WARNING - This is an extremely dry topic and definitely won't be for most people's tastes 250 years ago (5 Jan 1767) the famous J.B. Say was born, so in tribute I thought should start a thread. He is most famous for popularisation of the economic principles that underpin what eventually became known as "Say's Law" (noting that it wasn't actually called Say's Law until the 1920's). There are many misunderstandings and repeated half- (or non-) truths about what he claimed to say and what Say's Law is included the much maligned "Supply creates it's own demand" piece of doggeral popularised by Keynes. In brief, the underlying principle of Say's Law can be stated as: demand for goods and services is created by value-adding production and by nothing else. In it's more original phrasing, J.B Say's interconnected principles lead to the conclusion that Demand is constituted by supply. In essence, 'Goods buy goods': to buy, one first has to produce goods of one's own, sell those goods for money and then use the money received to buy the goods produced by others; thus it is the production of one's own goods that leads to the ability to purchase someone else's, even though money is used as the medium of exchange. A further conclusion is that there is no such thing as a general glut.
For those interested in this topic (which is quite heavy reading), Steve Kates provides better discussions about what Say's Law is and isn't (better than W.H. Hutt's very turgid text book). Steve summarises the inter-related propositions to: 1. Demand is created by supply and nothing else. 2. The process involved in purchase and sale is the conversion of one's own goods or services into money and then reconversion of the money one has received back into other goods and services. (There is no implication of a barter economy.) Money is intrinsic to the process involved. 3. Recessions are relatively common and result in high levels of involuntary unemployment. 4. Recessions are due to structural problems of one kind or another. In particular, recessions occur where the structure of supply does not match the structure of demand. 5. Overproduction of individual goods and services occurs continuously within economies and can lead to a general downturn in an economy. 6. Recessions are never due to demand deficiency. 7. Because recessions are not due to a failure of demand, practical solutions to recession do not encompass large increases in the level of public spending.
That would be fairly obvious, you don't have to be a rocket scientist to work it out. Only problem now the socialist rain free money on most citizens/slaves
^ You would think it'd be considered a truism but apparently at least some schools of economics (particularly the socialist ones) find the concept difficult to grasp.
It's point 1 and 6 that sticks out. Fundamentally (I amateurish profer) you can in part, in some circumstances aid recessions through appropriate infrastructure deficit spending. Japan isn't good example, please don't go there. Point one I may be mis reading, but it would seem that often demand drives supply...No? I'd be curious if a deeper reading of this.
How does Say's law relate with the need of consumption back in the 1760's with the glut of supply in this day and age ? Demand is produced by necessity not production, IE you can produce all you want of product A but if no-one is needing it or buying it then it fails as a product. You can have two or more competing products such as whiskey or tequila, both are produced, but if only one is bought as it is more palatable or has better marketing, only one will survive over the long run. Competing products need demand, but first you need demand for any single product. A half starved pleb will not spend hard earned coin on an unnecessary product until they have the spare coin to waste over and above survival. Fast forward 250 years or so and the amount of crap produced on TV is a witness to the mantra of production not meeting expectation. The amount of successful productions opposed to those that did not survive is very many to one. It is demand that creates production, you first need a market to sell too, in order to produce for, if you do not have a market that will purchase, all you have is a product.
Good questions. They show why it is important to understand the nuances. Using W.H. Hutt's definitions: Demands - Offers for inputs or outputs which induce their providers to sell, or invest in them as prospectively profitable assets. Essentially, he is using the word "demand" in the context of consumption rather than in the context of insisting that you are given it. Hence, you can only actually demand/obtain something that a supplier is willing to produce and trade with you at a mutually agreeable price. The most critical thing in the equation is "someone willing to produce it and trade with you". People can insist (demand) whatever they want. For example, I want a flying car that converts into both a submarine and a spaceship. Until someone actually can physically produce it, however, my demand is just mere wishing. Even then, an Elon Musk entrepreneur might say to me that he can build it for me, but it will take 10 years and will cost $100 million, to which I will probably say "Forget it, I don't want it that much.". In terms of "demand driving supply", I would rephrase it as "demand guides supply". There are millions of people supplying (offering) things to the market, but it is only if what they are offering is deemed valuable by the consumers that what they supply will actually trade. (If it doesn't trade, then the supplier has, by definition, been the final consumer of their own output.) If it trades at a price that makes a profit for the seller, then it is "value-adding production". In its entirety, the structure of supply needs to align with the structure of demand for a smoothly functioning economy. That is, what people are offering to the market is what the market actually wants. Things like technological or cultural changes (or even natural events) affect the structures matching neatly which is why a given item may be hard to get one day and be offered at twice the price of yesterday but then be on a fire sale next month. Entrepreneurs (and to some extent managers) are an essential element in constantly changing the structure of supply to try to best meet the ever changing demand schedules given the availability of the inputs needed to supply them. One year they are raising money to build a new VHS cassette factory, the next they are converting that factory to produce DVDs. They are in constant competition with other entrepreneurs trying to anticipate what and how much people will demand next. If a consumer is kind enough to give a firm indication by, say, committing to buy an apartment off the plan (thereby stating what they wish to consume in the future), then this will lower the risks for the suppliers and will generally also lower the costs. Throughout the economy there is constant creative-destruction happening. It is when a significant portion of suppliers mispredict what consumers will want in the future and it takes time to adjust to the new world order that we end up with recessions (i.e. the structure of supply does not meet the structure of demand). The recession is the mechanism whereby resources are freed up from the parts of the supply structure that are not wanted and moved towards the new parts of the economy. The US housing bubble in the lead-up to 2007/2008 is a good example. For whatever reasons, there were many, many suppliers convinced that people want more houses. Hence, the number of people employed as real estate agents, finance brokers, architects, builders, etc had been growing and growing until suddenly the demand evaporated. The recession is the mechanism whereby the builders, architects etc are "told" to stop supplying new houses and move into other areas of the economy if they wish to have "value-adding production" (rather than value-destroying production).
I think I captured most of your thoughts in my previous response (let me know if I haven't). Just on this point, however, I would say that as long as there are other people then "No". People offer goods for sale first. The first meat pie/jar of vegemite/CD/car/or whatever was first made and priced in the hope that there would be a market for it. If the entrepreneur correctly anticipated other people's desires and found that there was a market then they would ramp up production and roll out the "meat pie" innovation more broadly. Exactly. If it fails as a product, then it becomes "own-consumption" on the part of the producer.
I wasn't a big fan of the way Mark Skousen explained things in this article (and I was annoyed that Steve Kates gushed so much about it). Some of the comments are good though.
Would you be happier with this? If not could you please explain your reason or point me to one or more the comments to the Skousen article that you think explains it better. And I'd prefer it in no more than 2 lines too. *apologies for the grammar, I was trying to be clever.
The power of supply! Like a Bryce Courtney novel. Demand is always present, it is infinite, but it is not always achievable. For fear of anthropomorphising "supply", I think the willingness consumers have to satisfy demand hinges upon the capacity of supply to act effectively in creating a price point where the exchange of value takes place, or to paraphrase you, where consumers are empowered to satisfy demand. Without a supply of goods there can be no exchange of value, and consumers, whilst not powerless to meet their needs are certainly curtailed in doing so until a point in time when one or more of them decides to risk supplying a good. And the supply of one good is not enough, it must be a supply of many goods in order to empower consumers and meet demand. It's probably why individuals in centrally planned authoritarian countries are so demand impoverished. With the exception of pot smokers in Nth Korea.
Just a rambled musing I had whilst driving to work: Demand does not create supply, for if it did, then why don't we have Cat scanners in every hospital?
Last week we cut back on our order of burger buns from the local bakery, trade is down due to the cyclone and floods and we haven't been producing as many hamburgers for sale. The bakery will cut back on its production of burger buns as a result of our declining production. We will also lower our demand for other products from other suppliers due to our declining levels of production.
Profits go to those who satisfy the most wants of consumers not currently met in the most useful and cheapest way. Currently I am guessing there's a lot of consumers in the region whose most urgent wants have changed toward their house/business and contents. Luxury restaurants will presumably be cutting back their production even harder (which, ironically, may benefit the cheapest prepared/takeaway food options).
I'm reading Eamonn Butler's The Condensed Wealth of Nations and a piece of text of Adam Smith's struck me as being very much like the intention behind Say's law: Smith is basically saying that we exchange the fruits of our productivity for the fruits of other's productivity. If therefore, productivity declines, we have less to exchange and the market either contracts, or slips into a recession. Which is what is happening now.
