Opinion from a Libertarian ViewPoint

Government “Stimulus” Schemes Fail Because Demand Does Not Create Supply

Posted by M. C. on July 28, 2022

Hence, supply drives demand, not the other way around. Increases in government spending result in the diversion of savings from the wealth-generating private sector to the government, thereby undermining the wealth generating process. Likewise, monetary pumping sets in motion the wealth diversion from wealth generators toward the holders of pumped money.

Frank Shostak

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

It is not surprising, then, that most commentators believe that through fiscal and monetary stimulus, government can prevent the US economy falling into a recession. For instance, increasing government spending and central bank monetary pumping will strengthen the production of goods and services.

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?

Why Does Supply Precede Demand?

In the free market economy, wealth generators do not produce everything for their own consumption. Part of their production is used to exchange for the produce of other producers. Hence, production precedes consumption, with something exchanged for something else. This also means that an increase in the production of goods and services sets in motion an increase in the demand for goods and services.

According to David Ricardo:

No man produces but with a view to consume or sell, and he never sells but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person.

Note that one’s demand is constrained by one’s ability to produce goods, and the more goods that an individual can produce the more goods he can demand. If a population of five individuals produces ten potatoes and five tomatoes—this is all that they can demand and consume. The only way to raise the ability to consume more is to raise their ability to produce more.

On this James Mill wrote:

When goods are carried to market what is wanted is somebody to buy. But to buy, one must have the wherewithal to pay. It is obviously therefore the collective means of payment which exist in the whole nation constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do they not consist in its annual produce, in the annual revenue of the general mass of inhabitants? But if a nation’s power of purchasing is exactly measured by its annual produce, as it undoubtedly is; the more you increase the annual produce, the more by that very act you extend the national market, the power of purchasing and the actual purchases of the nation…. Thus it appears that the demand of a nation is always equal to the produce of a nation. This indeed must be so; for what is the demand of a nation? The demand of a nation is exactly its power of purchasing. But what is its power of purchasing? The extent undoubtedly of its annual produce. The extent of its demand therefore and the extent of its supply are always exactly commensurate.

Expanding Pool of Savings Is the Key to Economic Growth

See the rest here

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