parents into working at least 52*18...938 hours. At a minimum wage of $5.35, that is at least $5,000 of coercion.

2) If we have a workable basic income, then someone shouldn't find themselves in the desperate position of having a medical procedure done to make ends meet unless we don't have universal healthcare.

All I came up was pay for services instead of income for children.

Imagine the minimum income for children was diverted into services. So the government buys free clothes, school breakfasts+lunches, and medical insurance. This decreases the cost for a poor family to raise a child which allows you to give less money per child, and reduces the incentives for child farming.

> that will incentivize some people to have more kids simply to get more money.

This sounds like the edge case a non-parent would bring up. People who make poor life choices make them for far less insightful reasons that time-value calculus.

It would take an unbelievable amount of money for me to have another kid. It would be cheaper to buy my retirement.

My ideas of basic income always end up with the first implementation of basic income to be an amount of money just barely above what is needed to keep an individual above poverty. We have to ease society into this transition, and just like we shouldn't give the BI in one lump yearly sum(especially since most basic income proposals include almost completely gutting other safety nets) we shouldn't make perverse incentives to collect additional BI by neglecting their children.

Maybe for the first 20 years of the program every child affords a parent some additional BI based on the child's age. Raising a child when health care is inexpensive(my vision of BI does include pretty much free health care), job's are optional, and schooling is free makes the most expensive times to be early in the child's life when they are constantly outgrowing their clothing and beds and using up diapers at an impressive rate.

Eventually the amount of BI awarded becomes sufficient for most family situations(Star Trek post-scarcity style) or other factors like perfect birth control allow us to remove the child BI bonus.

True, though there are studies from elsewhere, which provide also a sampling of methodologies for determining a minimum living wage, dating to the early 19th century.

A living wage means just that: what is required to support a worker, their family, including children, and educate them, to provide the next generation of workers. Adam Smith discusses this at length in Wealth of Nations (Book 1, Chapter 8: https://en.m.wikisource.org/wiki/The_Wealth_of_Nations/Book_...)

You'll find other examples in Richard Meier, Science and Economic Development, 1966, dating to California during the Great Depression.

Chances are that land rents and goods prices would adjust to soak up the gains in wages. No guarantees there, though.

You index it to inflation of course.

Japan did massive fiscal stimulus ("bottom up") and capital injections ("top down") from the BoJ and it still has crawled compared to other economies.

China has for years done intense injections into its economy (both top and bottom down), with worker training programs, state owned enterprises, etc; and now they became so reliant on the artificial demand created by their own government that they have huge slack in inventories. There's a reason why copper/steel/oil are plunging.

There aren't many, if any, examples of "demand drives growth" working in a long term situation. In the short run economies simply need to work out their gluts, and slack. Famously coined "creative destruction," the unhealthy aspect (especially after Keynes) is that growth become a policy goal rather than sustainability in that growth. To this Keynes said "in the long run we're all dead," putting short term growth into focus of government policy makers rather than long term growth which often requires negative GDP growth and recessions.

Anyhow, you're also mischaracterizing the Chicago School and Milton Friedman. There is no claim that you can "never run out of demand." And the "freshwater school" is about discretionary policy of government policy, not whatever you just tried to say. This is one reason why Friedman was fond of the "Friedman rule" or the "K% Rule," because it took discretionary powers away from the Federal Reserve. The idea is that with rational expectation of monetary growth the market can set its expectations to not be prone to monetary policy failures. The same is true of government failures. The idea of "market failure" is a criticism, but the Chicago School doesn't deny market failure exists, only that the government should have a limited discretionary role involved in picking up any demand slack.

If the government bought wheat, for instance, to keep its price high and keep farmers employed; then burns it, this creates asset misallocations, though it is technically creating demand (this still happens to this day.) A policy measure is put into place to address a problem, but instead of the market correcting to shift to different types of production it continues its course and creates slack in other areas (such as too little corn, or soy.)

"If the government bought wheat, for instance, to keep its price high and keep farmers employed; then burns it, this creates asset misallocations, though it is technically creating demand (this still happens to this day.)"

This has been done successfully but without the burning. Just keep the price stables buying when the price fall and selling when the price goes up.

The idea of a buffer should be easy to understand here in HN. It can be done with all kind of things: http://bilbo.economicoutlook.net/blog/?p=23578

This "creative destruction" doesn't look very rational, don't you think? Is it not the goal of an economy to provide a good life for the human beings in that economy?

We should be able to do better than destroy capital in order to start again the game, but this time with less people owning more of the pie.

But that doesn't create demand, it just shifts it to the next year. That's not what the parent comments are talking about.

And there is no need for the government to be involved in that either. If there was really predictable price fluctuations between years, investors could make money buying up commodities on good years and selling during bad years (and they do.)

It's not me who said that it created demand. The grandparent suggested it.

I just said that it have been used successfully as a way of buffering prices, without the need of burning anything, in comparison to this "creative destruction" that he sees as necessary.

Well if you don't burn it, then you have to sell it at some point. When you sell it, you decrease demand. So it can work to stabilize prices, but it isn't going to stop a recession.

Obviously I'm not explaining myself very well. I will make a last try.

The comment I was answering, talked about a government buffering mechanism as something wrong and destructive (burning real wealth). I just pointed that this kind of mechanism is not necessarily destructive.

In the next paragraph he proposes that the only way to go out of recessions is the "creative destruction" of capitalism. This is effective destruction of real wealth. It seems, that if the markets decide to destroy real wealth, then it's OK.

My answer was only about that and I was not saying that the buffering mechanism created demand.

Interestingly enough, even if I was not claiming anything about that before, there is a buffering mechanism that would create demand, and keep inflation in check: Job Guarantee as a buffer mechanism of jobs.

http://www.epicoalition.org/docs/buffer_stock_employment_mod...

I am not totally convinced about the idea myself, but I think it deserves more attention

Instead of injecting money top-down through the Federal Reserve and large banks, they could inject it bottom-up in selected industries. Invest $1 trillion in biotech. Some will succeed and produce amazing advances. Most will fail, but they'll still drive employment, education, services, etc. targeting that industry, driving down the cost of inputs to the biotech sector for decades.

Of course, this can be done not completely blindly, by investing 10 to 1 with existing investors, or providing a guarantee to return 50% of lost capital, or having milestones companies need to hit, or have experts in the field provide "votes" toward getting higher levels of funding after examining their progress so far.

We don't want governments trying to pick winners, or generally even having an industrial policy at all. Their track record has been far worse than private investors. And politically it's impossible to justify when a large government investment fails. For example, look at Solyndra.

At better approach to stimulating demand would be to offer a cash prize or a guaranteed purchase contract for specific innovations that meet defined criteria. For example, what if the US federal government offered to purchase 10 million doses of a 90%+ effective Zika virus vaccine at $100 per dose? I'll bet that would encourage private investors to take a gamble.

You are suggesting what already exists, plus a guarantee. How does your guarantee change behavior? We already have the expectation of payoff for success, that's how we got to this point to begin with.

Well, if the government is going to drop money from helicopters, I would at least prefer they ATTEMPT to do so in a way that might lead to some scientific advancement. They could also just send everyone a check for $1000, but although that would create some demand, it wouldn't likely lead to investments in long-term payoff high-risk science. I understand and somewhat sympathize with the idea that we don't want the government telling us to do with our money, and maybe we should let people spend that $1000 however they want, but I'm proposing trying to kill two birds with one stone here and also at least ATTEMPT to put the money initially in the hands of people trying to create something rather than just consume some basic goods.

But then the money would be going to engineers and other educated people, who already have decent incomes and job prospects. There is no benefit to the poorer classes with that system.

Freshwater and saltwater are anachronistic distinctions that no longer apply. They were highly aggregated and misleading definitions even when they were relevant.

The Chicago School has always been quite diverse, from its early days with Frank Knight, Jacob Viner and Henry Simons to later periods of law and economics, new institutionalism and other tendencies.

Saltwater/freshwater came about because of a dispute in the dominant neo-Keynesian macro at the time (which both sides subscribed to) regarding the IS-LM model and the Phillips curve unemployment-inflation trade-off. Naive expositions of IS-LM had ignored the money demand function, which Friedman pointed out and ended up kickstarting the monetarist controversy. Phelps and Friedman also discovered a flaw in the absolutist Phillips curve and augmented it for rational expectations in 1968, destroying its former validity and anticipating the ensuing stagflation. This influenced Barro and Lucas to start the rational expectations revolution in macroeconomics, but it ended up being taken overboard to model always-clearing markets and other perfections.

Make no mistake, though. Both sides were operating in the same general framework. Most Chicagoites absolutely did not deny that there could be aggregate demand shortfalls. They were mostly Keynesians like the rest.

I think the "you can't tun out of demand" idea is more universal than just Freshwater economics. Even Keynes resorted to "animal spirits" to explain things. Once velocity picked up, you had the Postwar Boom.

The connective tissue is that in order to think that, it helps if you think there's untapped demand constrained by monetary policy.

At the margins, the cost of additional production is so low that there are multiple deflationary pressures even if everything looks normal.

The basic Market Monetarist ( the intellectual sons & daughters of Friedman ) stuff these days is quite interesting. It's very little fun because there's nothing to it to where you can have a "program" - either spending or austerity - to fit the ( lack of ) ideology[1]. So policy makers aren't interested. My favorite Monetarist - Scott Sumner - gets dismissed by such as Paul Krugman, saying that the stories are too hard; that's the politics are wrong[2]. It's not an assault on it even; just a dismissal. Very enlightening.

[1] which is in itself an ideology with certain blinders on - one I ascribe to, unfortunately.

[2] which I think means it has no politics and resembles control theory too much. If everybody can buy the Monetary Policy expansion pack for MATLAB and check the economists' work, there won't be any economists beyond a level....

> But pumping capital into a capital glut doesn't do much.

I believe this is a phenomenon captured by the term "Pushing on a string."

Both freshwater and saltwater (for reference, these refer to geographical locations in the US: Chicago and Minnesota near lakes, and MIT, Harvard, Yale, Stanford, etc. near the coasts) claim that you can't run out of demand, in the long run.

These schools differ in their analysis of the business cycle, that is the fluctuations around equilibrium output that are called booms and recessions/depressions. Saltwater economists believe that you can have too little/too much demand during booms/recessions. These are generally called "out of equilibrium" conditions. Neither group claim that in equilibrium, you can run out of demand.

Source: I have a PhD in economics.

EDIT: also see vezzy-fnord's answer, most "Freshwater" economists are and were some kind of Keynesian.

I wonder if there are any schools of economics that don't view demand and growth as critical. So what if demand is low? This is definitely an oversimplification, but I'm wondering, what if that means people are satisfied with what they have. Is there inherently anything wrong in that? If we create a self-sustaining economy that doesn't grow much (but still evolves) it doesn't seem like such a problem to me. Culturally, I think we just assume growth = good.

Instead of trying to increase demand to match supply, what if we decreased supply, like having a four hour workweek?

Classical economics does not claim to want to increase demand, and Keynesian economic only wants to correct for unnaturally low (or high) demand due to short run fluctuations.

There is nothing wrong with a four hour work week. The reason people still work long hours is not careful engineering of the economy to keep demand high, but people's natural desire for essentials like healthcare, and also luxuries and status-signalling goods. Also hours seem to be decreasing in Europe, which has a different culture to the US.

Also, one (left-wing) colleague of mine made the following point to me when I said something similar about economic growth: Would I be happy to see the world level out on a 1920's standard of living, including healthcare? If not, why is the current standard of living acceptable? Especially when a given average standard of living will also entail people who are much worse off. So to raise the standard of the worst off, we most likely need growth for everyone.

> So nobody really knows what to do about a capital glut and a demand shortage.

Sure they do. The concept of "Unlimited Wants" and Thorstein Veblen's "Pecuniary Canons of Taste" pretty much wrap up a capital glut. Spend it. Money flows somewhere. A demand shortage is not necessarily permanent (horse carriages vs automobiles withstanding)...that's one of the many reasons why the word pivot exists in YC vernacular. Everyone/everything living consumes. There are demands that are fundamental, and demands that are extraordinary. A market exists for all demands, no matter how small or how large. Demands = needs small or great. If you are selling buggy whips in the automobile age, yeah, you might have a demand shortage...so think and pivot. Absolutes have a place in extremum; an exercise left to the reader.

That's simple. You tax sitting on money not earmarked for a recognized task (EG: Saving up for big investment X (named) such as college, a new home/building, etc.) or for rainy day funds; but you also limit the maximum that can be stashed for such tasks.

Then with that tax you re-invest in infrastructure, exploration of new resources, and even missions to space. (I'd rather we have a (robotic) mission to the asteroid belt than mars...).

What to do about it: a basic income.