But what if this too much happens on the level of the entire society? We are living in a world right now where we have too much on a society level. Marco Nappolini points out:
“So productivity gains facilitated by the boom period become a liability in the downturn as it increases labour market slack and economies struggle to reach full employment. This in turn means that even during a recovery the impact of rising employment on prices is swamped by efficiency gains (machines are turned back on) breaking the Phillips curve relationship between inflation and falling unemployment as the data has been suggesting.
This helps explain why even cash heavy firms like Apple have struggled to find uses for their surplus capital. If the expected return on investment over the short term is presumed to be lower than the cost of holding cash then even pushing interest rates to zero will have little effect. That is, if you cannot push real interest rates below the so-called short run natural rate you will struggle to bring forward future consumption, blunting the short run effectiveness of monetary policy.
Specifically, when you have too much means of production along with the simultaneous problem of insufficient demand?
This is a dual problem. If we have full demand possible out of the current population, then we might have a time in the future where the population grows and we can use the machines and factories to fill that demand. But then if we have slack demand from the population – what can you do?
One way to bring about a new equilibrium would be to try to bring the demand up through some sort of stimulus. We could unlock that un-tapped demand, which would then use that unused capacity! This solves both problems at the same time.
Larry Summers points out we might need bubbles to do this. I’ll have more on that later today.
But another solution to this dual problem would be to blow up stuff and kill people. We could blow up the extra capacity and reduce a bunch of factories to rubble. This solves the over capacity problem. We could kill a bunch of people to reduce demand, which eliminates the unused demand in the economy.
War is a good way to force a new equilibrium on an economy. It destroys means of production and reduces maximum possible level of demand. It has a further benefit of invalidating many debt contracts in the losing country.
Any time you have deflation, people choose to push of consumption they could do today in anticipation of getting the same good or service more cheaply. This is a huge problem in the tech hardware industry, because people know if they wait a year, they will get dramatically better goods for the same or lower cost. This is exactly why so many economists fear deflation on an economy wide basis – it’s hugely possible to fall into a excess capacity/constrained demand equilibrium.
One way out of this equilibrium is to stimulate demand enough the economy uses the extra capacity. But another way to force a new equilibrium is to blow up stuff and kill people through war. It’s what we did after in response to the deflation economies of the 1930’s.
Update: This is related to Businesses Hire when they are swamped with Demand.