Government “Stimulus” Schemes Fail Because Demand Does Not Create Supply
By popular thinking, the key driver of economic growth is the increase in total demand for goods and services. It is also held that overall output increases by a multiple of the increase in expenditure by government, consumers and businesses.
It is not surprising, then, that most commentators believe that through fiscal and monetary stimulus, government can prevent the US economy falling into a recession. For instance, increasing government spending and central bank monetary pumping will strengthen the production of goods and services.
It follows then that by means of increases in government spending and central bank monetary pumping the authorities can grow the economy. This means that demand creates supply. However, is it the case?
Why Does Supply Precede Demand?
In the free market economy, wealth generators do not produce everything for their own consumption. Part of their production is used to exchange for the produce of other producers. Hence, production precedes consumption, with something exchanged for something else. This also means that an increase in the production of goods and services sets in motion an increase in the demand for goods and services.
According to David Ricardo:
No man produces but with a view to consume or sell, and he never sells but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person.
Note that one’s demand is constrained by one’s ability to produce goods, and the more goods that an individual can produce the more goods he can demand. If a population of five individuals produces ten potatoes and five tomatoes—this is all that they can demand and consume. The only way to raise the ability to consume more is to raise their ability to produce more.
On this James Mill wrote:
When goods are carried to market what is wanted is somebody to buy. But to buy, one must have the wherewithal to pay. It is obviously therefore the collective means of payment which exist in the whole nation constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do t
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