If you were paying attention in your econ 101 class, you probably remember that the supply and demand model was presented as a reasonably simple setup that explains how market prices and quantities get determined. What the model glosses over is the inherent chicken and egg problem with markets- for example, what’s the quote from Henry Ford about how if he had asked people what they wanted they would have said faster horses? So what comes first, supply or demand? (And which one is the chicken and which is the egg?)
In one corner, we have classical economists (and later supply-side economists) who pull out Say’s Law, which states that “products are paid for with products.” This implies that production is the key to getting the economy moving. John Maynard Keynes later stated Say’s law as “supply creates its own demand”, but this is regarded to be somewhat of a misinterpretation of the original principle. Nonetheless, supply-side economists seem particularly fond of this formulation. In any case, let’s think of one side of the debate as the “if you build it, he will come” principle…and yes, I am now envisioning John-Baptiste Say emerging from a cornfield in Iowa, in case you were curious. I’m also pretty confident that if that did happen, Say would be pretty annoyed to see things like this:
That’s pretty much the chicken and egg problem in a nutshell, and, if the cartoon is accurate, the supply side isn’t doing a whole lot to solve it. Keynes would have argued that this is because (again, taking liberties) “demand creates its own supply” rather than the other way around. I guess you can think of Keynes’ hypothesis as the whiny child who keeps asking for a pony and eventually manages to make the pony appear.
In practice, it’s entirely plausible both Say and Keynes are right in a sense, and the disagreement usually comes up when politicians are debating tax cuts for people versus for corporations, etc., where there is clearly more in play than just direct economic considerations. That said, I will acknowledge that it’s hard to decide what to supply when it’s unclear what people would demand if they had the money to do so. (Even Say acknowledges that the system breaks down when productive resources aren’t matched with what people want to consume.) On the other hand, it’s easy to decide what to supply when demand (or nature) smacks you in the face with it. From the New York Post:
While the blizzard buried the city in misery for three days, Danny DiLorenzo turned the snow into cold, hard cash.
The mercenary plower shoveled in $10,000 since the storm kicked up Sunday — that’s $500 an inch.
DiLorenzo, 41, who runs a glass and storefront business when it’s not snowing, said that behind the wheel of his white pickup, which advertises, “No favors, F- -k You Pay Me,” the streets seemed paved with gold.
I can’t help but think that companies would also be more than happy to start hiring in order to take an advantage of an opportunity if they saw one. I mean, if Homer Simpson can figure it out…