MCViewPoint

Opinion from a Libertarian ViewPoint

Why Doesn’t Increased Demand Bring More Supply?

Posted by M. C. on January 2, 2022

This view is questionable if individuals did not allocate enough savings in order to support increases in the production of goods and services. Also, note that to be able to exchange something for goods and services individuals must have this something. This means that in order to demand goods and services individuals must produce something useful first. Hence, supply drives demand and not the other way around. 

https://mises.org/wire/why-doesnt-increased-demand-bring-more-supply

Frank Shostak

By popular thinking, the key driver of economic growth is increases in the total demand for goods and services. It is also held that the overall output increases by a multiple of the increase in expenditure by government, consumers and businesses.

Following this way of thinking it is not surprising that most commentators are of the view that by means of fiscal and monetary stimulus it is possible to prevent the US economy falling into a recession. For instance, by increasing government spending and central bank monetary pumping it is held that this is going to strengthen the production of goods and services, i.e., the overall supply.

It follows then that by means of increases in government spending and central bank monetary pumping the authorities can grow the economy. This means that demand creates supply. However, is it the case?

Shrinking Savings Poses a Threat to US Economy

We suggest that without the expansion and the enhancement of the production structure, it is going to be difficult to increase the supply of goods and services in accordance with the increase in the total demand.

The expansion and the enhancement of the infrastructure hinges on the expanding pool of savings. (This pool comprises of final consumer goods). The pool of savings is required in order to support various individuals that are employed in the enhancement and the expansion of the infrastructure. Given all the past and present reckless fiscal and monetary policies, we have estimated that the US pool of savings is currently most likely under severe downward pressure (see chart).

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Furthermore, neither government activities nor monetary pumping generates wealth. Consequently, within all other things being equal, in the absence of increases in wealth it is not possible to have increases in savings as a result of increases in government outlays and increases in the money supply.

Why Supply Precedes Demand?

See the rest here

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Contact Frank Shostak

Frank Shostak‘s consulting firm, Applied Austrian School Economics, provides in-depth assessments of financial markets and global economies. Contact: email.

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