6 ms·

Consumer demand is meaningless. Trying to push it is like trying to push a string. Demand is an artefact of production. Unless your economy is producing, you

• redler 11y ago
  Supply and demand are entwined in a perpetual dance, and "if you build it they will come" only goes so far. A product has to find a market capable of making the purchase. Opening a Whole Foods supermarket in rural Tanzania isn't going to boost sales of Tom's of Maine Wicked Cool Toothpaste -- a product apparently worthy of exchange among sufficiently wealthy consumers in a different context.
  • brc 11y ago
    Malinvestment in incorrect production is part of the process. The person who produces unwanted goods and services must gain the feedback that they have, so they can switch production to what is desired. This is a very important reason why crony capitalism, protectionism and secession regulation hurts everyone. I have never stated that 'if you build it they will come', because that is patently false. This is a common straw man erected by the true 'aggregate demand is all' believer (I don't know if this is your position or not). If you build it, they will come is as absurd as 'if we just gave everyone a bit more money, the economy would grow'.
    • millstone 11y ago
      You're arguing that a glut is due to producing what is not desired, instead of what is desired. So when there is a glut in one area, there must be corresponding shortages in other areas. This is easy to debunk. Look at the labor market. The US unemployment rate went from ~4.5% in 2007 to 10% in 2010: a big labor glut. The "malinvestment" theory predicts unfulfilled demand comparable in size to the unemployment. Large sectors of the economy should have had millions of unfilled job listings, spiraling wages, etc. But this did not happen. The right explanation is simply that total labor supply exceeded demand.
      • brc 11y ago
        I don't agree with the statement that a glut in one area must equal a surplus elsewhere. You've added at interpretation to my statement. If a person produces hot pink sweaters and finds nobody wants them, that doesn't mean there is a shortage of blue sweaters, or even sweaters in general. Additionally, it might mean that people might want hot pink sweaters, but not at the price being asked. Taking this back to labor markets, surplus labor (unemployment) is indeed oversupply, that much we are agreed. But you must break this down further - it is an oversupply of specific types of labor at specific rates. You could clear that labor oversupply by switching the supply by changing the type of labor being offered, and also by changing the price. For example I'd happily pay someone to do work for me at lower rates than currently offered, but that market doesn't usually clear. Changing the price doesn't happen often for regulatory reasons or stickiness, but changing the nature of labor supply often does. It's just that the timescales involved involve a lot of problems. The solution to that is to identify reason why mal investment occurs and to avoid anything that contributes to it. I don't think it can be totally avoided due to human nature - hubris, mistakes and misfortune - but you can certainly avoid some of the obvious ones, like rigging credit markets and trying to centrally plan economies.
        • millstone 11y ago
          You wrote "The person who produces unwanted goods and services must...switch production to what is desired," which presupposes that there is something else desired, i.e. there is no general glut. For example, we Americans demand less oil today than we did 10 years ago. This contributes to the oil glut, which has turned many drill sites into malinvestments and caused layoffs in the petroleum industry. How can you say that that consumer demand is irrelevant here? Isn't it obvious that if there was a nationwide ad campaign to buy gas guzzlers and take them on road trips, it would increase oil prices and improve the state of the petroleum industry? And if it can happen in the petroleum sector, why not at the scale of the entire economy?
          • brc 11y ago
            Unpacking that slightly. First, an oil glut is not a general glut, so it's possible that the demand for oil has shifted elsewhere. I don't agree that an ad campaign for national gas guzzler travel would increase oil prices, because it's very unlikely that such a campaign would work, and even if it did, it would be a poor choice of resource spend. Going back to a general glut - and I hate the term - of course it is possible to have an economy-wide contraction where production overwhelms demand temporarily. This is possible from external shocks (eg war, disaster) or persistent interference (eg Venezuela). Such a scenario is generally best resolved by solving the cause of the shock and doing everything to let the market clear. Most of the time this will be temporary and conditions will resolve, if not at the speed at which makes everything happy. I think the key thing here is that while there will be demand for other production at some point, it's necessarily a case of timing and there is likely to be a lag before new preferences are developed. The key here for future prosperity is not to borrow and spend on what is already not wanted, or to borrow and spend on pointless spending just for the sake of making money move. The alternative is if an economy dropped to a new, lower level of production by choice, such as if everyone decided to lower their production and consumption and consciously not increase it again. You'd then get reversing economic growth, but then that would be the intention as results from people choosing less.
• SapphireSun 11y ago
  Sort of.... you want more stuff if you have more money, but if you have little money, at one point, your propensity to save increases to avoid poverty, whereas below some point I imagine you spend everything you have (not much) as fast as it comes in.
  • jacquesm 11y ago
    > you want more stuff if you have more money I don't think that's a valid statement. There is only so much 'stuff' that you can use. Beyond a certain level more money does not translate into a better quality of life or more 'stuff' for most people, there are a few outliers but lots of very wealthy people are actually quite modest. They're so modest you won't read about them in the newspapers.
    • chc 11y ago
      I don't think GP is saying that the demand you add to the economy increases linearly with income. I think the point is that it's essential to have lots of people with a healthy amount of discretionary income, because non-discretionary income can't really be reallocated no matter how compelling your wares are.
      • SapphireSun 11y ago
        Yea, it's more important because there are more (or should be more in this era) people in that range as a percentage of population than strikingly wealthy people.
  • brc 11y ago
    Demand is not want. Demand is standing at a cash register with cash, asking for a product. Although demand in the economic sense sort-of-sounds like want - certainly I'd like a new Lamborghini - I have zero effect on the demand for lamborghinis. The level of spending (poverty vs wealth) is mostly irrelevant because that's a value line someone draws on a graph somewhere. Poverty in the Midwest is not the same as poverty in Sub-Saharan Africa. Absolute Poverty (in which a person has insufficient resources to survive) has a wide variety of causes but essentially reduces down to the inability of an individual or family to produce enough to exchange for what they need. Savings are just postponed consumption in the same way as debt is the promise to hand over your future production.
• cubano 11y ago
  > To buy something, first you have to produce something worthy of exchange. Everyone has to start from this point. But so many people from the Marxist-leaning schools just don't and refuse to, because at its core this belief destroys pretty much every argument they make about moving from a market-based system to a collective one.
  • brc 11y ago
    Sure. The Marxism school of thought is one of fantasies, of free lunches from artful arrangement of resources. The problem is that this persistent belief stretches from hard core far-left socialist/communists right up to the centre right of political thought (though I despise the left/right denomination, I use it here to illustrate fashionable thinking). Eventually, beliefs will have to change - anything that can't go on, won't - but I don't expect it in my lifetime. Human nature is unchanging and economics is simply the study of human choice when it comes to limited resources. At some point understanding must come back to this simple point - you've got to produce something to trade for something - but magical thinking and hoping has a way of persisting for a long, long time. Edit: you'll see that most of my comments in this topic are being systematically down voted. This is because it is contrary thinking to what gets fed in higher education in the past few decades. I know, because I consumed the same content, and had to continue my own further education to realise why the concepts never sat right with what I observed going on. And that results in a lot of a-ha moments when you start reading pre-Marxian and pre-Keynesian thought. I hold no ill-will or malice to the down voters, perhaps one day they'll come to realise the dry, barren road current macro thinking finds itself.
    • TheOtherHobbes 11y ago
      >The Marxism school of thought is one of fantasies, of free lunches from artful arrangement of resources. Actually the Marxist school of thought is one of economic self-determination. That ideal went badly wrong with the concept of the dictatorship of the proletariat. Even so. Economic freedom - specifically the moral right of the working classes to benefit from the economic value of their labour - is the bedrock concept of both Marxism and Socialism. And the bedrock moral value of American corporate capitalism is the elimination of that right in favour of distribution of value exclusively to a social conceit called "capital". Now - in fact both are oversimplified and wrong-headed, and both lead to disaster in different ways. A useful synthesis may be possible, perhaps. But it's going to take a much more insightful analysis than anything that appeared in previous centuries.
• RobertoG 11y ago
  Why would you produce something for what there is not demand? Is not this the first lesson for start ups? searching for a market-product fit? Do you agree that the goal of a business is profit? Ergo, is the prediction of profits what create production. This is the core of the capitalist system, isn't it? If a business don't see profit in its future, the rational thing to do is decrease production and, more important, stop new investments. That means lay offs, no new hires, etc.. Less people with jobs, less people with money, less demand, less future estimation of profits. Feedback loop. Then come the creative destruction, that is supposedly a good thing. People is more desperate, accept worse conditions, business not 'efficient' enough close, this create less competence in the market and people ready to work for less. The survivors can accumulate more claims in the economy, what means concentration of capital in less hands. Rise and repeat.
  • brc 11y ago
    I don't think you understand my point. I'll reiterate: 'To buy something, first you have to produce something worthy of exchange'. To understand this, don't immediately jump to the business level, think of it at the individual level. If I want to buy something, first I have to produce something worthwhile, so I can exchange that thing for the other. It's unlikely that the exchange is going to be direct (barter) and it will take place using the medium of currency. I think your understanding of demand is slightly askew from the economic definition of demand. Entrepreneurism is precisely what you have described - the creation of new products where future consumption is uncertain. It is vitally important as an agent of change in any economy - and incidentally is the first victim to central planning. But that is incidental to the issue of requiring production before consumption. If I want something, first I have to make/do something which has value for someone else, then they can trade the thing that they made/did and that I value. We are both better off, wealth has grown. The issue here is that people think that just giving currency to one of us so we buy the thing off the other is the key to growth. When it is patently obvious that 'stimulating demand' by giving someone money can't possibly grow wealth (and the economy in the same way).
    • RobertoG 11y ago
      "When it is patently obvious that 'stimulating demand' by giving someone money can't possibly grow wealth" But this is not the claim. The claim is somebody trying to buy something with money create demand. We all agree that money is different of real wealth. Even in an alleged two persons barter economy I could buy from you with a promise of something in the future. If the promise is good enough you could even start producing more. And this is not even the correct framework, because what we are talking are systemic problems in modern economies that don't map well to hypothetical two persons barter economies.