Macro Follies continue – “demand creates its own supply”

In response to my posting on the Societies for the History of Economics (SHOE) website in response to his found at Decore la Casa con Macrofantasías, David Colander has now continued with this:

I am traveling so this will be short. In a monetary economy even though real demand is tied to real supply effective demand and effective supply can be far below both. In such cases hansen’s law holds– demand creates its own supply which is what i believe keynes meant which in nuanced terms meant new effective demand creates new effective supply.

This is as unreconstructed a Keynesian view as it is possible to find. I suspect he was worried that he would be drummed out of the profession if he was seen to give aid and comfort to the enemy. “Demand creates its own supply” is about as nonsensical a statement as I could conjure. How is it possible to believe something as stupid as that? It is not just the death of macroeconomics but the death of any economy that actually builds policies based on such inane ideas. Yet I suspect he speaks for the overwhelming majority of policy makers and macroeconomists who believe that if you just spend money the economy will grow and unemployment will fall.

My posting on the History of Economics website: After much thought, I have put the following brief post up onto the SHOE website in reply to David Colander:

David Colander wrote:

I am traveling so this will be short. In a monetary economy even though real demand is tied to real supply effective demand and effective supply can be far below both. In such cases hansen’s law holds– demand creates its own supply which is what i believe keynes meant which in nuanced terms meant new effective demand creates new effective supply.

Here is David’s key phrase: ‘demand creates its own supply which is what i believe keynes meant’. It is also what I believe Keynes meant but it is also why I believe Keynesian economics to be completely wrong. To come back to my previous post, I think the following passage from The General Theory is a perfect statement of the most fundamental of all Keynesian beliefs:

The above reasoning shows how ‘wasteful’ loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better. (p 129)

It would be one thing to argue that natural disasters, wars and useless public works could under some circumstances and in certain conditions increase the level of employment during some specified and relatively short period of time. But to argue that they would ‘enrich the community’ or ‘serve to increase wealth’ is to my mind indefensible.

In this I am at one with Ricardo where he wrote in his Notes on Malthus, written more than a century before Keynes wrote his General Theory, just how nonsensical such ideas are:

It might as justly be contended that an earthquake which overthrows my house and buries my property, gives value to the national industry. (quoted in my Say’s Law and the Keynesian Revolution: p 54)

Is Ricardo’s point not completely obvious? If it is not, economic theory has retreated to an even more primitive state than it was in 1820.

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9 Responses to Macro Follies continue – “demand creates its own supply”

  1. MattR

    Yeah, this argument is totally 100% accurate. I mean, look at all those people that are starving around the world. They demand food more than anything else and look at all the supply they got from their demand!

  2. AndrewL

    Matt, do they demand with money?

  3. Bruce

    I want a Mr Fusion for my car. Perhaps Prof Colander could suggest a supplier.

    Not only would my Mr Fusion save me the cost of petrol, but it would be CO2 free and therefore I wouldn’t be forced by my enlightened government to put ethanol in and therefore starve Africans due to ethanol mandate caused high food prices. Wow, that would be a win-win. So Prof Colander the demand is there, get cracking. Perhaps you can have a talk to cold fusion expert Martin Fleischmann, he could probably design you a suitable device. That he is dead should be no barrier as for Keynesian economics nothing is impossible!

  4. MattR

    AndrewL, yeah true, I guess the answer is for the Bangladeshi government to do what Zimbabwe did and give their citizens a whole lot of money. What could possibly go wrong?

  5. Jannie

    OK, for the purposes of debate.

    “Demand creates its own supply” is about as nonsensical a statement as I could conjure.

    What about a tender process (or secret specs to selected producer/s), to supply an article, which may or may not already exist, from a hammer to a hydrogen bomb?

    On the other hand there is a real demand for a cure for cancer, backed by real money. Mostly the suppliers offer snake oils.

    I think I can follow the debate without claiming to fully understand it, but the notion that supply creates its own demand also seems a bit intelectual, with utmost respect to JS Mill. There is a plentiful supply of blogs in the world, and there will never ever be a demand for them.

    My take is more practical than scientific or theoretical, but for what its worth, I dont think the science is settled.

  6. Helen Armstrong

    I think it was Gab way back who said supply creating its own demand was like Walkman. No-one wanted them before they were made, then everyone wanted one.

  7. John A

    Err, “Societies for the History of Economics (SHOE) website” ??

    Could the website “patron” perhaps be one Zaphod Beeblebrox 1st, President of the Galaxy, who successfully made off with the Heart of Gold Starship – the least predictable spacecraft in the known universe – and the snazziest, since it was shaped like a large running shoe?

  8. RedneckRuss

    This is crap, it is the economic equivalent of “Build it and they will come”. This is fairy tale economics combined with a good dose of modern snake oil salesmanship. Colanders remarks are an insult to the intelligence of even an undergard like me.

    Believe his and you are a fool!

    RussR

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