Hoarding and Scarcity: Applied Cambridge Economics

by Philip Pilkington

In recent comments to my blog there was a somewhat interesting discussion about hoarding and unemployment. One commenter claimed that hoarding only caused unemployment in a monetary economy. I have heard this a lot, but I have never thought it to be remotely true.

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I laid out a simple example. Here I will give another. Imagine an economy of robots with a constant population and a zero growth rate. This economy, then, just reproduces itself day after day. In order to do this oil is needed. The robots need to consume 80 barrels of oil a day to do their work (i.e. consumption) which is wholly occupied with operating the machinery, while 20 barrels are needed to use this machinery to extract the 100 barrels needed for the economy to reproduce itself (i.e. investment).

Now, what happens if I come along and hoard, say, 10 barrels of the oil? Well, the economy will experience unemployment that day. Let’s say that the 10 barrels are taken out of ‘consumption’ because the robots know that for every 1 barrel they take out of ‘investment’ they will lose 5 barrels the next day. Well, that means that 12.5% (1/8) of the robot workforce will have to go unemployed because they cannot be paid. Let’s say they ‘shutdown’ and do not operate that day**.

Another commenter correctly pointed out that this could not happen in a marginalist model. He was entirely correct but this does not point to the unreality of the situation — this scenario is undoubtedly a real one and perfectly logically coherent — but rather the inability of mainstream models to deal with such phenomena. Due to the way mainstream models are set up — in this case, the problems arise due to assumptions of substitution; the assumption that ‘capital’ is an endowed feature that does not rely on inputs; and the assumption of timelessness — they simply cannot conceive of such problems.

But these problems are real. I am no Peak Oil theorist but I think we can all agree that if 20% of the US’s oil imports were cut off tomorrow a recession and unemployment (together with inflation) would follow. Indeed, we have a natural experiment in this regard; namely, the oils shocks of the 1970s.

During the oil shocks OPEC undertook an embargo on exports of oil to the US. This was effectively the same thing as my example of hoarding. What happened? Prices rose after each shock and a recession soon followed. You can see this in the chart below (data from FRED).

As we can see, each time the OPEC countries held back oil exports to the US the economy dipped into recession. The mainstream at the time came up with all sorts of wacko explanations for these recessions (and I want to stress that oil was not the only factor) and they also came up with wacko explanations for the inflation that accompanied them. But that was because their basic models could not incorporate such events.

Thus even in a monetary economy a withdrawal of certain key resources needed for the reproduction of the system of production will create unemployment and recession. This is intuitively obvious, of course, but economists are not the most intuitive people on the planet. Rather they are led around by the nose by their models which completely structure the way they view the world.

The model that I laid out above is, by the way, a stripped down Sraffian model. Such a model could also be derived from the work of Wassily Leontief or Karl Marx in the reproduction schemas of Volume II of Das Kapital or you can find a similar framework married to Keynesian economics in Joan Robinson’s The Accumulation of Capital, but such a model cannot be derived from marginalist theory.

What lesson should we learn from this? Simple. Different models tell us different things about different aspects of the economy. Even if you don’t think that marginalist models are complete garbage you must understand that they only produce results based on the assumptions that they make. If the initial assumptions rule out, for example, the effects that shortages of a commodity that is needed to reproduce the system of production lead to, then the model-user will not be able to understand such phenomena. They will literally suffer from a myopia that is caused by their own rigid adherence to the models that they have been told are “superior” by those who mark their exams and give them promotions.

If that is not, at the very least, a good case for economic pluralism, I don’t know what is!

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** Actually, it’s a little more complicated than this. If the robots were rational they would recognise that the entire workforce was required to operate the machinery. Thus, by removing some of the workforce by ‘shutting them down’ they would not get the maximum amount of oil even if they kept investment constant. Thus, they would have to balance this properly. I think that the end result comes out at about 1 barrel of investment-oil forgone and 9 barrels of consumption-oil forgone. Thus around 11.25% (9/80) of the workforce go unemployed. This will lead to a shortfall of 5 barrels the next day that will have to be distributed and so on and so on until the economy returns to full employment. But I laid it out above as I did to keep things simple. The overarching point is the same.

Update: I actually ran through the simulation properly in the comments. What we actually get is a permanent unemployment equilibrium. Here I quote my comment from below:

In the period in question — call it Period t — demand is 100 (but 10 are essentially disposed of). The inputs needed to cater for this demand come from Period t-1. These were produced in a full employment economy. The robots then decide how to distribute these 100 inputs, minus the 10 extracted by the hoarder (imagine these disappear), in line with how best to produce inputs in Period t+1. The best way to do this is to “shut down” 19 of the robots and have the rest work.

In Period t-1: 80 units of labour (at subsistence wage) and 20 units of (circulating) capital produce 100 units of output. The labour:capital ratio here is 4:1. For every 4 units of labour, 1 unit of capital is used. Together each “coupling” produces 5 units of output, so 100 units.

In Period t: 10 units disappear (hoarded). Leaving the economy with 90 units. These are divided up in line with the previous ratio (4:1). So, that means that 72 units of labour are thrown together with 18 units of circulating capital (again, 4:1, the optimal ratio). The rest of the labour force remain unemployed because they are in “shutdown” and cannot be reactivated without more output. This system again reproduces itself. It produces 90 units of oil.

Now that I actually work through it what we get is a permanent unemployment equilibrium ala Keynes in the General Theory. Wow! Very interesting!