Unlike the famously unanswerable question “what came first, the chicken or the egg,” the economic question of what comes first, Supply or Demand, is easily answered. It’s not rocket science. Without consumer demand, nothing happens, regardless of how much capital businesses have on hand.
Entrepreneurs and inventors do not begin by asking themselves “how much will it cost to make” or “what capital will be required to begin.” These things become important later in the process, but the process begins by identifying a want or need that consumers have that is not being filled. How many people will need or want my product? How many people will be able to afford it? How much will they be able to afford to pay for it? The answer to these questions is what drives innovation and business growth.
It is true that, when businesses and corporations have cash on hand, they can grow their business by investing in increased production and hiring more people. BUT, this ONLY happens if the consumer demand for their products and services is high enough to justify an increase in production. No business person in their right minds is going to invest in increased production if there is no consumer demand for their products!
So, what factors influence the level of consumer demand for a product or service. The two main types of demand are determined by what consumers NEED and what they WANT. Everyone NEEDS the bare necessities of life, like food, shelter, and health care. The need for these things is fairly static and is not impacted by cost, availability, or affluence. Just because these things become expensive does not mean that people can afford to go without them. Conversely, as people become more affluent, the quality of the necessities they purchase may continue to increase, but not the amount. If you are not hungry, you are not going to order more food at a restaurant. One can own only so many houses, and if you are not sick, you’re not going to be spending a lot more on health care. So basically, consumer demand for the necessities of life is tied more closely to how MANY people there are, not how much money they have.
The 2nd category of consumer demand involves what people want to have or would like to have, and this is directly tied to their discretionary income – income that is above and beyond what is needed for the basic necessities of life. Discretionary demand is by far the largest component of consumer demand, and it is the most variable and volatile type of demand. This is where most of the opportunity for economic growth and increased profits lies. And this kind of demand is tied directly to how much discretionary income consumers have.
The economic law of Supply and Demand basically says that, if the Supply of a product increases, the price is reduced due to competition, and this stimulates increased demand. But businesses can not and will not reduce their prices to a point where they are losing money. On the other side of the coin, if Demand increases, then consumers are willing to pay more, and this stimulates businesses and corporations to produce more – Supply increases to satisfy Demand. And if businesses and corporations do not have enough cash on hand to increase production or enter a new market? Well, there is a whole segment of the economy dedicated to providing the funds necessary – banks and other financial institutions, and venture capitalists. If you can demonstrate unfulfilled Demand for your products, you will have no problem obtaining the cash, but if there is no demand for your products, then banks will not lend you money, venture capitalists will not invest in your business, and there will be no competition in your market.
So, I assume that all Americans want a robust and growing economy, increasing profits, and a higher standard of living for all. So, what economic policies should government institute to cause this to happen? The rhetoric from the Right and the GOP would have you believe that “Trickle-Down Economics,” another name for Supply-Side economics, is the way to go. They talk about the “Job-Makers,” and say we need to have more tax breaks for the wealthy, subsidies for corporations, and lower wages for employees, all so that businesses can afford to increase production and create more jobs. And when doing this results in huge government deficits, out of the other side of their mouths they try and tell you that we have to cut social programs and reduce funding for the Arts and other programs to reduce the deficit.
This strategy is, of course, trying to put Supply before Demand, and as such is fatally flawed. In fact, cutting social programs and not increasing the minimum wage is actually reducing the amount of discretionary income consumers have, and thus reduces discretionary demand for products and services. Think of it this way: if you were a manufacturer of toasters and coffee makers, or a retailer selling these items, what do you think would better stimulate the economy and make your business more profitable, having the government give a million dollars to each of a hundred billionaires, or having the government give a hundred dollars to each of a million poor or middle class folks? How many toasters or coffee makers do you think the hundred billionaires will buy?? How about the million middle class and poor folks who now have an extra hundred dollars to spend?? As I said, it isn’t rocket science, it’s common sense.