What Makes Businesses Hire- Supply or Demand: Mike Sanowski vs. Sumner

       In a recent post I-what else-got into words with Scott Sumner. Basically he's claiming that Krugman is wrong to criticize Britain still having lower GDP than the previous high in 2007 and supposedly much of this GDP shortfall:

      "Of course when productivity “collapses” one expects to see RGDP growth “collapse.”  And Krugman has a graph that shows RGDP growth did collapse.  So presumably the collapse in productivity growth at least partly explains the collapse in RGDP growth.  But Krugman simply ignores this clear implication, and writes the rest of the post as if it’s obvious that “austerity” explains the low growth in RGDP, even as employment in Britain does much better than in America, and dramatically better than in eurozone economies that also experienced banking distress, such as Ireland and Spain."

      "Don’t get me wrong, I believe Britain has had both an AD problem and a productivity problem in recent years, but not due to austerity.  And I believe the AD shortfall partly explains the low RGDP growth.  And that productivity and AD can even interact in the short-run (but that doesn’t even come close to explaining the UK productivity data, as Krugman himself hints at with his “reasons not clear” remark.)  But you’ll never catch me writing a post claiming it’s a demand side problem, where 100% of the evidence actually presented in the post points to it being a supply-side problem."

       http://www.themoneyillusion.com/?p=25583&cpage=1#comment-307255

       However,Mike Sanowski has a very interesting post that argues that the problem for lack of hiring is always about demand not supply. Companies don't hire because they ahve high profits but because they see more consumer demand:

        "I have been saying this for years – businesses hire when they are swamped with demand, not when they have high profits. I’ve been tweeting this for the last few weeks to attempt to get more traction for it, and blogged extensively about this for such a long time. It’s great to see people start to take this idea and run with it."

        "Businesses do not hire in large quantities for any other reason other than high demand for their products/services."

       "Recognizing demand drives employment does not diminish the importance of business owners or entrepreneurs. Business owners respond to demand because they have good judgement. They innovate products and services due to their smarts and high motivation."

       "The smart thing to do is to respond to demand – Steve Jobs found this out with the failure of the Newton vs. the success of iPod*. Good business owners try to make money in a stable and repeatable fashion, and then make as much money as they can while doing this. Maximizing profits does not mean hiring people, although it might."

      "The economy needs people and companies who can make stuff, and provide services. **

      "Recognizing the importance of demand does not diminish the importance of making stuff. Innovation is easier when you’re already making something. You can then see the good and bad of the design and make incremental improvements to the design or the process."

      http://monetaryrealism.com/ability-demand-and-innovation-businesses-hire-when-they-are-swamped-with-demand/

      Steve Roth has a post that argues that what matters for companies is less 'price signals' than 'quantity signals. He also leaves this fascinating comment over at Sanowski's.

      "For most products and services, it’s impossible to test price. You just have to make a best guess and set a price that you think will make you the most money. Then you respond based on quantity sold."

      "This is contrary to orthodoxy, of course, which suggests that price signals are the essential information delivered by the market. This is only true in markets for financial assets — markets where demand does not consume the supply, merely recirculates it."

       "In real-goods/services markets, the key information that the market provides is the quantity signal."

      I find it fascinating as it really does challenge orthodoxy right where they live. In his post he gets into it in ore detail:

       "Every business or product-launch plan I’ve ever seen has a huge dartboard right in the middle of it: How much, how many, will we sell? (“Well, it depends what we charge…”) In some businesses there are ways to do controlled tests of different prices and see how sales respond — Amazon being a brilliant example, and we did a a bit of it using direct mail with split runs — but most businesses (i.e. all of Amazon’s producers/suppliers) don’t have that luxury. You have to just choose a price with your best guess, based on various scraps of hard-to-interpret historical-sales and market data. It’s incredibly frustrating."

      "Which brings me to the point of this post: most producers are dealing (at least in the short term whose length varies with the type of business) with a fixed-price market. Once they’ve set their price, they can’t go changing it all over the place."

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       See more at: http://www.asymptosis.com/real-businessmen-respond-to-quantity-signals-not-price-signals.html#sthash.V3MLMhFj.dpuf

      In economic parlance: they're 'price takers' not 'price setters.'

      "So: They’re not receiving any of the market’s supposedly informational price signals. They’re receiving quantity signals. That’s the information that producers derive from the market. Then maybe they change the price, and get more quantity signals. But again, those signals are always hard to interpret because you don’t generally have a controlled test to know whether the price is what drove quantity changes, or whether it was something(s) completely other."

     "Price is fixed, while quantity is very flexible. i.e. Analysts expected Apple to sell five million iPhone 5s in its first weekend. They sold nine million. Did the price go up? No. They rousted workers out of bed in China and filled the goddamn orders. When one of our conferences wasn’t selling well we couldn’t just lower the price, cause we’d piss off everyone who’d already signed up. If sales were good and it looked like we might sell out (there was simply no more room for hotel employees to place chairs), the last thing we were going to do was raise the price and risk stomping on that success. It’s very difficult for producers to derive prices signals from the market."

    In economic parlance: sounds like these companies are dealing with 'sticky prices.'

    Lord Keynes also has a great related piece. 

    http://socialdemocracy21stcentury.blogspot.in/2013/03/kaldor-on-economics-without-equilibrium.html

    If you follow Sanowksi and Roth here, there's no basis for blaming an economy like Britain's problems on alleged supply side issues. 

    UPDATE:  Lord Keynes has this great summation of Kadlor:

     "If one were state the difference between Post Keynesianism and mainstream neoclassical theory, it might be summed up with the idea that Post Keynesian theory is “economics without (Walrasian) equilibrium.”

     "In many markets in the real world, the “sellers are price-makers and quantity-takers, and not, as Walrasian equilibrium theory supposes, price-takers and quantity-makers” (Kaldor 1985: 31). Many prices are cost-determined, and demand has considerably less influence on prices than neoclassical theory supposes (Kaldor 1985: 31)."