L’offre crée même la demande

In the AFR today there is an article reprinted from The Financial Times dated 19 January and written by one of the FT‘s columnists, Wolfgang Münchau. And here is the relevant para:

Last week, we heard another Frenchman, President François Hollande, proclaiming: “L’offre crée même la demande”, which translates as ‘supply actually creates its own demand’. If you want to look for the real political scandal in France today, it is not the sight of the president in a motorcycle helmet about to sneak into a Parisian apartment building. It is that official economic thinking in Paris has not progressed in 211 years.

If you want to understand the financial crisis and the subsequent recession, Say’s Law is of no help whatsoever.

What does this guy know? The Socialist President of France, who more than anything else would have liked to spend the French economy into recovery, having personally experienced the consequences of trying to use Keynesian economic policies, has concluded that economies are not driven by demand. That the writer of this article knows no better is just par for the course. All he knows is Keynes, and wrong or right, one stimulus-generated economic catastrophe after another, on he goes. But at least Hollande has finally understood what needs to be known and has embraced Say’s Law as best he understands it.

You may be sure Hollande did not do this lightly. This awareness has come as the result of the bitter fruits of experience. The stimulus packages of 2009 are today’s debt and dying economies. There will be no recovery until demand is again constituted by actual value adding supply. The article tries to explain the significance of the shift towards thinking in terms of Say’s Law, tries to explain what’s wrong with Say’s Law but discusses nothing with anything resembling economic content, and ends with this:

The third significance lies in the fact that the new consensus spans the entire mainstream political spectrum. If you live on the European continent and if you have a problem with Say’s Law, the only political parties that cater to you are the extreme left or the extreme right.

The problem remains that while they are all trying to walk away from Keynes there are no longer any guideposts on what to do since no economics text, with only a single exception that I know of, will explain the actual meaning of Say’s Law, the classical theory of the cycle and what needs to be done to generate a recovery when the economy is in recession.

[My thanks to Alan for forwarding me this article.]

This entry was posted in Classical Economics, Economics and economy, International. Bookmark the permalink.

140 Responses to L’offre crée même la demande

  1. Token

    Was the president referring to the services provides to moronically stupid lefty women?

  2. manalive

    … You may be sure Hollande did not do this lightly. This awareness has come as the result of the bitter fruits of experience …

    …the right attacks government intervention. It’s as if the right doesn’t care about empirical data, or the scientific method in general … Monty (previous thread).

    At last in France it’s only the extreme Left and extreme Right (Le Pen National Front) parties that have not learnt from experience.

  3. DMS

    It’s nice to see someone maybe learning. Generally the Left create their own reality then fingers in ears “nyah nyah nyah”

    example (without attempt to thread hijack – just peek and move on).

    Workers in a restaurant win doubling of wage
    http://www.nytimes.com/2013/10/28/nyregion/ruling-doubles-paycheck-for-1375-employees-at-high-grossing-queens-slot-parlor.html?_r=1&

    Restaurant closes a few months later
    http://www.nytimes.com/2014/01/09/nyregion/after-winning-a-raise-175-casino-workers-in-queens-lose-their-jobs.html

    Back OT.

    Any sign that “walk(ing) away from Keynes ” is a trend?

  4. Ant

    Are you sure he didn’t say “Homme, elle a obtenu un chaud bas

  5. DMS

    derrière formidable?
    C’est assez non?

  6. steve

    I read that Craig Emerson has a Doctor of Philosophy in Economics from the Australian National University. Maybe we should ask him what to do………

  7. Watching It Unfold

    Surely its reasonably straight forward – when things are going bad, sell (stop spending) assets and go backwards a bit (sell what ever you can to get through). when things are good make some profits and save it for the next bad bit. All things considered, its an upwards trend. I don’t know about world economies but having been through this process more than once, I’d recommend it.

  8. The Pugilist

    I read that Craig Emerson has a Doctor of Philosophy in Economics from the Australian National University. Maybe we should ask him what to do…

    If the ANU didn’t demand the PhD testamur back and fire up the shredder after his time as a Minister (particularly the ‘whyalla wipeout’ performance), it should be turned into the ashes of a a TAFE campus…

  9. John of North Lakes

    “Watching it unfold” @6.01pm. It’s called “look after the pennies and the pounds will look after themselves” I give away my age by quoting this but it was relevant in my Grandmothers day and it is still relevant today.

  10. Alfonso

    “A young Australian (sic) who died in Syria was shot in the head by a rebel sniper after a long siege, a member of an Al Qaeda-linked militant group has told the ABC.”

    Quality telescopic sights create their own demand.

  11. Joe Goodacre

    Say’s law assumes that people produce, which creates demand because they want to maintain purchasing power.

    Most people I know would be happy serving none if their wants could be satisfied without working.

    The reason people work is to satisfy their wants – few people work as a ‘want’ in of itself.

    If demand drives supply, it is possible to stimulate supply by making it harder for people to satisfy their demands. If a person wants a house and government through taxation and inflation make it harder to achieve that desire through their ordinary level of production, it’s possible that a person will supply more to satisfy that same want. Housing is the classic example in the sense that we still have high demand for housing in Sydney even though it’s many times more the average annual wage compared to a decade ago.

    If our argument against government intervention is that government taxation and inflation there is less overall production, that won’t always be true. Whether something is possible and moral are two separate questions.

  12. Louis Hissink

    Supply creates its one demand is Keynes’ definition of Say’s Law, but that’s not what Say’s Law is since it’s demand that creates supply. Demand is not created by stimulus either, since no one decides to produce stuff simply because a finite amount to stimulus was fed into the system.

    Entrepreneurs only start producing when they sense a demand for their product, and that situation in the modern economy of ‘just in time’ manufacturing relies on the retailers placing orders for future sales.

    The answer lies in why people defer purchases, apart from the essentials, and decide to save, not in banks but under mattresses, or into precious metals. Matressing might cause a reduction in the money supply and hence deflation, but not buying previous metals.

    The whole problem is that Keynesians don’t seem to understand why people act (and not in the vaudeville sense, I have to add).

  13. brc

    Joe that post is completely wrong for a variety of reasons. You cannot legislate demand – all you can do is channel demand towards certain things by eliminating others by taxation or regulation. Just because people still spend money on houses despite the government assault, doesn’t mean they wouldn’t rather spend on other things. The house represents the last investment standing rather than a symbol of working harder.

    Remember to always look for the unseen, not just the seen. Australians standards of living are lower than they could be, despite being already quite high by world standards. But much is appropriated by the government and then wasted. Look at the age of the Australian car fleet for an example of where government policies create terrible outcomes. Get rid of the intervention and production would be much higher, even if that production is only just unloading imported cars at he wharves.

  14. Louis Hissink

    Joe,

    Say’s Law is that people produce in response to demand. Producing a widget no one wants is indeed production, but guaranteed to send that producer broke because he produced something no one wanted.

  15. brc

    Louis, you’ve got it around the wrong way.

    It’s not ‘demand creates supply’ or ‘supply creates its own demand’.

    It is simple.

    To consume, you must first produce.

    If I have caught some fish, you need to have something worthwhile for me to trade before I’m giving you a fish.

    To demand, you must first supply.

  16. Louis Hissink

    brc,

    Sorry, you have it back to front.

    I consume simply by catching a fish. I don’t need the fish you caught because I caught my own. I therefore don’t need to produce anything.

    Your ball.

  17. Louis Hissink

    Actually Say’s Law is better expressed as ‘Demand creates its own supply’; no demand, no supply.

  18. Infidel Tiger

    Actually Say’s Law is better expressed as ‘Demand creates its own supply’; no demand, no supply.

    That is the diametric opposite of Say’s Law.

  19. The Pugilist

    To demand, you must first supply.

    To want, or even to need you don’t need to supply anything. That is merely a desire or a wish. To act on your desire or wish (in other words to exchange), you must supply something to the market.

  20. Louis Hissink

    IT,

    Keynes’s definition or whose?

    I am going to produce 5 reverse geared, 1 forward geared horseless carriages tomorrow. I should make a motza selling them, no ? And what caused me to believe that producing this contraption would be a commercial success?

  21. The Pugilist

    Likewise, you can produce something, but to supply (ie exchange) it, someone must want it.

  22. Louis Hissink

    Pugilist – right, no sense producing anything no one wants.

  23. Tel

    I consume simply by catching a fish. I don’t need the fish you caught because I caught my own. I therefore don’t need to produce anything.

    Even if you catch your own fish, you first catch and then eat, never the other way around.

    Thus, you do need to produce something FIRST, that is to say, catching fish is production.

  24. Louis Hissink

    Tel,

    So I have produced a fish from catching it, in a market sense. So with whom am I then going to exchange it with as a producer?

    ;-)

  25. Petros

    Token, the President was talking about the supply of loose women.

  26. The Pugilist

    It is the presence of money and credit that allows us to shift consumption relative to production through time. We can borrow to consume but there is the expectation that we will forgo consumption in future to repay our debts.

  27. Louis Hissink

    Aaand, As I am hungry, and that is the demand, me and myself also realised that I, being hungry, created a demand, which I then satisfied by producing a fish.

    So Tel, ball is also in your court :-)

  28. Louis Hissink

    Being in two minds, I have to slightly edit my previous post:

    ‘created a demand, which we, me and myself, then satisfied by producing a fish.’

  29. Leigh Lowe

    He’s going to learn all about demand when his missus serves the papers.

  30. Tel

    Louis Hissink: If you take the trouble to read above, I’ll quote:

    To consume, you must first produce.

    You can be as hungry as you like, you can demand the government gives you a fish if you like, but if no one catches any fish, you won’t get to eat them. That’s a physical reality. Economic theory must fit the physical limitations of the world, that’s the most important constraint. Then it must also attempt to model what people do in that world, that’s the next most important constraint.

    If any economic theory requires consumption to exist ahead of production, then that theory is bogus, utterly. Don’t worry about whether people want it to be that way, or they even demand it to be that way, still ain’t gonna happen.

  31. Louis Hissink

    Leigh,

    I thought the French had more subtle ploys when exacting revenge ala boudoir.

  32. Bons

    Supply side works with children, mobile phones (& IPads) and boat owners. And sadly, increasingly with Gen X who consider saving to be an evil concept practiced by the Boomers – I jus gotta ave it, !

  33. Louis Hissink

    Tel,

    but if no one catches any fish, you won’t get to eat them

    Er, I am catching my own fish, and being borne in Indonesia, I can also grab mangos and pisangs off the plentiful trees to live.

    And you ignore my ability to also catch fish.

    Boing, back in yours

  34. Tintarella di Luna

    Aaand, As I am hungry, and that is the demand, me and myself also realised that I, being hungry, created a demand, which I then satisfied by producing a fish.

    So Tel, ball is also in your court :-)

    So this is the sports thread – tennis or ping pong.

  35. The Pugilist

    To consume, you must first produce.

    No. To consume, someone must first produce and believe you will repay them by consuming less than you produce in future.

  36. Louis Hissink

    Pugilist,

    No, in order to consume one must have something to exchange, no argument with that.

    What the argument is really about is what drives economic activity – supply or demand.

    You do not produce something for which there is no demand; which is Say’s Law.

  37. Oh come on

    I thought the French had more subtle ploys when exacting revenge ala boudoir.

    I don’t know about the French, but I wish there were more subtle methods of self-promotion than we’ve seen from Professor Kates in recent times.

  38. Mk50 of Brisbane, Henchman to the VRWC

    Mmmm.

    Louis.

    pisang goreng…. just can’t get that here in Australia.

  39. Louis Hissink

    Oh come on, maybe if he published on Kindle ?? I bought his latest for the neff in the RAN, but kindle, nyet.

    Live in hope.

  40. Louis Hissink

    Mk5- burn a banana on an a barbie…..nooo, not the same, is it.

  41. The Pugilist

    …to consume one must have something to exchange

    And that can be a promise to supply something in future. But someone must produce what you want to consume now before you can consume it. Say’s law is that you can’t exchange something for which there is no demand. Someone must believe there is value in what you have to offer, but you don’t necessarily have to produce it before you consume.

  42. Oh come on

    pisang goreng

    What is that, some kind of Indonesian STI?

  43. Louis Hissink

    Pugilist,

    Say’s law is that you can’t exchange something for which there is no demand.

    No, Say’s Law is that people only produce something for which there is a demand.

  44. Louis Hissink

    Fried banana, actually

  45. Jim Rose

    The downside of five year terms

  46. Tel

    Let’s go through this slowly:

    Er, I am catching my own fish,

    Thus production comes before consumption.

    … and being borne in Indonesia, I can also grab mangos and pisangs off the plentiful trees to live.

    Oh there is happened again! Production comes before consumption.

    And you ignore my ability to also catch fish.

    I ignored nothing, go back and read properly.

  47. Dan

    His demand was the fish, then he produced it. Then he ate it

  48. Snoopy

    No, Say’s Law is that people only produce something for which there is a demand.

    Morris Marina?

  49. Louis Hissink

    Having read all above,

    Humans produce before consumption.

    I am hungry

    I go and catch as fish, or pick a mango or banana, to quell my hunger.

    I have produced a mango, banana or fish in response to…..my demand of sustenance.

    Demand drives supply.

  50. Tel

    No, Say’s Law is that people only produce something for which there is a demand.

    No that’s just plain wrong. Direct translation from the French is available on Wikipedia, the short phrase is this:

    Inherent in supply is the wherewithal for its own consumption

    Pretty easy to understand. You cannot eat what has not yet been produced. Even if you pull up your own fish, you never the less cannot eat them until AFTER you catch them.

    It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J.B. Say, 1803: pp. 138–9)

    That’s the longer version. There is absolutely no way to interpret this as you have above.

  51. Infidel tiger

    Louis must be referring to Jean-Baptiste Says’s stupid cousin: Simon Says.

  52. Tel

    http://en.wikipedia.org/wiki/Jean-Baptiste_Say

    Quotes from that page BTW, but also from the original references at the bottom.

  53. The Pugilist

    Say’s Law is that people only produce something for which there is a demand.

    How do you explain the emergence of new goods and services? Entrepreneurs speculate that demand for something new will be there when they bring it to the market at some point in future. To bring something to the market, they borrow, acquire capital, labour and raw materials, combine them and try to sell the end product. Sometimes it works, as in the case of the iPhone and facebook. In other cases it doesn’t as in the case of MySpace. In the first case, value is created (while also possibly destroying other previously value adding production). In the second case, resources are destroyed (ie capital is consumed). I would have thought someone well versed in Austrian economics would understand this.

  54. Louis Hissink

    Inherent in supply is the wherewithal for its own consumption

    So one only produces what one expects to be consumed.

    Meh!

    My argument stands: Demand creates supply

  55. The Pugilist

    So one only produces what one expects to be consumed.

    Correct. But an expectation can be misplaced. What you are trying to prove is that something that has been produced but not sold does not exist. This overreach in fact, was the same error Say himself made. Read Schumpeter’s History of Economic Analysis on this point.

  56. Gab

    Say’s Law is that people only produce something for which there is a demand.

    You almost got that right, Louis. Had you said “Say’s Law states people produce something which then creates a demand” you’d be correct.

  57. Louis Hissink

    Pretty easy to understand. You cannot eat what has not yet been produced. Even if you pull up your own fish, you never the less cannot eat them until AFTER you catch them.

    This assumes an ultra-autarchic economy in which me, myself, and I, exchange goods as services under an evenly rotating economy.

  58. Louis Hissink

    Gab,

    Wrong, I as a producer i only produce when I recognise a demand for my product.

  59. Snoopy

    Successful people/companies/nations produce something which then creates a demand.

  60. Demosthenes

    My argument stands: Demand creates supply

    It’s true for mothers’ milk, at least.

  61. Gab

    I as a producer i only produce when I recognise a demand for my product.

    Then you would never have produced the Sony Walkman as there was no demand for it until there was a supply.

  62. Louis Hissink

    Snoopy,

    Based on what market analysis? Surely your company would produce only once it knows it can sell, and then that means the existence of a demand?

  63. Louis Hissink

    Gab, the demand was for a personal music source – the originators of the Sony Walkman realised that the music cassette could be the basis of a personal music system. It worked,

  64. The Pugilist

    Surely your company would produce only once it knows it can sell,

    This cannot be known ex ante with certainty. A company produces what it believes it can sell and acquires factors of production accordingly. It is this uncertainty which is a fundamental part of the Austrian theory of the cycle. C’mon man. Lift your game…

  65. Tel

    There’s another relevant quote from Say here:

    http://www.martinfrost.ws/htmlfiles/sayslaw.html

    It is not the abundance of money but the abundance of other products in general that facilitates sales… Money performs no more than the role of a conduit in this double exchange. When the exchanges have been completed, it will be found that one has paid for products with products.

    The commentary on that page is pretty good and goes into the background of it.

    Debating the neutrality of money is one of the biggest arguments in economics. It is demonstrable that money is not neutral in the short term and this was both documented and demonstrated by Richard Cantillon who made a fortune on bubble speculation. Say almost certainly understood this, so it is tempting to think that Say’s Law was intended to apply over the longer term, or perhaps it was his reaction to the observation that bubbles tended to do more harm than good. Many at the time thought Cantillon was a scammer and a fraud, and quite likely he was to some degree.

  66. Louis Hissink

    The Pugilist,

    Precisely – but the uncertainty has nothing to do with the business cycle however, since under or over estimation of business outcomes is purely local, and nothing to do with national aggregates of statistics.

  67. Louis Hissink

    When the exchanges have been completed, it will be found that one has paid for products with products.

    Why money is described as the item of intermediary exchange. It’s the grease facilitating commerce.

  68. will

    Successful people/companies/nations produce something which then creates a demand.

    so you need to produce something which has a market value to create demand.

    many things produced are purely for the satisfaction of the producer (such as fishing, or cooking) and do not create demand.

  69. Leigh Lowe

    Leigh,

    I thought the French had more subtle ploys when exacting revenge ala boudoir.

    Indeed.
    She will hit him where it hurts.
    Public humiliation, possibly dropping some pillow talk about other world leaders.

  70. Tel

    Surely your company would produce only once it knows it can sell,

    Implying that there is no such thing as an entrepreneur; and further implying that investment can be separated from risk.

    Certainly business tries to manage risk, and avoid unnecessary risk, but we live in a changing world, so someone must always be first to market with a new idea, else there never will be a market in that particular product.

    I might further point out that bubbles almost always occur in relation to some new product or risky undertaking. The market goes through this process on the way to discovering the real long-term value of the goods concerned:

    Cantillon & Law’s Mississippi Company was an attempt to develop new land in Louisiana.

    The South Sea bubble was essentially a gamble on England defeating Spain and gaining access to South American resource wealth.

    The Dot Com bubble was the emerging new market for web pages and online applications and services, which seem like they should be valuable, if only someone can figure out how to make money (some comanies did, many didn’t, many are still trying).

    The recent US real-estate bubble was driven by a new and risky debt instrument: the CDO. One might argue that this was deliberately an attempt to confuse buyers about the real value of what they were buying, and perhaps that’s true but irrelevant. The point is that the bubble-market exists because a new entity has not had time for accurate pricing experience to develop yet.

  71. Louis Hissink

    Heh, I wonder how it compares with Mitterand’s peccadillos….

    Sigh, the more things change, the more things remain the same

  72. Tel

    …many things produced are purely for the satisfaction of the producer (such as fishing, or cooking) and do not create demand.

    People consuming what they produce is still consuption, even though it does not count towards GDP. Even if I just take the day off and play chess in the park I’m still producing leisure activity (which is valuable) and I’m consuming what I produce. In this case I would say that production and consumption are instantaneous, so perhaps it’s a borderline case, but what is the point of any sort of economic activity if you cannot enjoy some leisure time?

  73. Louis Hissink

    But getting back on, as JC would write it, fred, Say’s Law is all about entrepreneurs reacting to market signals.

  74. Gab

    Gab, the demand was for a personal music source – the originators of the Sony Walkman realised that the music cassette could be the basis of a personal music system. It worked,

    No. Akio Morita, the ideas man and co-founder of Sony, wanted a portable music source when traveling. When he proposed the idea of what was to eventually become the Walkman he was opposed by his own board, his executives and even Sony’s market research results stated the product would never sell. He went ahead regardless.

  75. Louis Hissink

    Gab,

    Morita was still the consumer who demanded something, a portable music player.

    Demand spurs production.

  76. Tel

    … uncertainty has nothing to do with the business cycle however …

    That’s a very difficult question IMHO.

    … since under or over estimation of business outcomes is purely local, and nothing to do with national aggregates of statistics.

    Rothbard argued much the same, in “America’s Great Depression” when he gave a lead-up to the nature of how depressions get started. Rothbard’s argument is that only government can produce a sufficiently broad effect that bad investment decisions will happen everywhere at once.

    I’m tempted to disagree with Rothbard on that one. Although government is one cause of depressions, it isn’t the only one.

    Tech-shock is real and the effects are broad. Not long before the Great Depression we had a number of inventions: the internal combustion engine, the electrical dynamo, the lightbulb, electrical power grids, the tractor for farming, motorized transport. Each of these in itself could be regarded as a significant change in the way we live, but put together they almost define modernity (until the computer age at least).

    The effect without a doubt was broad based. It is completely unsurprising that the economy required deep structural changes because of these tech changes, so yes you can have many businesses simultaneously effected by tech-shock.

    In the case of the Great Depression, my argument is that it was triggered by tech-shock, but made much worse by Hoover’s attempt to deal with this. Hoover went around interfering, FDR interfered even more. It was Keynesian economics that drove the world back into war.

  77. The Pugilist

    But getting back on, as JC would write it, fred, Say’s Law is all about entrepreneurs reacting to market signals.

    So entrepreneurs never try to create markets for new products?

  78. Gab

    No, you;re missing the point. Even their market research showed there was no demand. When there was a supply, Sony then created the demand.

  79. Louis Hissink

    Tel,

    uncertainty has nothing to do with the business cycle however

    Where you get this quote from ?

  80. Louis Hissink

    Gab,

    If there was no market indication of demand, how did Sony then manage to create a supply of something which, by definition, did not exist.

  81. Louis Hissink

    Pugilist,

    New products come into existence because someone, somewhere, saw a demand for something.

    How else would new products be created?

  82. will

    Demand spurs production.

    No

    The economy is an aggregation of market transactions.

    The more I produce (and sell), the wealthier I will be, and the wealthier my customers will be as I maximise my sales by reducing prices. I do that by increasing my productivity. This stimulates demand.

    Production (of market quality goods and services) creates demand.

  83. Gab

    If there was no market indication of demand, how did Sony then manage to create a supply of something which, by definition, did not exist.

    Read what I wrote above.

    “Supply creates its own demand”.

  84. will

    New products come into existence because someone, somewhere, saw a demand for something.

    How else would new products be created?

    Most new products fail. There is no demand. Resources have been wasted.

  85. Stateless, free and happy

    Steve, I have a simple question: Why is there only one textbook on the subject (your book)?.

    The market place for ideas works rather well. So, a good idea will gain currency and there should be more than one textbook.

    Can we infer that the market for ideas assigns little value in this idea and hence you are left in the wilderness?

  86. stackja

    Gab
    #1161575, posted on January 21, 2014 at 8:56 pm
    I as a producer i only produce when I recognise a demand for my product.
    Then you would never have produced the Sony Walkman as there was no demand for it until there was a supply.

    Nintendo, which is famous for its colorful Super Mario and Donkey Kong characters, was once at top of its game, but the company has fallen on hard times in recent years, amid poor hardware product sales.
    Many analysts have turned bearish on the stock, arguing that the company has vastly misjudged the switch towards smart phones and tablets in the industry, and too fiercely protected its iconic characters and game franchises, only releasing games for its own hardware devices.

  87. C.L.

    L’offre crée même la demande

    Is this one of those fancy coffee debates?

  88. will

    You are thinking too much about new products, whereas the supply of existing products at cheaper prices creates and satisfies demand.

    Motor vehicles are cheaper and ownership more widespread now than a generation ago. We are all wealthier as a result. This is how markets create wealth.

  89. Technaeresis is the term for further, alternative choices arising from new technology, unplanned by inventors thereof; for example, desk-top publishing arose from the availability of personal computers though few people thitherto knew they’d wanted to publish poorly-edited memoirs or awful vers libre until they had a computer which they’d bought, say, for handling business accounts; PCs created and then met that demand.
    There were very few people before the development of the personal computer and the internet, I warrant, who’d complain, “I sure wish I could send instant comments on any story which might appear in the newspaper, and I’d sure love to know exactly what minor starlets are having for breakfast.”

  90. JC

    I think we’re trying to over intellectualize things here. Demand = supply and supply = demand.

    We pay for our consumption through our production. This becomes clear to people when they see goods being made rather than services. Services are a little more esoteric although of course they form part of production.

    Do I demand a coffee in the morning. Of course I fucking do. Would I be able to demand a coffee in the morning if there was no such thing? Of course I couldn’t.

    I think the most important part of Says Law is the part which suggests consumption can only occur through production.

    It’s also a bit difficult to ignore demand shocks. They do exist.

  91. Louis Hissink

    will,

    The economy is an aggregation of market transactions. – True

    So what prompted you to produce ? Belief in your product or market analysis?

  92. Louis Hissink

    People,

    The question remains that stalled economic activity is caused by insufficient demand (true) and that the solution is to stimulate demand by increasing the money supply.

    Is this interpretation true or false?

  93. JC

    Here’s a hypothetical for demand shocks

    RBA Governor Stevens gets out bed tomorrow morning totally pissed because his wife wouldn’t let him get a leg over. As a result, he decides to punish us and he goes to the office and raising the overnight rate to 20% signaling a huge monetary tightening. Does anyone really think this wouldn’t cause a demand shock? Please.

    I believe we had two shocks to contend with in the past decade. We had a inflation from the supply side which caused commodity prices to spike as a result of the bottle-necking prompted by heavy unexpected demand from the developing world.

    The large central banks mistook, or in fact totally misunderstood what was going on and they tightened monetary policy dangerously thereby causing a demand shock which was the GFC. The CBs were the cause of the developed world going over the cliff. It was a demand shock.

  94. Gab

    You are thinking too much about new products

    Housewives everywhere were using the same type of cloth to clean in the kitchen/laundry/bathroom. Then an alternative appeared on the market, a sort of “hairy” cloth. There was no demand for this cloth and yet once it was supplied the demand was significant. That was the SuperCloth.

  95. Louis Hissink

    Gab,

    And the point is ?

  96. Gab

    Supply creates its own demand.

  97. JC

    The question remains that stalled economic activity is caused by insufficient demand (true) and that the solution is to stimulate demand by increasing the money supply.

    Is this interpretation true or false?

    Not really unless it’s clearly understood what caused insufficient demand for the present level of production. If the Central bank really fucks things by being far too tight, then yes a monetary loosening is warranted. However it’s a little more complex than that. Markets will react to CB signaling. If the Central bank increases the money supply, but simultaneously signals that it will react harshly to perceived inflationary pressures then the increase in the money supply is for naught. There won’t be any impact. This is why the European QE has been a dismal failure while the US’s last QE has been a success. The ECB signaled only a temporary fix through a long dated repo with the added announcement that it would be taken back in time. Players read through that and ignored the QE. The US has played it differently this time signaling a fazing out only when certain milestones are reached.

  98. JC

    Supply creates its own demand.

    And demand can also create the required level of supply to meet that demand. Sure, there was no demand for Iphones when they first came out. But think about what Apple is desperately attempting to do each moment of the day. It’s trying to assess what demand there will be as best it can all the time, therefore tweaking the production process very frequently.

  99. Louis Hissink

    Gab,

    No, advertising the hairy cloth created the demand, which then caused sales.

    But if advertising failed, then demand would have been zero, but no advertising, no demand, and hence no sales.

  100. Louis Hissink

    JC,

    Are you summarising the SQ for CB policy?

  101. brc

    I think we’re trying to over intellectualize things here. Demand = supply and supply = demand.

    I’ll second that. The discussion about entrepreneurship and new products muddies the waters.

    Depends on what you call ‘demand’. ‘Want’ is a wish for something. ‘Demand’ is want combined with the ability to trade to get it. You may want a coffee in the morning. You’re not getting a coffee until you produce something of value to trade with the coffee producer in simple terms. To consume, you’ve first got to produce. There is no demand without production.

    Taking it back to fishing. I catch three fish. 2 other people want my fish. They haven’t produced anything to exchange with me for my fish, so I decline to trade with them. The government says the economy is depressed so takes 2 fish off me and gives it to them, calling it the ‘fish stimulus program’. They now say the GDP has increased by 2 fish and thus the depression is fixed. I still didn’t get anything in exchange for my fish.

    Says law : to consume something, first you’ve got to produce something, so you have something to trade. Read what Tel posted and work through the flowery rhetoric.

  102. Gab

    Marketing and advertising is part of the sales process. But if there is no product to sell there’s no need to market it.

  103. Louis Hissink

    brc, the number of fish are irrelevant.

    Say’s Law is simply stated that we produce something in reaction to the demand for something. If no one demands anything, then no one needs to produce anything.

  104. JC

    Says law : to consume something, first you’ve got to produce something, so you have something to trade.

    Yep. That’s basically it. That’s why supply reforms of the type we went though and the US during the Reagan era were so important and had everlasting impact.

  105. JC

    If no one demands anything, then no one needs to produce anything.

    That’s just silly.

  106. Louis Hissink

    JC, silly ? Ok, please explain.

  107. JC

    If no one demands anything, then no one needs to produce anything.

    If that occurred literally we’d be all dead.

  108. Louis Hissink

    JC, How the hell did you come to that conclusion?

  109. JC

    Louis

    If you no longer wanted to eat, you would die. Do you demand food?

  110. Louis Hissink

    Of course I demand food.

    That is why demand requires supply.

  111. JC

    That is why demand requires supply.

    And supply also requires demand.

  112. Louis Hissink

    And supply also requires demand.

    Which is what I am be arguing, rule

  113. brc

    The problem remains that while they are all trying to walk away from Keynes there are no longer any guideposts on what to do since no economics text, with only a single exception that I know of, will explain the actual meaning of Say’s Law, the classical theory of the cycle and what needs to be done to generate a recovery when the economy is in recession.

    Steve, if you’re reading the comments, kindly state whats in your book so we can move on.

    My guess is that it’s not ‘demand creates supply’, and that borrowing future taxes and buying stuff now doesn’t fix recessions.

    My guess is that the book says something like demand first requires production so you can trade, and the way out of a recession is to encourage production through lower taxes and removal of production-constraining regulations. A lack of demand is not a lack of want, it’s a lack of produced goods to exchange, probably because you’re producing goods of the wrong type, probably because a government made it so.

    But that’s just my guess. I only got it by reading some of Jean-Baptistes stuff and other texts talking about it

  114. Arnost

    Food / shelter / love Louis… Can’t live (reproduce) without those.

  115. Louis Hissink

    Arnost,

    Merci in a Poirot sense, (acted by D. Suchet)

  116. The Pugilist

    Keep in mind that a new product can be something – a good, a service, a process, that is produced using well established, proven materials and techniques but transported to or delivered in a new location. None of this changes the fact that credit allows an entrepreneur to act on a hunch. That is, that they can sell the new product. This entrepreneurial decision must take place before the decision to consume. Once a good has been produced ready for sale, the decision to produce is in the past. It is a given and is irreversible. The decision to consume something must come afterwards. If the entrepreneur is wrong, you cannot get the raw materials, the capital services, the labour effort and the time taken to produce the item back again. It is gone. If the product sells and costs are covered, value has been created. If not, value has been destroyed. I don’t see how anyone can dispute this.

  117. The Pugilist

    My guess is that it’s not ‘demand creates supply’, and that borrowing future taxes and buying stuff now doesn’t fix recessions.

    My guess is that the book says something like demand first requires production so you can trade, and the way out of a recession is to encourage production through lower taxes and removal of production-constraining regulations. A lack of demand is not a lack of want, it’s a lack of produced goods to exchange, probably because you’re producing goods of the wrong type, probably because a government made it so

    I’d say you’re pretty close brc…

  118. Steve Kates

    brc

    But of course I am reading this but am reluctant to buy in because I hardly ever hear a descent conversation on this issue. But this has been so densely interesting that I don’t wish to interrupt but I will make only one observation. Say’s Law is not a micro concept so that while it originates with the notion that one must supply if one is to buy, as in any form of exchange, it is for all that about aggregates. I will merely take you back to the correspondence between Malthus and Ricardo about what caused the recessions that followed the Napoleonic Wars. Malthus said it was demand deficiency (which is where Keynes got the idea) to which Ricardo replied, no it’s not:
    .
    “Men err in their productions, there is no deficiency of demand.”
    .
    He didn’t deny it was possible, only that it was inconceivable that it should ever be the case. If you want to understand why demand deficiency is impossible, you have to begin from understanding what makes demand actually possible in the first place, which is the supply of other goods and services that when they are put on the market others will buy them with the money they have earned themselves by selling either their own goods and services or their labour.

  119. Louis Hissink

    Pugilist

    Where do you get your economics from?

  120. JC

    Steve

    And I would bet at the time they also had a pure gold standard- at least Britain. In other words they had a very stable, predictable currency. The point is that they didn’t have to contend with a central bank which miscues and gets it wrong.

    Demand shocks are most likely to occur when there is a screw by a central bank.

  121. Gab

    An eminent economist once remarked that Say’s Law was not just one law but more like eight laws (or more). He also said described Say’s law thusly:

    “That you can never give an economy momentum from the demand side. You can never spend your way to recovery. All expenditure must be backed by value adding production.”

  122. Louis Hissink

    Which misses Say’s Law, that production anticipates consumption, a more obscure rendition of his law.

  123. brc

    one must supply if one is to buy

    This is my new definition that I will use. It even rhymes.

    I get what you’re saying about the micro-level. Talking in those terms is wrong. I just try and use simplified language when I sense someone is heading in the wrong direction. I get that it talks about the near-impossiblity of a demand deficiency, but more of the fact that people haven’t been producing, so therefore have nothing to exchange, so therefore cannot create demand.

  124. JC

    “That you can never give an economy momentum from the demand side. You can never spend your way to recovery. All expenditure must be backed by value adding production.”

    Try and get that through the left’s thick head. They all thought raising energy prices wouldn’t detrimentally impact of production. But I digress.

    I also don’t believe we can ignore the demand side, which is primarily influenced by the goings on at the central bank. This is where the right, I believe comes unstuck. We all believe the CB can create policy loose enough to create booms. However the Right falls short in believing the Central Bank can create a bust as a result of misapplied monetary policy.

  125. The Pugilist

    I also don’t believe we can ignore the demand side, which is primarily influenced by the goings on at the central bank. This is where the right, I believe comes unstuck. We all believe the CB can create policy loose enough to create booms. However the Right falls short in believing the Central Bank can create a bust as a result of misapplied monetary policy.

    JC, I do not disagree with what you have said here. Of course we cannot ignore the demand side. However, if you’re going to take anything from Say’s Law, it is that the ‘demand side’ is inextricably linked to the ‘supply side’. In crude AS-AD terminology, if one curve moves, the other must move also. They are interdependent. I have posted a rather long quote from Schumpeter’s History of Economic Analysis on this point previously. I don’t have it to hand at present, but that’s the crux of the matter.
    Misapplied monetary policy merely thickens the fog of uncertainty through which entrepreneurs must wade. Just as excessively loose monetary policy can induce an excess supply of money, of course overly tight monetary policy can induce an excess demand for money. The latter means that individuals and firms try to rebuild their stocks of cash by shedding goods, assets and factors of production, thereby putting downward pressure on prices. The process is not uniform. It is messy and disjointed and there are many entrepreneurial/production decisions that are locked in to various degrees. The financial system propagates this initial shock through the rest of the system by restricting credit as banks try to repair their balance sheets. I hope I’ve made clear how ‘demand’ and ‘supply’ in the aggregate are linked to one another but I’m not sure I have.

    Louis, I’ve learned various strains of macro from 3 different Australian unis. Then I’ve unlearned them and educated myself in business cycle theory by reading lots of old stuff. To me the old stuff seems much more insightful about today’s world.

  126. dover_beach

    Louis must be referring to Jean-Baptiste Says’s stupid cousin: Simon Says.

    Tears are running down my face.

    I feel sorry for Steve Kates, he must be reading Louis and saying: I cannot make it any clearer and yet….

  127. dover_beach

    The clearest example of supply leading demand is the fashion industry; we see it repeated every six months.

  128. Tator

    Seeing that I come into this lively debate at a late stage, In response to Louis’s earlier comment
    “I am going to produce 5 reverse geared, 1 forward geared horseless carriages tomorrow. I should make a motza selling them, no ? And what caused me to believe that producing this contraption would be a commercial success?”
    Obviously with this being a French themed thread, I have one answer for Louis, The French Army is a willing market for such vehicles as it always buys its vehicles with one forward and 5 reverse gears.
    For another French gag, seen on Ebay, For sale, genuine French WW2 rifle, never fired, dropped once.
    Plus they have apparently banned the nightly fireworks at EuroDisney. The first night they set them off, the nearby Army barracks hoisted up the white flag and surrendered.

  129. JC

    Bringing politics into all this… it’s absolutely vital for the left that they try to discredit the important principles of Says law because in not doing so would credibility that the supply side… economic reform that helps commerce. Business of course is evil in leftspeak and should only be barely tolerated.

    Demand side is alluring for all the obvious reasons one can muster. Demand side helps the Left pretend supply efficiencies don’t exist. in that having a profitable sustainable commercial culture raises living standards.

  130. Formerly A Political

    dover_beach
    #1162039, posted on January 22, 2014 at 6:57 am
    “The clearest example of supply leading demand is the fashion industry; we see it repeated every six months.”

    However, first there has to be a demand for clothes. Once the demand for clothes has been established then the fashion industry needs to innovate to keep up a constant demand. Why would anyone want to buy new clothes if fashions remained the same year after year? Clothes would only be replaced when they wore out.

    The same logic applies to other goods, eg, cars, TVs, washing machines, etc, etc. All these consumer goods were invented for various reasons and initially they were very expensive. Henry Ford did not invent the motor car, but he realised that there was a huge demand for cars, which couldn’t be satisfied because they were too expensive for the general population. Thus he perfected the production line, which helped lower the price per unit and sales took off. Thereafter, constant innovation ensures constant demand.

  131. Joe Goodacre

    Brc,

    The premise of your argument is that people will continue working regardless of how easily their demands are satisfied. Had government not intervened, these people would have continued producing and they would have had more to spend (Bastiat).

    I think differently. Our wants don’t always require us to trade with others. If we want to spend more time with our family, we are not required to produce anything to satisfy that demand. Satisfying that demand actually takes away our capacity to produce for others.

    If we value putting a roof over our family’s heads more than spending time with our family, and the government makes it harder through inflation or taxation to satisfy that want then we are likely to produce more than we otherwise would.

    My point is that some consumers will be better off because government intervened in the lives of the productive, with the cost to the productive being that they are less able to satisfy demands that don’t require trading. The total effect of such interventions could be a better standard of living for the average person. It’s only the basis of morality not economics that such interventions can be said to be wrong.

  132. The Pugilist

    Bringing politics into all this… it’s absolutely vital for the left that they try to discredit the important principles of Says law because in not doing so would credibility that the supply side… economic reform that helps commerce. Business of course is evil in leftspeak and should only be barely tolerated.

    True JC, it also helps them indulge their wet dreams about ‘multiplier’ effects from building utopian cities with their own wind farms, solar panels on every (public) house, a vast mass public transport system but no roads and no cars, public hospitals and schools, public art, etc. They don’t need to bother with the pesky notion that the supply side needs to anticipate and match consumer preferences. They can justify almost any utopian scheme by saying they create jobs. It doesn’t matter that the rest of society doesn’t value their utopia. They do, and if they build it, you will come…

  133. JC

    Next to Says law is JC’s law which should be included in every single economic text on the front page. In fact I ought to win a Nobel for it, but that’s digressing.

    The left only find out about Says Law/ supply side reforms after they have totally and completely destroyed an economy.

  134. JC

    oops

    in not doing so would lend credibility to the supply side…

  135. dover_beach

    However, first there has to be a demand for clothes.

    No, how could anyone desire clothes, leave alone particular types of clothing, or particular styles, before they had ever be produced? The initial desire might have been a desire to be protected from the elements, and this led to someone coming up with the idea of a skin, or some such, protecting us from the elements which in time develops into clothing. But no, the law it seems to me is about particular items being produced which create their own demand because they becomes desirable for material or symbolic reasons.

  136. Formerly A Political

    Dover_beach,

    Just because you can’t understand why people desire clothes or you don’t desire same doesn’t mean that others don’t desire them. Initially clothes, whether they were animal skins or man-made materials, may have been produced to protect from the elements or provide warmth, but there you have the initial demand. It is raining thus there is a demand for some sort of waterproof garment, it is cold thus there is a demand for warm garments. Perhaps some entrepreneurial cave-person (have to be PC here, can’t use man) conceived of the idea of protection from the elements and adorned himself with these garments. When others saw the effects of that protection, they would have wanted and thus demanded the same protection and our cave-person was well on the way to becoming a cave producer.

    If on the other hand our hypothetical cave society had merely yawned and wondered why cave-person entrepreneur was wearing such odd garments which, in their opinion, weren’t of the slightest use and took no notice of his efforts, we might still be running around naked.

    I do agree with you that once the initial demand is made, producers innovate to initiate more demand, whatever the reason for the demand. However, there always has to be an initial demand.

    I wonder how many inventors have invented some gadget which absolutely bombs because there is no demand for it? Inventors generally create something which they themselves may desire, but can’t find in the market place, so they build it, usually improving on a design which may already be available, but still the initial demand is there.

    So in conclusion I still maintain there is always an initial demand, however, once the demand is there producers will try to create further demand by using clever marketing.

  137. Louis Hissink

    Dover_beach

    I feel sorry for Steve Kates, he must be reading Louis and saying: I cannot make it any clearer and yet….

    So Steve Kates writes:

    What hope is there for me if even amongst my fellow Catallaxans I cannot convince them that without Say’s Law there is no understanding of how economies work and why wasteful government spending will not lead to an increase in employment or consumer demand. Louis Hissink alone seems to have understood the issues. Ricardian Equivalence, for those who do not know the economic literature, was the feeble attempt to expain why private demand does not follow public demand. No one thinks it’s valid so there is no explanation for what happened following the GFC anywhere across the vast expanse of economic theory. I look, believe me, I look. Debt is not, I might add, an answer since all value adding businesses take on debt. You must go back to demand is constituted by value adding supply for an answer, that is, you must go back to Say’s Law.

    Source

    Que?

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