Demand creates growth... or does it?

Economics Economics Questions
1

I was discussing this with a guy. I will try to reconstruct it from memory as best as I can:

He: Demand creates growth

Me: Africa has more demand than any part of the world. Why aren’t they all rich?

He: Because the demand hasn’t been met.

Me: Met by what? Production. Because demand doesn’t create growth.

He: The demand has to come first.

Me: So Keynes (his hero, by the way) was wrong when he said that supply sometimes creates it’s own demand?

He: No, he was right. Of course, supply can create it’s own demand.

Me: Why? (interuppting him) Because demand doesn’t cause growth.

He: No, demand has to come first.

Me: So, there was a demand for Pet Rocks? For Rubik’s Cubes? No, there wasn’t. The production of these things came first.

He: There was a demand for toys.

(note: earlier I had said that demand was a constant. He said it isn’t constant: it’s dynamic. I said but it always exists.)

Me: Yes, as I said earlier, demand is a constant. There was no demand for Coca Cola. The inventor of Coca Cola really pushed his product hard, and didn’t do too well at first.

He: There is a demand for drinks.

Me: So, demand is a constant.

He: No, it’s not.

Me: So Keynes was wrong, demand never creates it’s own supply.

Then he and I started talking about cars, and how there is a glut of cars on the market, but no demand. He thought he won the exchange because I didn’t know how to (or have the energy to think of how to) counter him.

So, is he right? Brand new cars are sitting on the lot, waiting to be sold, but since demand is at record lows, they aren’t selling.

I am trying to suss it out, but I worked 16 hours per day, two days in a row helping my nephew move, and my brain isn’t working too well.

2

demand ‘inspires’ production. demand is the target at which production aims and hopes to hit.

if there was no demand, there would be no-need for further production.

however, only production can hope to satisfy demand. demand cant satisfy demand.

if by ‘growth’ you mean increase material wealth, then production is pretty much the definition of this.

3

Right, I just remembered part of the conversation that I didn’t transcribe. He was trying to make it seem as if I was claiming that demand doesn’t matter at all. So, I corrected him, saying “Demand catalyses growth. It does not cause it.”

4

i also picked up a little confusion regarding say’s law, which no doubt keynes was responsible for introducing.

trying to be as non-technical and still saying something:(a challenge!), Say’s law is pretty much that the only means to have a real demand for some supply is to have some other supply to offer in trade for it. ergo. people can emptily demand all they want but without offering any (supply) to others they wont be supplied by them

this should highlight that there are two meanings to demand;

1)the every day sense, i want x,

and

2)the economic sense, i have y to bid for x and i do (real demand)

. so africans might have lots of demand, but not much in the way of real demand, since they might lack production/supply. the more production and supply they had the more real demand they could have. (i’ve been here sloppy by collectivizing africans but please forgive me my tresspasses)

5

The cars aren’t selling because there’s no demand for them, interest rates were pushed too low and the length of production increased beyond the extent that the structure of production and the time preference schedules could maintain, and so now we’re suffering the adjustments necessary to fix the malinvestments that have occured.

All production and all human action is aimed at consumption, in that, it is always aimed at replacing a less satisfactory state of affairs with a more satisfactory state of affairs. It does not, however, follow from this that consumption drives the economy, savings does that.

6

By that logic, Robinson Cruesoe “wanting” more berries to eat creates more berries. Isolate the statements to a cruesoe economy and you can see their fallacy.

Another good implosion of the fallacy. Unsatisfactory answer.

Bad answer. The demand was already in place. The demand was already there.

He needs to explain how supply creates demand.

He seems to be in a logical bind. Does demand create supply, does supply create demand?

Valid criticism. If people don’t know that a good exists, how can they demand it?

People want specific goods, not goods in general categories. Invalid criticism.

ditto

7

There is demand for cars, just not at the current prices. Note that in Germany, government recently gave money to everybody replacing old car. I think it was about 2.500 EUR and car sales jumped substentially. Same happend all over Europe:

http://www.nytimes.com/2009/04/01/business/global/01refunds.html?_r=1&hpw

Sales of cars fell because other costs of living made cars unafordable at current prices. There is nothing wrong with the demand for cars. The producers extended production and market conditions changed.

8

When thinking about this stuff, I usually throw money out of the equation. Imagine a market place where only two people exchange their goods. Apple producer and orange producer come to the market place to exchange their production surplus. One has 100 kg of apples, the other 100 kg of oranges. There is obviously parity 1 kg apples = 1 kg oranges. Imagine that one season, apple producer has managed to produce 150 kg of apples. When he comes to the market, he’ll be forced to exchange 150 kg for 100 kg of oranges (1 : 1.5). The producer of oranges will say: “Oh, so much more demand for my oranges this season!”. The orange pruducer now has much more apples (50 kg) than last year, enabling him to extend his production (so, not everything is lost for poor apple producer). Luckily, next year, he’ll come to the market place with 150 kg of oranges. Now the apple producer will say “Oh, 1:1 again, the demand for apples has been up this year!”.

If both of them improve production each year, for example for 10%, the price will stay the same, however both of them will sell more in quantity. Both of them will say: “Gee, the demand for my product is up, more sales at the same price!”.

9

Growth is created by being more efficient in what you do, IMHO. Everything else is just a mirage and a shift of resources from one thing to another. Am I wrong?