Monday, October 04, 2010

Economies are Driven by Supply

Peter Smith points out that, "Keynesians believe that economies are driven by demand." Let us take a few seconds to demolish this nonsense, shall we?

What was the demand for the iPod before the iPod was invented and, afterwards (as it necessarily had to be), supplied?

What was the demand for the iPhone before the iPhone was invented and supplied?

What was the demand for the internet before the internet was invented and supplied?

What was the demand for the car before the car was invented and supplied?

Hector Sabelli points out in Bios that "creation necessarily precedes destruction." Schumpeter's concept of the dynamic economy as "creative destruction" requires creation before there can be destruction. To put it another way: there has to be supply before there can be demand. Once the supply is made available, demand increated, and demand can then drive the creation of more supply.

In a recession or depression, there is widespread destruction. Creation/supply must occur for there to be demand. Therefore, Keynesian policies are going to have no real effect on the economy, as any demand will be for what is already created. Thus we will see what we are now seeing: some economic growth without a change in employment. We will see growth in already-existing companies (indeed, we see greater profits), but no creation of new companies and new products. Keynesianism is why we get such things as "jobless recoveries." It is why we have reports from experts that the economy is out of recession, while there is little evidence from the real economy that any such recovery is or has been underway. Now we know why.


WillORNG said...

But if money demand is weak due to low economic sub-optimal activity mass unemployment and output gaps, supply simply diverts weak demand from other areas.

Check this out if you can handle it...

or this

Anonymous said...

WillOrange: Your comment makes no sense. Right now we have a strong demand for government assets such as money and Treasury debt. This is itself a reflection of an uncertain supply-side due to for instance healthcare costs or future taxes, as well as failure to allow housing market to equilibrate. In a very uncertain climate, the rational response for many entrepreneurs is to do nothing, hence the large cash holdings of many corporations.

Also, what specific points would you have us take away from Mitchell and Mosler ? Its absurd and lazy for you to provide links to an enormous volume of writing. What are the key insights from it that you see ?

The Arthurian said...

"What was the demand for the car before the car was invented and supplied?"

Where is the supply of buggy whips?