Which came first, supply or demand? At first blush this question appears to be of the intractable “chicken and egg” variety, however upon closer inspection we find the correct answer: Supply. How so? Surely no one will supply something if there is no demand. In order to solve this riddle we must first understand what is meant by “demand.” In the vernacular it means mere want or desire, however in economic parlance the meaning has a subtle and important difference. Demand is both the desire AND the means to fulfill that desire. In other words, it’s not enough just to want something; you must have something to offer in exchange.

No one can demand something until AFTER they themselves have produced something.

 

Why are demand and desire not economically equivalent? Consider the following: how relevant are people with no money at an auction? If we define demand as mere desire then as human desires are unbounded so too must be demand. Since we know there is not universal infinite demand for every good (i.e. infinite prices), we then know that demand and desire cannot be equivalent for economic purposes. However, desire does play a role. It is the spark that determines what should be produced. Entrepreneurs gauge market desires in order to determine the things that are a safe bet to produce while accounting for people’s ability to pay for such new goods (e.g. high desire/low affordability: people desire flying cars, but few could afford them, low desire/high affordability: nobody desires mud pies even though they could be affordably made, and high desire/high affordability: smartphones are desirable and since they could be affordably produced, they were).

So, if I want what Joe has, I have to two choices: (a) I can take it from Joe by force (the warrior path) or (b) I can produce something Joe wants and trade with him (the market path). In order for me to “demand” something I must first produce (supply) something. No one can demand something until AFTER they themselves have produced something. If Joe and Greg exist alone in the universe we can demand things all we want, but none of those demands will be met until we first produce something. Therefore supply must come first.

So if supply comes first, then where does job creation start, from those that spend money (demanders) or those that save it (suppliers)? Popular opinion and a Keynesian worldview err in the belief that demand drives job creation, but that is mere superstition. Logic clearly demonstrates it is savings that are the source of new jobs. It might seem intuitive that spending would create new jobs, after all, that money eventually goes to pay workers, right? True, but applauding the result of production (demand) while ignoring the source of such demand (supply) is a disingenuous attempt to ignore reality: that jobs are produced from saved funds. Policies that ignore reality and promote spending at the expense of saving can do nothing but harm job growth.

To understand why savings are critical to new jobs we must spiral all the way back to a business’s inception. What was the source of funds to pay those first workers before anything they had produced was sold? It came from the invested capital of the owners of the business, i.e. their savings (profit from prior ventures). To make this point a bit clearer imagine the following: all businesses decide to disburse all profit as bonuses to their employees, so all business net income is $0. Should be great for the economy right, all that extra cash floating around? Not really, the increased demand cannot be met because businesses have no unused funds (i.e. saved profit) from which to hire any new employees or purchase equipment. If they hired any now it would have to be on the condition that they could not be paid until the things they produced actually sold. Of course they can lower the pay of the other workers, but that’s my point, the funds withheld to lower the pay represents what was previously characterized as profit/savings: only profit/savings can create new jobs. Every attempt to redistribute it or tax it only undermines the job creation process.

So this begs the question, since companies have a lot of saved funds and profit why isn’t there more job creation going on now? The answer to that question will have to wait until next week…