The Myth of Insufficient Demand

Following the ideas of Keynes and Friedman, most mainstream economists associate economic growth with increases in the demand for goods and services.
Both Keynes and Friedman felt that The Great Depression of the 1930’s was due to an insufficiency of aggregate demand and thus the way to fix the problem is to boost aggregate demand.
For Keynes, this was achieved by having the federal government borrow more money and spend it when the private sector would not. Friedman advocated that the Federal Reserve pump more money to revive demand.
There is never such a thing as insufficient demand as such, however. An individual’s demand is constrained by his ability to produce goods. The more goods that an individual can produce the more goods he can demand, and thus acquire.
Note that the production of one individual enables him to pay for the production of the other individual. (The more goods an individual produces the more of other goods he can secure for himself. An individual’s demand therefore is constrained by his production of goods).
Note again demand cannot stand by itself and be independent – it is limited by production. Hence, what drives the economy is not demand as such but the production of goods and services.
In this sense, producers and not consumers are the engine of economic growth. Obviously, if he wants to succeed then a producer must produce goods and services in line with what other producers require.
According to James Mill,

This post was published at Ludwig von Mises Institute on Dec 29, 2017.

 

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