Economists will never ever get it right until Say’s Law returns

Two things sent to me by friends of which this is far and away the most significant. There may be about half a dozen economists in the world who understand the difference the absence of Say’s Law makes to economic theory. Mark Skousen is one of them, and he has just written an article on Which Is More Accurate, Say’s Law or Keynes’s Law? Here is the start:

We all know that teachers, especially at the college level when students are away from their parents, can have tremendous influence.

My best example is when I ask my economics students “Which is more accurate, Say’s law or Keynes’s law?” Say’s law (defined below) is named after the 19th century French economist J.-B. Say, while Keynes’s law is named after the 20th century British economist John Maynard Keynes.

Most of the students have never heard of either law, so on the blackboard or PowerPoint, I simplify the definition as follows:

Say’s Law: “Supply creates demand.”
Keynes’s Law: “Demand creates supply.”

Before we have any discussion, I ask the students to intuitively decide which one makes more sense, and why.

Invariably, the vast majority of students side with Keynes. Demand, they say, is essential. Without consumers willing to buy a product, suppliers will go out of business. They conclude, consumer spending drives the economy.

What can you do? These students are as clueless as most economists about what causes an economy to grow and employ. Read the whole thing. Then there’s this, Chief economist of Bank of England admits errors in Brexit forecasting. Forecasting errors are a dime a dozen and comes with the territory. The subtitle captures more of what’s wrong with economics:

Andrew Haldane says his profession must adapt to regain the trust of the public, claiming narrow models ignored ‘irrational behaviour’

This irrationality in economics – the latest pile of junk which comes under the heading “behavioural economics” – is as nonsensical as it gets. It seems to be news to economists that people make mistakes, which after the fact they describe as irrational behaviour. It’s the same guk I am getting in Michael Lewis’s Undoing Project. My great classical economists all understood the role of mistakes, and even crowd behaviour, in moving an economy off course. The point about the market economy was that you could not be wrong for very long since you would then lose your shirt, as many did. The modern view is that governments should do the spending to make up the difference, and they can be wrong for a very very very very long time. Even now with government debt rising, no one is seriously trying to cut it back. Classical economists universally would have understood the problem. A modern economist is miseducated to such a fantastic extent that they still think Keynesian theory is right and Say’s Law is wrong. And as long as that goes on they will never get anything right.

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70 Responses to Economists will never ever get it right until Say’s Law returns

  1. classical_hero

    I wonder how they explain things like Tickle me Elmo and that Egg hatching toy animal craze?

  2. Rohan

    Try this one Steve.

    No one demanded the iPhone. In fact everyone was content with thier Nokia or Blackberry.

    But Apple could supply the iPhone and the rest is history.

  3. Jannie

    I am not convinced either is totally wrong or right.

    Says Law is intuitively illogical when expressed like the definition above. I can create or supply a huge pile of dung, but that wont necessarily create a demand for it. Conversely if the government offered to pay me for a huge pile of dung, I would happily supply it at inflated prices.

    It seems to me that intuitively demand must create supply, even if its dung, but only the government is dumb enough to demand it and to pay good opm derived money for it.

    Demand is essential, as important a driver as supply (new innovative stuff creating new demands).

    The problem is surely that the Government cannot meaningfully create or stimulate “demand” by sloshing other people money around. The tax and spend gravy train represses economic activity and misallocates investment, so both supply and demand for the most desirable stuff is reduced.

    Long time since I read Keynes, who I once naively thought the equal of Adam Smith, so I am probably wrong in my appraisal. But I know what makes common sense, and the above definition does not.

    Just saying.

  4. .

    Economics is surprisingly counterintuitive, Jannie.

  5. Andrew M.

    “Demand creates supply.”
    “Supply causes an economy to grow and employ.”

    Why does Kates believe those two sentences are in contradiction?
    In Kates’ opinion, how does a product designer know what to specify for the factory to create?
    Will Kates go on record stating that market research has absolutely no effect on profitability?

    I think they are 3 legitimate and relevant questions that ought to be answered if he is to convert people to Say’s “Law”.

  6. Jannie

    The problem for me Dot, if I cant understand something, I am forced to rely on belief. I don’t believe much of anything these days.

  7. John Carpenter

    There is nothing new under the sun Rohan.Thirty years ago I used to say that no one demanded the SONY Walkman.

  8. .

    Say’s Law: “Supply creates demand.”
    Keynes’s Law: “Demand creates supply.”

    Before we have any discussion, I ask the students to intuitively decide which one makes more sense, and why.

    Invariably, the vast majority of students side with Keynes. Demand, they say, is essential. Without consumers willing to buy a product, suppliers will go out of business. They conclude, consumer spending drives the economy.

    Well, you must produce before you can consume.

    Accurately, above subsistence, they are often jointly determined.

    I don’t get Kates’ beef with behavioural economics. If you take the assumptions and apply them dynamically – then market discipline is maintained.

    Prospect theory is consistent with demand inelasticity becoming weaker over time.

    Hyperbolic discounting is no different to most people having poor spatial awareness. You should used tape measures when building a house. Likewise, use excel or a finance calculator to work out your finances.

    Reciprocal altruism is shown by virtue signalling.

  9. Fleeced

    Andrew Haldane says his profession must adapt to regain the trust of the public, claiming narrow models ignored ‘irrational behaviour’

    It’s the Age of Modelling. When models fail to predict accurately, it’s always because of some special circumstance. “Yes, yes – our model was correct, it just didn’t account for [x], which was a special event”. Of course, this means that the model isn’t correct, but on it goes.

    But economics isn’t a science. Not even a dismal one.

  10. Scavenger

    Either Steve or my self are missing something.

    Says Law – Supply creates demand.
    Keynes Law – Demand creates supply.
    That seems like two sides to the same coin. From what you say Says Law is like something like “Build it & they will come”. Keynes Law is something like “I have identified a need & I can produce something that accommodate that need’. That seems somehow compatible to my uneducated view of economics. I await further economics education from the far more intelligent Catallaxy commentators. (Seriously)

  11. Andrew M.

    > “you must produce before you can consume.”

    Yes, but that is beside the point. Consumption is not demand. Demand is what people want, consumption is what they actually get. The abstraction of the demand precedes the reality of the production by a long time.
    Steve’s version of Say’s Law is simply and trivially untrue because invention is not the mother of necessity, it is obviously the other way around. Also people do not demand particular goods and services, they demand solutions to abstract problems, which can be solved in a myriad of different ways.

    Perhaps the disagreement stems from different definitions of the words.

  12. Infidel Tiger

    Demand is absolutely irrelevant without income.

  13. gary

    If the Undoing Project is of interest, Daniel Kahneman one of the psychologists discussed in the Undoing Project has written a book ‘Thinking, Fast and Slow’ which discusses his and Tversky’s work in more detail than the Undoing Project and may be worth a look. I am currently reading Pre-suasion by Robert Cialdini which was recommended by Scott Adams (of Dilbert fame who tweets a lot on persuasion) and calls Cialdini the Godzilla of Persuasion. Reading Cialdini’s book I thought he had been heavily influenced by Kahnemann’s work and Cialdini does say ‘when Daniel Kahnemann talks people listen’.
    This BBC documentary discusses Kahnemann’s work and is worth a look if reading the books doesn’t appeal.

  14. Stimpson J. Cat

    Keynes Law – Demand creates supply.

    I want to be God.

    Nope.

    I want the laws of gravity not to apply to me.

    Nope.

    I want economics to make sense.

    Nope.

    Wrongity wrong wrong.

  15. Rev. Archibald

    I can create or supply a huge pile of dung,

    ..
    Dot bought the EM drive, so someone will buy your pile of shit too.
    But seriously, the horse farms around here sell it for $2 a bag, and it goes very quickly.
    The shit, not the EM drive, that is.

  16. .

    Harold White, NASA, JPL, the British government, the Chinese government, Mike McCulloch and the American Institute of Aeronautics and Astronautics (AIAA)’s Journal of Propulsion and Power also bought into the EM drive.

    Want to explain why all these guys are idiots after repeated experimentation, experimental controls and peer review, let alone testing in space?

  17. Eyrie

    Some good insights here, Cats. Reminds me of when my early high school physics teacher posed the question ” which is more important in science, theory or experiment” and got us to write an essay justifying our conclusion. The answer is both of course. Three of us figured that out, out of thirty.
    Economics, bleh. Contrived theories in a contrived field of study known as “social science”.

  18. Denise

    Without the brilliance and effort of people like Gutenberg and Faraday who were not content with the status quo but did all the heavy lifting, we’d all still be living in caves.
    It’s the Pareto principle; 20 percent of people – probably much less- have lifted the other 80 percent out of the darkness of ignorance.
    So I believe in Say’s principle that it’s supply that produces demand.
    Most people do want to better themselves but don’t know how and it’s the trailblazers that deserve our gratitude for lifting our gaze above the clods.

  19. Trax

    How about:
    Say’s Law: “First you create something then people can buy it.”
    Keynes’s Law: “People buy something then someone decides to create it.”
    It is fairly obvious in that case, Keynes’s cannot even happen unless the Say’s case has already happened and you are simply borrowing from the capital/products created in the first place.

  20. Mark A

    Trax
    #2255018, posted on January 7, 2017 at 11:26 pm
    How about:
    Say’s Law: “First you create something then people can buy it.”

    With a proviso, create something that will be useful or desirable to people and they will buy it if they can afford it.

  21. Entropy

    You can demand stuff all you like but you must supply something to someone to get a hold of someone’s else’s supply.

  22. .

    Let’s go back to fundamentals.

    There is no such thing as demand without a willingness to pay.

  23. Terry Collmann

    You forgot the need for “ability to pay” as well

  24. RobK

    Sometime ago Tel described Say’s Law, I thought quite well, something like this:
    Money is just a means of exchange when you go to market. Before money you’d barter, you’d go to market to exchange your produce for something else you wanted. If you turn up to market without being able to supply something, no one is going to be able to trade with you.
    That explaination worked for me. If you can’t supply something, you can’t trade, you can’t demand. You’re invisible.

  25. Ray

    Say never said supply creates demand. What he did argue was that in order to consume you must first produce goods or services which could be either consumed directly or indirectly by exchanging for goods and services produced by somebody else.
    Indeed, one of the fundamental failings of classical economics was the absence of a demand curve. Instead classical economics implies a vertical supply curve which is illogical over the longer term.
    It was the neoclassical revolution which ushered in the demand curve, the notion of equilibrium, a workable pricing function and the notion that markets must clear. Unfortunately, too many economists today take the alternative route and regard demand as the all important driver of activity. Here they make the same mistake as the classical economists.
    However, the solution to the mistakes of modern economics is not to dismiss demand with an ideological reinterpretation of Say’s Law, but to encourage a return to the neoclassical concepts as they were given to us by Jevons, Walras, Menger and Marshall.

  26. Mark A

    Ray
    #2255182, posted on January 8, 2017 at 5:31 am
    Say never said supply creates demand. What he did argue was that in order to consume you must first produce goods or services which could be either consumed directly or indirectly by

    That makes a lot more sense to me as an economic novice.

  27. Trax, Entropy and RobK comments are all well expressed and hit the nail directly, IMHO.

  28. Entropy

    Invariably, the vast majority of students side with Keynes. Demand, they say, is essential. Without consumers willing to buy a product, suppliers will go out of business. They conclude, consumer spending drives the economy.

    Of course. They are children. All their life to that point they have demanded stuff and their parents supplied it.

    It is a bit of a metaphor for the perils of Big Government really.

  29. Jonesy

    Keynes’ demand is just describing money on credit. Spend big, create demand because the economy will get big enough to pay it all off….but it doesn’t!

    Isn’t Says the same as Hayek? Supply is a surplus to your own need….savings? I can go to the market with my surplus and barter/buy/sell in exchange for your surplus……money! Wether that money is converted to a good or not is the descriptor of the exchange.

    Why is that simple premise lost on the sheeple?

    If you follow Keynes in your own household you will soon go broke….because you really do not need that latest 100inch LED supa HD TV….just because you want(demand) it means years of debt repayments BECAUSE THAT TV WILL NOT HELP YOU CREATE YOUR OWN SUPPLY or A MEANS TO PAY OFF WHAT YOU WENT INTO DEBT FOR.

    Why do we give politicians/bureaucrats the power to create wealth out of a printing press or a computer screen? Every Thursday a credit shows up in my carer pension account…is that real money? The DSS or whatever it is put those electrons into my account that I can exchange for other electrons using my card or computer. Somewhere someone has to make a surplus to their direct need to finance/invest in that electron transfer. Surely, sooner or later we must run out of other people’s money.

  30. Jonesy

    …hmmm, the last par got cut off.

    What I wanted to add…Taxation is still an implied debt on your perceived surplus. Doesn’t matter if your a pensioner or Kerry Packer. The parliament makes a tax on everyone’s perceived surplus to fund all those things that parliaments deem important to waste money on. But to give a government surplus away in the hope all that spending on 100in LED supa HD TVs in the hope of a result in the gates of economic nirvana miraculously opening to one and all??? Keynes has strong Kool-Aid!

  31. struth

    Economists demand to be heard but no one is supplying an ear.

  32. Wayneof Perth

    Talking of Skousen is his Gross Output idea being adopted in Australia?

  33. Machaggis

    A lot of misconceptions here I think. At the macro level an economy will move as producers find “stuff” people will buy. They are often wrong, sometimes spectacularly so, sometimes they appear to be right but someone comes along and does it better and pinches their market. Think of the development of video and sound recording over the past 50 years. Where was the demand years ago for 50″ flat screen TV’s? Some bought them at very high prices ( a friend proudly bought one for just short of $20k but a few years later I bought one for less than $1500) but eventually the demand grew and the suppliers work hard to fetch up but they were the ones that made the demand real and meaningful for so many people and created a major economic element in the community.
    At the micro level of course there are times and places where someone wants a product that no one makes because he sees that he needs it and looks for a supplier. It may be only one off but without his need (demand) it would not exist. The small thing supplied might have a great economic impact or pretty well none at all.
    Context is pretty well all: broad brush strokes often look great from a distance but become blurred and indecipherable at close quarters.
    Anyway that’s my tuppence worth

  34. pbw

    Aren’t a lot of the objections here are covered by

    The point about the market economy was that you could not be wrong for very long since you would then lose your shirt, as many did.

  35. Machaggis

    Correct. You don’t go bankrupt just for demanding- talk is cheap. Suppliers go bankrupt regularly because they misread the market and cannot meet a demand at an acceptable price or quality.

  36. Roger

    These students are as clueless as most economists about what causes an economy to grow and employ.

    Perhaps the question should be put in a less esoteric format for the economically ignorant:

    What drives an economy and creates wealth, the production of goods and services or their consumption?

    (Note “the government” is not included in the answer.)

  37. Jannie

    RobK,
    If you can’t supply something, you can’t trade, you can’t demand.

    Yes, that makes sense. I can go with that.

    Ray, if you say

    What he did argue was that in order to consume you must first produce goods or services which could be either consumed directly or indirectly by exchanging for goods and services produced by somebody else.

    That provides the opportunity for the government economists to say we can create demand by giving money to people who do not or have not produced goods and services, because those people NEED it more, etc etc. Want exists, its easy to consume without producing so long as there is charity, socialism or a government job.

  38. Sometimes I think we (and our super super smart experts) have trouble coming to grips with a proposition because we are looking into it when it’s been operating since the dawn of time and has become complex to the point where both sides of the proposition may be correct depending on perspectives.

    Just like the Original Sin, humans have Original Demands; food, clothing, shelter. We create humans out of nothing by giving birth. That new human needs food clothing and shelter. Immigration has the same effect in that new comers need food clothing and shelter, good news for home builders, there is more demand.
    However things get complex when adding value to these needs. When someone thinks mechanizing transport might be great for example. There was no ‘need’ nor no demand for it per se, but as soon as it was supplied, people couldn’t get enough of it (productive, fun and a status symbol all in one)….lots of demand was created.
    Therefore, if we were to separate the question into two segments i.e. Original Demand and Value Adding, we’d find that demand side economics would be correct in the first instance and supply side economics correct in the second instance IMHO.

    In a modern free market economy, innovators take the risk that what they’ve produced will be taken up by others. Many many fail because of no demand for their innovation, but some succeed and our economy grows. So therefore once we get past the Original Demand, I think Say’s Law applies always.

  39. john

    Anyone who was worked in or with government will be aware of its tendency to produce things which aren’t very good or don’t sell well. This, ironically, may lead people to question Say’s law that demand creates supply.

    If anyone could address this problem, I would be much obliged.

  40. Grumbles

    Steve, the reason is that basic needs follow the rule of demand creating supply. People just don’t realize in western society almost everything we have are wants and luxuries, these all follow the rule of supply creating demand.

  41. john

    Sorry, that should read …
    “question Say’s law that supply creates demand”.

  42. Lem

    Say’s law: there’s no such thing as a free lunch.

  43. Ray

    Jannie

    “That provides the opportunity for the government economists to say we can create demand by giving money to people who do not or have not produced goods and services, because those people NEED it more, etc etc. Want exists, its easy to consume without producing so long as there is charity, socialism or a government job.”

    Say did not argue that Governments should stimulate demand, he only noted that society and individuals could only consume as much as they produce. Indeed, as I discussed above, the classical economists had no construct for demand in the way we do today such that thinking along these lines would have been most unlikely at the time.

    The need for demand management was ushered in by Keynes. However, Keynes himself was not in favour of transfers, at least not as we know these today. Keynes’ approach was to spend government money on infrastructure projects not welfare.

    If you are looking for justification for transfers, this has nothing to do with Keynes or Say. Instead you answered that yourself, NEED. This implies a value judgement by politicians and / or bureaucrats that lower income earners are in greater NEED of government largesse. Of course, this NEED assumes a diminishing marginal utility, a concept which has no foundation in economics.

  44. iampeter

    The way I explain both is:

    Say’s Law wasn’t meant as a floating abstraction but a statement of fact, along with everything that it implies. I.e. You have to produce before you can consume (implied in this is that you are producing what you can consume or can trade to someone for what you can consume, medium of exchange is in place, contract law is in place, etc, etc, etc.). Say’s Law is derived from a good grasp on reality.

    Keynes on the other hand is trying to say it doesn’t matter what you produce, everyone can just be digging holes and filling them up again as a full time job and somehow shelves will be full of goods that you need. Keynes economic theory is detached from the facts of reality.

    The reason people pick the second one is due to the fact that we don’t teach anyone how to think anymore these days. It used to be that a PhD stood for Doctorate in Philosophy, meaning people were first taught how to think, then they would specialize into whatever fields they chose. Today it’s meaningless, so we have legions of economists, doctors, scientists, all spending their days practicing their profession completely detached from the facts of reality.

    That’s how we get economic “stimulus” packages, CAGW, alternative energy companies consuming more energy than they produce and so forth. Legions of professionals completely detached from reality.

  45. danger mouse

    Not directly related, but Steve will appreciate this http://www.politico.com/story/2017/01/trump-clinton-loyalists-jobs-233296

    All these flunkies having to get real jobs and contribute to value added supply. The irony!

  46. Say’s Law: “Supply creates demand.”
    Keynes’s Law: “Demand creates supply.”

    Neither of these are “laws” they are opinions.

    This is why we can’t economics seriously. Surely this isn’t as one sided as either of these two claim.

    This attempt to reduce billions of decisions to a single simple formula is intuitively absurd.

  47. Say never said supply creates demand. What he did argue was that in order to consume you must first produce goods or services which could be either consumed directly or indirectly by

    One has to keep in mind that both these supply-demand economic theories were developed during a time of population growth. When the population is growing supply is always pushing to keep up with demand, Says “law” seems attractive. But what happens when the population is shrinking? We are in a perpetual state of oversupply. Neither have any solution to manage this situation.

  48. Hydra

    It is very easy to confuse the layman definition of Demand with the economic definition of Demand, as Andrew M has done.

    Economic demand is the willingness to pay a certain price for a specific good or service, rather than the concept of simply wanting something. If that specific something does not exist as it is yet to be supplied, demand in an economic sense cannot exist.

    For example, people may ‘want’ a flying car, but until a suitable product at an acceptable price point is produced, said car cannot be demanded, because the specific product at a price people are willing to pay does not exist.

    By creating a product that someone is willing to pay for at the right sale price, the supply creates the demand.

  49. Hydra

    But what happens when the population is shrinking? We are in a perpetual state of oversupply. Neither have any solution to manage this situation.

    Economics deals with this just fine. We call it either a ‘firesale’ or ‘landfill’.

  50. .

    Correct Hydra. Some people need to stop talking out of their rears, drop the autodidactism and accept standard definitions.

  51. NewChum

    Demand is absolutely irrelevant without income.

    Bingo

    Demand is not wishes or event wants or even needs.

    Demand is fulfilled orders, paid and shipped.

    You can only demand after you have income to exchange. The only way of (legitimately) getting income is to supply something to someone first.

    Lots of people fall into the trap of thinking Demand is want or need. No.

    TAke the ‘oldest profession’ in the world. Limitless want for that particular product. Supply has to be created first before any of that want can be converted into demand. Of course turning it into actual demand requires the one with the desire to produce something first, in exchange. Nothing happens before two lots of supply is created.

  52. You can only demand after you have income to exchange. The only way of (legitimately) getting income is to supply something to someone first.

    That presumes someone already has the income to pay for the supply, which would be government which just printed it.

    This chicken and egg is silly because once the wheels get started, once people are buying and selling stuff then who is pushing and who is pulling become circumstantial. Considering most people don’t make anything but sell their own time it’s rather blurred who is driving what.

    Economics deals with this just fine. We call it either a ‘firesale’ or ‘landfill’.

    That’s why there is negative rates right?

    Europe has a century of firesales and landfill in store for it. Portugal fertility rate is 1.2 Greece & Spain 1.3. Germany 1.4 (thats probably pushed up a bit by muslims)

    2.1 is replacement.

    Every 30 odd years there are almost half the number of kids born as there are parents. Once the parents and grandparents die off, cities will be near ghost towns. Keep in mind we are already into the first stage of grandparents dying off, as this has been going on since the 70s.

  53. You can only demand after you have income to exchange. The only way of (legitimately) getting income is to supply something to someone first.

    Or you can just go to a bank and borrow money based on your future capacity to repay, whom by virtue of fractional reserve effectively create money out of thin air.

    Given the majority of the money supply is in fact credit, it’s not clear at all how this demand-supply push-pull actually works. Domestic credit is not even used to make assets that produce income and there is a lot of domestic credit.

  54. Entropy

    Or you can just go to a bank and borrow money based on your future capacity to repay, whom by virtue of fractional reserve effectively create money out of thin air.

    So.. the bank has provided a supply, based on the expectation of future supply by you.

  55. DrBeauGan

    Until the terms in the ‘laws’ are defined with sufficient precision to be able to confirm one of them by observation, you guys are doing unnatural philosophy. Some folk enjoy that activity, but others think it frivolous.

  56. struth

    Really……REALLY?
    It is my firm belief that the most destructive attack on an economy comes from people taking economists seriously.
    There is no agreement between them, therefore there is nothing they study but theories by people trying to justify their politics by muddying the waters of a clear stream.
    I once had a person who had a university education, tell me that only people with a university education, should be allowed to be members of parliament.
    Apparently , we would all be better off.
    The pure arrogance and stupidity of the comment, shows the same mentality that must exist with most economists.
    People like Steve are fighting the good fight amongst this, but unfortunately validating those who should be totally ignored in the first place.
    Economists are mostly political hacks trying to disguise their bias through “economics”.
    Hence the importance of it being nearly entirely captured by the left.

  57. Or you can just go to a bank and borrow money based on your future capacity to repay, whom by virtue of fractional reserve effectively create money out of thin air.

    So.. the bank has provided a supply, based on the expectation of future supply by you.

    That doesn’t tell you who drove the trade. Was it driven by the banks supply or by the publics demand? Both cases are valid, sometimes people want stuff they can’t afford and apply for more credit cards, other times the bank keeps shoving credit at you.

    It’s not in the slightest bit clear that the situation is as one sided as supply pushed or demand pulls.

    Take housing. New couple with babies drive demand for new housing stock in the outer suburbs where they can afford something with land to bring up children. But there is also new apartment stock that clearly pushes supply. In other case people upscale as their circumstances improve. Or downscale as the kids move out.

    Again it’s not the slightest bit obvious that the pressure that drives trade is even mostly one way.

  58. .

    DrBeauGan
    #2256101, posted on January 9, 2017 at 7:42 am
    Until the terms in the ‘laws’ are defined with sufficient precision to be able to confirm one of them by observation, you guys are doing unnatural philosophy. Some folk enjoy that activity, but others think it frivolous.

    The law of demand and law of supply hold more consistently than the conservation of matter and energy. How about that!

  59. Lutz

    All of you below are still missing the point: Even if there is a demand of a good an entrepreneur has to invest his own funds to create the good before it can appear on the shelves. All the demand in the world will not produce something without an initial investment.
    For those who now say more demand will empty the shelves of goods, you need to understand that the money to put the goods on the shelves has already been invested and is not new money to create new products.
    For an example of demand look to Venezuela – there must be lots and lots of demand!

  60. Lutz

    Sorry, you’re above, actually.

  61. All of you below are still missing the point: Even if there is a demand of a good an entrepreneur has to invest his own funds to create the good before it can appear on the shelves. All the demand in the world will not produce something without an initial investment.

    And that still doesn’t explain the pressure in the system that actually makes transactions happen which is really the only distinction between:

    Say’s Law: “Supply creates demand.”
    Keynes’s Law: “Demand creates supply.”

    My point is that both these arose during times of population growth. What happens when the population declines by 60-80%. As it’s about to do in many parts of the west. No amount of creating new supply will drive demand. Supply creates demand, works nicely in a growing population, not so much in a shrinking population.

    The pressure in the system is the needs and wants that are efficiently and astutely addressed by supply.

    There is an entire industry devoted to dismantling firms that have failed to correctly and efficiently address demand.

    Women’s desire to be beautiful is apriori to firms creating beauty products, see market-less animal kingdom where one sex does the peacocking completely without any market.

    Even the idea that there is an equilibrium between supply, demand and the money supply is hypothetical, The reality is quite different, there are shocks, trends, fads, panics, political meddling and mistakes that continuously play havoc with any attempt to maintain price stability.

  62. Roger

    Good Lord! You are actually still debating this?

  63. mh

    Did America demand Donald Trump, or did Donald Trump create the demand?

  64. Some commenters above are bemoaning the declining populations in the West. I would suggest taking current trends and extrapolating them into the future is fraught with danger.
    Societies do not develop in a linear fashion. Members of cultures who have 5,6,7 kids change within even one generation when they move to cultures that have 0,1,2 kids.
    We don’t and can’t know, but it may well be that the next generation or the one after will be the one that decides to have less material things and more kids. It can take as little as one government act or the prominence of one popular figure to change the direction of a society.

  65. Hydra

    That’s why there is negative rates right?

    Europe has a century of firesales and landfill in store for it. Portugal fertility rate is 1.2 Greece & Spain 1.3. Germany 1.4 (thats probably pushed up a bit by muslims)

    2.1 is replacement.

    Every 30 odd years there are almost half the number of kids born as there are parents. Once the parents and grandparents die off, cities will be near ghost towns. Keep in mind we are already into the first stage of grandparents dying off, as this has been going on since the 70s.

    I was being sarcastic.

    Clearly supply side economics allows for this in that if a product is likely to be bought but fewer people the supplier decreases production and increases the price.

  66. Hydra

    All of you below are still missing the point: Even if there is a demand of a good an entrepreneur has to invest his own funds to create the good before it can appear on the shelves. All the demand in the world will not produce something without an initial investment.

    Which is where the distinction between the economics definition of demand and the lay definition of demand becomes important.

  67. Hydra

    Zippy, your example of housing in the suburbs is very poor as supply is clearly the determinant factor here. Farmers sell the good sized land to developers who create estates with infrastructure and separate lots which people buy. Demand for housing or land does not drive this, because if the land was not cleared by the farmer and developed by the developer there is nothing to demand because there is nothing available for sale without this.

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