To quote the Upshot directly, “There is a worldwide glut that includes oil wells, steel plants, and eager would-be workers, and it will take more than a United States presidential election and a few months of solid global growth to fix it.” The problem is that this presumes the true existence of what is really a mirage: an economy-wide glut.
To be clear, there’s no such thing as a broad “glut” that causes prices to fall across the board. As logic dictates, falling prices merely expand the range of goods that consumers can demand, thus driving up the prices of other items. Prices are how a market economy organizes itself, and as such they’re rising and falling together with great constancy. As John Stuart Mill wrote in Principles of Political Economy:
“If one-half of the commodities in the market rise in exchange value, the very terms imply a fall of the other half; and reciprocally, the fall implies a rise.”
Thinking about New York City itself, if there’s a glut of hotel rooms such that room prices fall, that just means that visitors have more money to spend at the City’s shops and restaurants. Contrary to what business writers at the Times believe, falling prices represent opportunity in much the same way that the tractor and sewing machine represented opportunity for consumers long ago. Thanks to productivity advances, producers were suddenly able to attain a great deal more food and clothing in return for every dollar earned; their surplus from lower-priced food and clothing freeing them up to pursue previously unattainable goods and services. Translated, the declining prices that have the Times mildly hysterical are a sign of rising living standards for all simply because they represent increased access to formerly unnattainable goods, along with looming access to products we don’t yet know we want. Who was “demanding” the internet in the early ’90s, Uber in the ’00s, or an iPhone (that mobile phone experts roundly dismissed) in 2004?
In growing economies, prices of highly demanded goods are generally always falling simply because investment is usually about boosting worker and equipment productivity. If readers doubt this, they need only research what the original microwave oven cost, or personal computer, or ballpoint pen. And then, as previously mentioned, the falling prices lead to the discovery of new wants, thereby driving up the prices of other consumer goods. More on this in a bit, but for now, economy-wide gluts are an impossibility given the basic truth that production is the driver of all consumption. If we’re demanding goods and services, that’s a tautological sign that we’re producing goods and services in order to attain what we want. These things balance.
The Reality of Supply and Demand
To look at it in a more micro sense, consider NFL drafts over the last 10 years: the value of running backs has steadily declined over that timeframe, but rather than creating a glut driving down NFL salaries, the effect has been that the price of quarterbacks – and left tackles to protect those quarterbacks – has risen.
The same is true in music. Thanks to Amazon’s Echo, musical libraries that once would have cost consumers billions to own can now be accessed through Alexa the DJ for a few dollars per month. And since music is becoming ever cheaper, Americans have increasingly spent on concerts what they previously spent on albums. The theoretical “glut” of recorded music that would theoretically follow has instead authored surging demand for concert tickets; the ill-fated Frye Festival (where tickets cost up to $12,000) from last week is one of many expensive examples of migrating money that used to be directed at music purchases.
Silicon Valley is thick with workers, while Flint is bereft. Yet it’s in the Valley that wages are surging in the face of the supposed glut. As the Times itself reported a two years ago, there’s even a bidding war for corporate chefs in northern California, presumably along with a surging demand for yoga instructors, sommeliers, and personal trainers. In Flint there’s little demand for any of the professions precisely because there’s very little production in the once-prosperous town. There’s little demand where automobiles used to be made simply because there’s little supply.
Thinking about the Valley more broadly, its technological innovations are constantly driving the prices of everything down. Anyone who doubts this need only consider the smartphones in their hands. Ten years ago, the technology within them would have cost millions, had it existed.
The Times’ argument is that a glut defines the global economy, such that the price of everything is falling. Of course, the Times missed that, short of a monetary event whereby the value of the major global currencies surges, there’s no such thing as a decline in the total price level. More realistically, prices of goods and services rise and fall to reflect increased productivity, changing consumer preference, evolving consumer demand wrought by falling prices, and all manner of other market activity.
Reducing all of this to the absurd, let’s assume scientists discover tomorrow that consumption of three oranges a day will forever cure humans of life-threatening heart disease and cancer, while clearing our skin. If so, demand for citrus products will likely outpace initial supply on the way to rising prices for oranges, only for apple demand to decline. Prices balance. Looking back to the late ’90s, a glut of VHS recorders didn’t signal deflation as much as it indicated surging demand for then-expensive DVD players. Fast forward to the present, and formerly expensive DVD setups are going the way of the VHS as consumers direct their dollars to Netflix, Amazon and Hulu.
Also odd about the Times’ thesis was its faulty use of singular prices like oil to make a bigger, global point. With oil trading at $50 after a barrel of crude cost over $100 in 2014, The Upshot points to the latter as a sign of a global glut. Really? The problem there is that in 1998, a barrel cost $10. And just as we all benefit when Valley geniuses drive down prices of everything, so would the global economy benefit if oil plummeted to $1/barrel. If so, money saved on oil’s by-products would introduce new demand for formerly out-of-reach or presently non-existent goods and services, only to drive up the prices of that which was once unattainable, unfathomable, or both.
Consuming and Supplying As We Please
The Times’ writers think inflation is essential for growth, and they puzzle at what they deem an inability of central banks to generate higher inflation. Their theory is that if prices are always rising, people will consume rather than save in order to capture goods and services before they become too expensive. But they get things backwards. Not only does no act of saving ever detract from consumption (banks don’t pay for deposits only to stare at the money), the greater truth is that money saved is what powers production and the creation of goods and services at lower and lower prices. Once again, economic growth is driven by investment, which fosters the very innovation necessary to produce goods and services for fewer dollars.
This is important given the Times’ focus on consumption to the detriment of savings. Indeed, if all we ever did was spend, there would be very little capital for entrepreneurs and businesses eager to innovate on the way to lower prices, and, by extension, the introduction of new goods and services previously unimagined. We have computers, cars, WiFi, and Amazon Echo products (from which we can demand the world’s plenty) all because people saved.
The Upshot’s writers presume a non-existent world where businesses can only thrive if they’re jacking up prices such that consumers are constantly buying ahead of those increases. But reality contradicts the presumption. As the relentless price-cutting in productive locales like Seattle and Silicon Valley constantly reminds us, entrepreneurs and businesses are rewarded the most by investors when they charge the least. Falling prices are a certain sign of economic growth precisely because they signal massive investment in the production of what people want on the way to falling prices: the savings once again directed to new, usually higher-priced wants. And then, once a market is discovered, feverish price-cutting reveals itself yet again.
Opposite the musings of The Upshot, falling prices signal rising prices in other parts of the economy, and vice versa. The Times’ journalists point to an alleged “glut” of workers, but implicit in their argument is that jobs are finite. But jobs are a function of investment. They’re plentiful – and at higher and higher wages – in Palo Alto and Seattle right now despite a surge of willing workers in both locales, but scarce in Williston and Detroit.
Notable here is that when a currency is sound – as in, it’s not being devalued as the Times and President Trump desire, given their shared belief that inflation is stimulative – investment soars on the way to high-wage job creation. There are quite simply no companies and no jobs without investment first, and, as evidenced by the feverish flow of capital into high-wage locales like Austin, Boston, San Francisco and Seattle, investors reward the producers that most aggressively turn formerly obscure luxuries into that which is ubiquitous and cheap.
But the main truth is that we can only demand goods and services insofar as we supply them first. Glut theorists presume that goods and services just exist for us to demand. Adding to their confusion, glut theorists presume that producers create goods and services without any desire to attain goods and services in return. But they create so that they can obtain; the more value they create, the more they can demand. And that’s why prices balance. There are never local, national, or global gluts simply because the production equals demand.
So, while prices of steel and oil at the end of the 20th century mock the odd notion promoted by the Times that either commodity is presently oversupplied, the greater truth is that the Times’ proud “discovery” of a perceived economic ill was nothing of the sort. The very notion of a global glut is an impossibility given the basic truth driving all economic activity: we export so that we can import. The latter, by its very description, speaks to balance.
This article was first published by the Foundation for Economic Education (FEE).