Here is a Little Economics Lesson
Here’s a little economics lesson: supply and demand. You put the supply out there, and demand will follow. — Rick Perry, U.S. Secretary of Energy
While the media is having fun at the expense of Secretary Perry’s asinine “economics lesson” it is worth pointing out that the very same publications that ridicule Perry perpetually peddle the exact same theory under the guise of “debunking” the imaginary lump-of-labor fallacy. Here is The Economist from yesterday telling its readers that the demand for goods and services is infinite:
By the 1990s governments and employers realised they were making pension promises they would not be able to keep. The idea that there is only a finite number of jobs to go round—the “lump of labour”—was more widely exposed as a fallacy. It became fashionable to argue that “we must work till we drop.”
Just for the record, the number of jobs to go round is indeed finite. The demand for goods and services is limited by the funds and credit available to consumers to purchase them and the time available to consume them. Those funds and credit are, in principle, limited even though those limits are, in practice, quite malleable and difficult to pinpoint. Expansion of credit beyond those limits invariably leads to collapse when debt loses its “credibility” — which is to say the reasonable expectation that the debtor can continue to service the debt.
Perry may be a total fool but he is only parroting what he has been taught by… “economists.”
In its simplest form, Perry says supply leads demand. Is that true?
Sure, supply keeps the inventory flush, demand is emptying inventory. I would think.
Funds and credit can keep up. When the bank sees loans spike, it delivers a surprising interest charge, and the agent will smooth its demand and reduce inventory volatility. And visa verso for deposits and interest payments.
Credit defaults are normal, and rare. But since the interest charges are immediate, the agent generally ramps down to early exit, avoiding massive losses.
The question is technology. Since the Nixon shock, the central bank has applied surprising interest charges and payments about ten times, twice per recession cycle. It also applies a surprising interest charge once per generation, and if we have not updated out government programs, the adjustment can be painful.
But every generation we stop and upgrade money technology and get better at this. Through the Nixon shock until now we have not started one world war, and that is a lot better than the last two previous applications of a surprising interest charge.
Much too complicated, Matthew. The classical theory refers to what happens (ideally) in the market. Period. You can wave your arms all you want about what the central bank does or should do or can do but that has nothing to do with the classical theory. The classical theory is about a SELF-ADJUSTING market mechanism. No fair tweaking it unless you are going to REJECT it.
The Nixon shock was really the DeGaulle shock in 68 which also comes to the point when inflation started rising in the US due to monetary uncertainty.
“Perry is certainly be a total fool . . . ”
Fixed it for you.
“You put the supply out there, and demand will follow.”
Perry is correct; he just omitted the “price” component. With most, not all, commodities and situations, if you increase the supply, the price will drop. When the price drops, more consumers can afford the product and demand increases, particularly with an input like energy. When energy prices fall, more and more projects become economically feasible.
It is Econ 101.
You forgot “all other things remaining equal.” So, yeah, Perry is correct — except for the key parts he omitted: price and abstraction from reality.