Thursday, July 08, 2010

CUE CARD ECONOMICS: Demand

The way some alleged economists talk about “demand” and how to boost it, you’d think that  boosting demand was just a matter of wheeling out the printing press and machine-gunning retailers with paper money.

If only reality worked as well as their fantasies!

Sure, in all those Keynes-inspired textbooks boosting demand is all simply a matter of combined fiscal & monetary legerdemain, but as we discovered in the seventies after two decades of this kind of poncing about, the result of this sleight-of-hand is not a medium-term boost to demand, but stagnation, inflation and a long-term dilution of purchasing power of the currency in which the printed paper is denominated.

In reality, i.e., the place where we live and work, demand comes not from the printing press, but from production. The so-called “Classical Economists” understood this perfectly.

They understood that wishing for something doesn’t make it so.  Demand, they said, is not just a pent-up desire; it is “the will combined with the power of purchasing.”

_Quote The will to purchase can be taken for granted [explains George Reisman]. All that is required to enlarge demand is the power of purchasing.  And all that is required to enlarge the power of purchasing ... is an increase in production. In the words of David Ricardo, the desire to consume ‘is implanted in every man’s breast; nothing is required but the means, and nothing can afford the means but production.’”

It’s so simple, it’s no wonder Keynes tried to deny it. When I supply a bunch of stuff, and you offer to exchange it with me for something I value more (the very basis of trade), what I want for the goods I’ve supplied is not just coloured bits of paper but what those coloured bits of paper can buy.  The printing of lots of coloured bits of paper does nothing at all to increase what I can buy, in reality all it does is dilute how much real stuff those bits of paper can command.  The only way to produce more purchasing power is to produce more.

The Keynesian denial of this fundamental fact is not based at all on sound economics, but on the reification of consumer’s wishes as if they constituted the very power to create—on the fantasy of consumptionism “in which one not only can eat one’s cake and have it too, but in which one bakes one’s cake in the very act of eating it.”

_QuoteBut, in fact, consumers qua consumers are not part of anyone’s market; qua consumers, they are irrelevant to economics. Nature does not grant anyone an innate title of “consumer”; it is a title that has to be earned—by production.
    “Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market’s ‘supply’; in the role of consumers, they represent a market’s ‘demand.’ The law of supply and demand has an implicit subclause: that it involves the same people in both capacities.
    “When this subclause is forgotten, ignored or evaded—you get the economic situation of today...”
        [Ayn Rand, in ‘Egalitarianism and Inflation’ (1974)]

Demand is not just a pent-up desire; it is “the will combined with the power of purchasing.” In reality, it is something only producers can do.

This is part of a continuing series giving a common sense explanation of economic terms and concepts as used by sane economists. The series as it grows can be accessed through the Cue Card Economics tag.

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