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Supply And Demand, Chickens And Eggs…And Snowplows?

January 4th, 2011 · 8 Comments
Macroeconomics · Markets · The Simpsons

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…

Tags: Macroeconomics · Markets · The Simpsons

8 responses so far ↓

  • 1 Dave M. // Jan 4, 2011 at 5:03 pm

    Can we really make the same assumption that the Toles cartoon does?

    I don’t think it’s necessarily the case that there is a lack people out there who have great ideas or are willing to produce goods and services…

    Is it really a lack of motivation or funds that keeps these ideas off the ground, or is it the at-present higher barriers to entry that have evolved over time through economic regulations?

  • 2 Russ Nelson // Jan 4, 2011 at 5:15 pm

    Hrm. Suggest you read Human Action where it talks about the roles of Entrepreneur, Laborer, and Capitalist. Why do people ponder solutions to problems which are solved in Human Action already? Is it because the book in Germlish (or do I mean Engman?) is written?

  • 3 Phil Graves // Jan 4, 2011 at 5:30 pm

    Bob Clower and Axel Leijonhufud made seminal contributions toward the chicken-egg problem you raise. The latter argues that Hicks misinterpreted the Keynesian model, and Keynes erroneously went along with that (mis)interpretation. Ultimately, it seems that the problem stems from a failure to have perfect futures markets–but, of course, consumers don’t want to sign up to buy something in the future when something better might be invented in the meantime (e.g. suppose you signed up for a cathode ray TV prior to the plasmas, LCDs; that would be quite disappointing). The desire to retain generalized purchasing power rather than sign futures contracts creates all sorts of macro problems.

  • 4 Judgeetox // Jan 4, 2011 at 6:32 pm

    In respect to snowplowing- any city worth a toss will keep a hefty staff of snow-removal personell on hand; Paying them for the entire season even if this city would have a record low snowfall. Why is this?
    We’ve learned that snow-removal is a borderline essential service if a city is to continue its business.
    The cities that decided to save the money and cut their snow removal staff and rely on the private sector to handle snow removal, have almost always ended up having day to day operations disrupted, lawsuits from businesses and a general decline in service. Why is this?
    ….because in a wholly profit-motivated system of city management, short-term gains are always the issue. Nothing can be allowed to run at a loss even though doing so has certain side benefits to the community. Simply put- the benefits of keeping snow clear from all streets at the spur of the moment does not entirely benefit the private company that is doing the work.

  • 5 Chuck Dolci // Jan 5, 2011 at 12:15 am

    “…and, if the cartoon is accurate…”
    This cartoon reminds me of the old Donald Duck comics. Those of you old enough to remember will recall Donald’s fabulously wealthy uncle – Scrooge McDuck. Scrooge was often pictured diving into a basement full of glistening gold coins and greenbacks. See
    http://farm4.static.flickr.com/3261/2898462678_86927d7f85.jpg?v=0

    So when the press states that “corporations are ‘hoarding’ billions in cash” – many people equate that to Scrooge McDuck and see, as does the cartoonist, mountains of greenbacks just sittiing around doing nothing, and being outside the economy.
    Well, after a lifetime in the corporate world I can assure the readers that there are few, if any corporations, that are actually “hoarding” cash. If anyone knows of a company with a huge vault where it is “hoarding” its cash I would love to know about it.
    The reality is the cash is in banks and other investments where it is available for people and businesses to borrow – if prospective borrowers thought now was a good time to bet on the future and start building, expanding or whatever.
    Of course, some of the banks are holding onto more cash because of the new capital requirements imposed by the regulators. But the money from corporate profits is still in the economy. Corporations are not hoarding – THEY may not be spending, but they are not hoarding. The money is available for someone to spend.
    There may be very valid reasons why producers are not spending – they might be conscious of the fact that consumers are not buying,and even if they do spend and hire new workers they might just be making products that no one will buy. I don’t see that as being economically efficient. They may not be spending becasue they are uncertain both of the market and of government. Not knowing what government is going to be doing tomorrow or the next day suggests one should be cautious.
    Some people do not like the idea of “corporations ‘hoarding’ cash” because they think that such money is not available for the government to grab. They believe that the government is in a better position to decide when and how much and where to spend than is the business that actually created the money.
    Well, for those who believe that – I suggest they read these articles on California’s high-speed rail system They are going to spend ove5 $5 billion dollars to construct a rail system from two “towns” (not cities – towns – that noone has ever heard of) in California’s Central Valley. Moroever the plans and the money do not contemplate acquisition of locomotives, passenger cars, or even the electrical system to run them – it is only laying down rail and building passenger platforms – for a system that has no foreseeable date to actually carry passengers.
    See
    http://latimesblogs.latimes.com/lanow/2010/12/first-leg-of-california-high-speed-rail-project-chosen-critics-say-its-a-train-to-nowhere.html

    If I had to choose who was in a better position to decide when and if to spend money I would bet on the business that was smart enough to make the money in the first place.

  • 6 Punditus Maximus // Jan 5, 2011 at 8:12 pm

    I can’t think of a more apt description of Say’s economics than the thought of people appearing from a cornfield.

  • 7 Amarsir // Jan 8, 2011 at 8:53 pm

    How did I not know that Henry Ford quote? I’ve said versions of that myself a hundred times when talking about customer feedback, but never heard about that before.

    Great post. My instinct is to think that Keynes’ “animal spirits” have taken over and yet the Keynsian approach of pushing on a rope isn’t really the solution either.

  • 8 Phil Graves // Jan 9, 2011 at 12:08 am

    @Chuck Dolci–nice post! Asking a lot of business people to invest in capacity when their current plants can meet demand well below existing capacity. At Amarsir–the “Keynesian approach” is not the pushing on the rope, rather the pulling of the rope with fiscal policy (Keynesian tend not to believe in the efficacy of monetary policy, particularly at very low interest rate times when they view the “liquidity trap” as being of relevance).

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