Effective Supply

The fourth chapter of Organic Wealth is the longest chapter and could have been expanded to become a book all on its own.

Effective Supply defines supply side economics and how such policies are essentially giving workers and businesses the freedom to pursue income creation. This type of economic climate is most conducive for organic wealth creation.

When the entirety of supply has more freedom, income and organic wealth will flourish. I summarize supply side freedom with the statement, S ▷ D. This represents the truth that supply works to satisfy demand. The sideways pyramid points to demand because of the work required to reach a pyramid’s pinnacle.

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There is also the mathematical expression introduced that sums up the political left’s view of economic policy:

I ⇒ D = S ∝ E

The above expression represents government investments on the demand side will equal a supply output which will increase employment proportionally. This formula is the basis for just about every Democratic program, but has proven to not increase supply output and has failed to proportionally increase employment.

In this chapter, I dispute John Maynard Keynes’s theory of Effective Demand. His theory is the basis for much of the world’s economic policies today. It’s why national governments everywhere have bloated budgets and massive debts. They are all attempting to stimulate demand to increase supply which they believe will increase employment, economic growth and tax revenues.

Keynes became popular during the Great Depression with his published work, The General Theory of Employment, Interest and Money (1936). The way he clawed up the ladder, though, was to pull others down. The one I highlight in my book is Jean-Baptiste Say. He was a French classical economist who published Treatise on Political Economy in 1803. He may have been the world’s first supply side economist.

In order to promote his theories, Keynes cast blame for the depression on classical economists. He misinterpreted the teaching of Say’s Law of Markets to the point where he convinced the public and government officials his prescriptions should be followed instead. His policies put an emphasis on consumption.

Say’s Law of Markets

John Keynes summed up Say’s Law with the line; supply creates its own demand. By leaving out context, he deceived many people to believe they’ve been following economic teachings from the past that still hadn’t been disrupted by reason and the Age of Enlightenment.

Keynes misinterpreted Say’s Law by claiming it meant that all anyone would have to do is supply something and it would automatically be met by an equal amount of demand. So if Harry created 1,000 guns out of toothpicks, he would be able to sell them because demand would just materialize. This, of course, is absurd and is not what J. B. Say believed.

Nonetheless, Keynes convinced people classical economic thought was the cause for the Great Depression. If Say’s Law was true, using Keynes’ logic, then how could there be such a demand shortfall and high unemployment?

It’s obvious Keynes taught this false interpretation. In Organic Wealth, I cite three instances that reveal his false definition of Say’s Law of Markets. All three are from his General Theory book.

We know Keynes’s narrative is false just by looking at some of Say’s contribution to economics:

  • Say coined the term utility which was what he believed ultimately determined the price of an item and not its cost.
  • Say believed markets would eventually clear by lowering the price. This was how gluts and overproduction could be alleviated.
  • He believed the entrepreneur, a word he created, was the fourth factor of production because they have to use the other three factors and balance the risk/reward to produce products that will sell for a profit.

So if Keynes was right about Say’s Law, then none of the above would be Say’s teachings. All that would be necessary would be haphazard production.

Supply creates its own demand plainly means that in order to demand goods and services within an economy, you have to supply something first. But supplying something doesn’t mean building toys out of toothpicks and selling them as instruments of war. It means supplying something that meets demand. If demand is met, then income is created that can be used to demand other products, services and investments.

Say’s Law is most obvious by looking at workers in a labor market. These are people who supply labor to employers in exchange for a paycheck. It isn’t until the workers are paid, that they are then able to demand products that’s equal to their income. This is Say’s Law.

The truth of Say’s Law, according to Say himself, shaped good government policy which would be those policies that encourage production. In other words, people and businesses should be working to satisfy demand so that they themselves would have the means to demand products and investments.

Say also believed bad government policies were those which encouraged consumption. It’s bad policy because it doesn’t address developing the means for oneself in order to demand. If people don’t have the means, then some government investment becomes necessary.

As you may have gleaned, Keynesian and supply side economics emphasis the opposite sides in relation to political economy. One side requires massive government investments while the other more freedom. In Effective Supply, I make the case more freedom is the best policy.

You can read much more about what makes good government policy by reading Organic Wealth. It’s not free, but then again neither is a Chipotle bowl that I wish to demand.

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