Monday, November 5, 2012

Supply Creates Its Own Demand

"If I can just get this home, I just know it will sell."

Big!Lots! thrives on this error.  So many people are so convinced this thing that delights them will sell so well the problem is reduced to logistics "just get it to the home market."

Always reform these impulses as a hypothesis and test it.

The error comes to us probably from human nature, but that "supply creates its own demand" is attributed to J.B. Say.  No record of that.  We only have Keynes word for its attribution to Say.  James and John Stuart Mill, delusional economists said it, but not Say.  And it does not even sound like Say. So it is a classic straw man argument.

What Say did say was:

In Say's language, "products are paid for with products" (1803: p. 153) or "a glut can take place only when there are too many means of production applied to one kind of product and not enough to another" (1803: p. 178-9). Explaining his point at length, he wrote that:
It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J. B. Say, 1803: pp.138–9)[4]
He also wrote, that it is not the abundance of money but the abundance of other products in general that facilitates sales:
Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another.[5]

To say supply creates its own demand does not reflect the above.  It says products are worth that which someone will trade another product. Not really controversial, that idea.  And what Say sets up is the division of labor required, and wealth reflected, in ever more options, ever more affordable.  But wealth comes from producers.  Keynes wanted to say wealth can come from government intervention.  Hence supply, of anything, will create demand.  Say would caution, supply of what, demand by whom, at what price?  Keynesian economics never addresses obvious problems.

When someone posits "If I can just get it here, it will sell" they are acting on a false premise, that their feelings accurately reflect market demand, and conforms with the erroneous Keynesian principle that supply creates its own demand.  Human frailty supported by government supported academic lunacy.

Head away from the voodoo-based economics department and take a lesson from the hard science philosophy department, specifically logic. Form a hypothesis and test it.

"All my friends like it."  All your friends are not your market.  That is the error of the narrow basis of comparison.  Your friends are too small of a sample to prove anything.  Make your implicit premise explicit.  Reform the premise as a hypothesis: since all my friends like this, so will everyone else.  Test that hypothesis.  Get a sample in front of "everyone else" or representatives thereof, such as retail store buyers.  See what they say.  When they say "are you kidding?!"  you will be glad you only have samples.

If you had already bought the goods, believing in Keynesian economics, that supply creates market, you would have a garage full of that which only Big!Lots! will buy at 5 cents on the dollar you paid for the garage full of supply.  Aren't you glad you only have samples?

And you also have feedback, so it is not a total loss.  From there you can build on what you learned.  and start up a company that actually supplies what people demand.

Feel free to forward this by email to three of your friends.


0 comments: