Friday, September 13, 2013
In A Real Economy: Supply is Demand
In a healthy and sustainable economy, supply equals demand. Therefore it's very ironic that Keynesian (Demand-Side) policies have failed for the very similar same reasons that Supply-Side policies have failed i.e. they both create a totally unsustainable imbalance between supply and demand...
An Economy Is Born
According to Say's Law, "products are paid for with products"- which in a pure trading-based economy, is highly intuitive. One type of product gets paid for with another kind of product. Pure trading involves simultaneous supply and demand on the part of both constituents. You demand an orange and supply an apple. I demand an apple and supply an orange. An economy is born.
Unfortunately, the introduction of money as both a trading exchange and store of value, obfuscated that intuitive AND inextricable link between simultaneous supply and demand. Modern economic theory therefore branched in two main directions - demand side and supply side. Keynesians (demand-side) envisioned a world where a "consumer" could demand something without also having to create something in return. The structurally high unemployment of the type we face now is purely a function of a 30 year one-way trading system in which the U.S. is no longer competitive in supplying things that other countries want. This structural issue can't be addressed by handing out free money. That said, anyone who has read Keynes' works knows that he in no way envisioned a 30 year consumption binge paid for with debt and mass outsourcing. He was primarily addressing the 1930s demand collapse and how to support demand while alleviating the crushing poverty of mass unemployment. Even Jean-Baptiste Say shared these concerns, as did Adam Smith. They were all aware that boom and busts can occur thereby bringing deflated economic activity across the board. ("Austrian school" economists insist that all boom and busts are caused by credit expansion, but I will leave that aside for now...). In any case, I would not call the U.S. economic paradigm of the past 40+ years a true Keynesian revolution, because relative to other socialist nations, the U.S. social programs pale by comparison - even compared to Canada, specifically around welfare and unemployment benefits. I would more call call the U.S. paradigm Keynesian-lite or "Foodstamp plus", just barely enough social support to preventing rioting in the streets as the country was sold off to the highest bidder. No more, no less.
On the other hand, Supply Side economics - which has been the true dominant paradigm in the U.S. for past decades - has been a catastrophic failure because it systematically concentrated Supply in the hands of fewer and fewer people. Walmart et al. displaced millions of small businesses, therefore small business supply (and hence demand) was reallocated to Walmart's miniscule base of ultra-wealthy shareholders. Meanwhile, the supply value accruing to Walmart's employees at minimum wage was massively marginalized and therefore so was their potential demand. The difference in demand value between the new minimum wages and prior higher wages was merely papered over with debt in the interim so that the Walmart shareholders could pretend that they still had a consumer base even though they had systematically destroyed their own demand. Supply and demand are now totally out of balance from a longer-term perspective. Without continued debt accumulation, demand would collapse. Which is why I have maintained all along that today's historically unprecedented level of corporate profits are a temporary illusion. The large-scale multinational companies that exist today are primarily just hollowed-out marketing shells. Few of them actually still make anything anymore since industrial arbitrage has been the overwhelmingly predominant business strategy of the past several decades i.e. the real assets are gone. The Chinese are no fools, they are playing a long-term game of industrial/economic chess based on competitive advantage. Astonishingly, they managed to bribe/con the frat-boys in the corporate country club into dismantling and shipping their own economy overseas in broad daylight, all while U.S. buffoons in leadership and media spent their time debating whether or not the U.S. is "exceptional". Even at this late juncture, the stunned dunces in leadership still have not realized the basic fact that trading "freely" with countries that have no labour/environmental standards, merely means that your own country will either end up with no labour/environmental standards, or will be bankrupt. That's arbitrage, Wall Street's oldest trick.
My main point in this was not to give an economics lesson it was to point out in layman's terms that fundamentally the current paradigm is totally out of balance - well beyond that indicated by the continuing unidirectional flows of money. Ultimately, until supply and demand get back into balance both via external fair trade agreements AND via internal leveling of the playing field between small and large business, then the dysfunctional economy that we have now will persist. In the long-term, supply must equal demand or markets will inevitably collapse due to accumulated imbalances.
Posted by Mac10 at 5:29 AM