The notion that all economic crises are based on the money supply misreads how the market economy works. Demand does not precede production. Giving money to consumers or to banks to lend to consumers cannot bring something into production. Rather, it is production that generates demand. The investor creates a production process and produces a new product. The new product, as introduced to its appropriate market, meets needs that express themselves as consumer demand. Coal mine owners in England were not sitting around in 1690 saying to themselves, we wish we had steam engines to lower the cost of moving the coal out of the mines. Steam engines hadn't been invented then. It was the invention of the engines, their demonstration to the coal mine owners by their inventors, and the demonstration of cost savings, that created the industrial "demand" for steam engines. Similarly, midwestern US farmers in 1880 didn't sit on their horse-drawn or steam engine powered combines saying, we wish we had gasoline fueled internal combustion engines to power our farm machinery. Those engines were yet to be invented. When they were invented, it took nearly a generation to get the internal combusion powered tractor widely adopted on farms. The demand for such tractors was created by their manufacturers, by insurance companies eager to keep farms solvent, by railroads wanting to increase farm production and so product railroad loadings, by agricultural experiment stations, and other interest groups. When consumers have entered into creation of demand, often they have acted as quasi-investors or producer, rather than consumers. They stepped across the bridge, in other words, from consumer to producer (or agent of production). Women historians have shown repeatedly how, by the end of the nineteenth century, women's interest groups (from sewing circles, to cooking clubs, to better homes groups, e.g.) tried to modify production of products. Better fitting products (shoes, refrigerators) to consumers actualized demand.
When looking at the emergence of demand, we should begin by examining the way the investor, entrepreneur, and producer view potential need, latent demand, and actualized demand of their new product. From this perspective of economic behavior, the current efforts to get us out of our economic crisis by flooding banks with money are a mistake. We might need to save the banks and financial system, but that's not the total of our problems. We're missing the bridge between lendable money and production, because we looking at the link between lendable money and consumer demand. We need to look at the linkage between money, government regulation, investment, and production. We need to make increased investment and production possible. The investors and producers will identify potential needs, create consumers of products, and actualize demand. Then we'll be walking our way out of the crisis.
Recent Comments