A question to you of a chicken and egg sort.
If you have a group of people in a flat empty world with nothing in their possession, how do you get them to have things? Would you:
A) Give everyone pieces of paper with faces on them, call it money, and tell them to wait for someone to devise a way to accumulate those pieces of paper for himself, and hope that the means he devises results in people getting stuff?
B) Or would you give them tools, machines, and other various means to produce things they want? Would you give the knowledge and the means to make the tools?
The answer here should be obvious. Yet, I am always astounded to hear people say that the way to generate economic growth is to stimulate demand, or speak as if the money itself has some kind of intrinsic value. Demand is an artifact; it is a consequence of production, not its progenitor.
It wasn’t the vast network of highways that induced Henry Ford to start building cars. It wasn’t the airport runway that induced the Wright Brothers to put wings on a lawnmower. And it isn’t the existence of currency that induces people to make things. We make things because we want things. Money is merely the means by which we coordinate and communicate our individual desires and interests to others. If no one else is making anything, currency doesn’t communicate anything.
A currency is not a measure of the total demand. It is a measure of overall production. The dollar is the inch on this yardstick. I explained it this way the other day: If you have a length of rope, and you wish it were longer, you don’t make a longer rope by making more notches in your yardstick, and call the new divisions “inches”. You still have the same length of rope, just smaller units of measure. Your inches are shorter, and it is a deception to say that just because now it takes more “inches” to measure the same length of rope, that you have a longer rope.
So consider this when someone claims that the economy isn’t growing because no one has money, or that companies are hording it all. Well, that makes just about as much sense as saying you have a shorter rope because you’ve erased some notches and now your “inches” are longer.
Of course, there is a general kind of demand that the production takes advantage of, but this is a generic phenomenon that doesn’t change or modulate in intensity. A demand for the needs and comforts of life are not specific, and are always present. But the means by which they are satisfied are specific and can take an infinite variety of forms.
So it is not merely enough that humans will always want and demand ways to conserve their energy and save labor. That is a given. Nor can that kind of demand be stimulated by giving out pieces of paper.
Nor will handing out pieces of paper get you from point A, that generic, formless and inchoate sort of demand to something as specific as an internal combustion engine — the internal combustion engine being only one way that general demand can be satisfied. To perhaps borrow from Keynes’ interpretation of Say’s Law, the production of internal combustion engines creates a demand for internal combustion engines.
Filed under: Economic Theory