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Artificial Demand

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Lathanar

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(Mod's note: Split from

another thread, on the "Great Depression")

Bad loans do not cause economic growth; not when the loan is made; not in the years thereafter; and not when the loan matures and fails to be repaid. All a bad loan does is it increases the borrower's consumption (and decreases the lender's); it does not affect production.

I would think that bad loans to allow consumers not normally able to buy a product to buy would create an artificial demand so prices did not go down in relation to the excessive output. When people began defaulting on loans and returning the products, inventory levels soared and plants put people out of work because that demand was suddenly gone. If they had increased wages at the same rate production was going up then there would have been more demand for the products they produced without need of loans.

Edited by softwareNerd
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All a bad loan does is it increases the borrower's consumption (and decreases the lender's); it does not affect production.

I would think that bad loans to allow consumers not normally able to buy a product to buy would create an artificial demand

I see you've learned your lesson from Professor Keynes. I argue that the loan does not affect production, to which you respond by talking about consumers and demand, apparently oblivious to the argument I've made.

A loan is when I allow you to spend a dollar I have made (in exchange for repayment with interest later). So I spend one dollar less, while you spend one dollar more. What difference does this make to the producers? None.

There is no such thing as "artificial demand." Demand means that people are both able and willing to exchange given quantities of a certain good (typically money) for another good at given rates. And if a person is able to pay for something, that means he has the wherewithal to pay--the money--which in turn means that he or his creditor has produced enough to offer in exchange for what he's buying. The money is merely the means of exchange; it is the amount of production that matters. Wherever there is money, there are goods that have been produced by somebody--either the buyer or a creditor who trusts the buyer's ability to produce in the future--so the demand is real, not artificial.

excessive output

There is no such thing as excessive output. Production is the creation of values; producers may now and then be wrong about what kinds of things to create--in which case they destroy value, and their production won't figure into the economy's output--but as long as they can profitably sell their products, they are creating values for both themselves and their customers, which can never be a bad thing. To say otherwise would be to say that values are not valuable--an obvious contradiction.

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I have never heard of Keynes nor am I an economist, so you'll have to forgive me.

I see it, as a layman, that if I am producing a product and there are people wanting to buy my product but they are unable to afford it at the prices I am asking, then if I am letting them buy my product with a promise to pay me, not with money, I see that as creating artificial demand for it, not letting the price decline to where it should be. If there's a different term for it, then use it instead, I don't know what it is.

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I have never heard of Keynes nor am I an economist, so you'll have to forgive me.

Unfortunately, you don't have to have even heard of him. He's the source of almost all of the theories taught in almost all of the schools today. And he is absolutely dead wrong.

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So you came up with the terms "artificial demand" and "excessive output" on your own? Color me skeptical.

I'll color you purple and green if you want. That is my terminology. I have no idea where I first heard them, either the news or business articles of which I read a lot or any other place. If there is a more fitting terminlolgy for scenario I was saying about, let me know.

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I have no idea where I first heard them, either the news or business articles of which I read a lot or any other place.

The business articles you read were probably written by Keynesians. You shouldn't accept the assertions and implications of such articles uncritically; most of the time, they are wrong.

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The business articles you read were probably written by Keynesians. You shouldn't accept the assertions and implications of such articles uncritically; most of the time, they are wrong.

Well, until someone gives me a better term for it, I'll stick with artificial demand. I'll also stick with excessive output being having too much inventory and no buyers for your product unless you sell at a loss. That is until someone can give me a better term.

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A loan is when I allow you to spend a dollar I have made (in exchange for repayment with interest later). So I spend one dollar less, while you spend one dollar more. What difference does this make to the producers? None.

Doesn't propensity to spend enter into this equation? If you loan someone a dollar that you were going to save and not spend then someone else spent one dollar more while you spent the same amount. That would make a difference to the producers.

There is no such thing as excessive output. Production is the creation of values; producers may now and then be wrong about what kinds of things to create--in which case they destroy value, and their production won't figure into the economy's output--but as long as they can profitably sell their products, they are creating values for both themselves and their customers, which can never be a bad thing. To say otherwise would be to say that values are not valuable--an obvious contradiction.

Are you saying that producers can only be wrong about what kind of thing they produce and not also err on the volume of production, too. If someone comes up with a product that has a valid niche in the market, are you saying that the producer can not makes too much of the product? I mean, there is a certain demand for every product (from 0 to heaping lots) and it is physically possible to make more of your product than there is demand for it.

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Well, until someone gives me a better term for it, I'll stick with artificial demand. I'll also stick with excessive output being having too much inventory and no buyers for your product unless you sell at a loss. That is until someone can give me a better term.

Here's a better term for you: INVALID CONCEPT. I have explained to you why such things don't exist, but you continue to ignore my arguments. Why?

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I see you've learned your lesson from Professor Keynes. I argue that the loan does not affect production, to which you respond by talking about consumers and demand, apparently oblivious to the argument I've made.
If the demand for a certain type of good increases, then production is likely to increase also (if people start wanting lots of pencils, someone will probably start diverting his resources into increasing pencil production in order to satisfy the market). Similarly if demand for a good decreases, then production will tend to decrease also (noone is going to make pencils if they arent selling). Since people in different economic classes sometimes have different buying patterns, any change in the distribution of money between classes is going to increase the consumption of the classes involved, and hence increase production of the goods they buy, for reasons given above. If banks start granting large loans to people of low economic class, then you would expect to see a rise in the consumption of goods aimed at poorer people, and the associated changes in production that comes with it. None of this is Keynesian economics, its just common sense. If people with blue skin like to eat caviar but cant normally afford it, and banks start randomly giving blue skinned people money, you would expect the caviar market to change.

I agree that 'artificial demand' is generally an invalid concept though, but its still true that markets can be significantly (and deliberately) affected by unsustainable short-term trends. The latest pop-star or 'must have' Christmas toy are good examples of this (taamagotchis/furbies and so on), as is the dot com crash on a slightly larger scale. One context in which 'artificial demand' is definitely valid is when it comes to government interference. If there was a law saying that everyone had to own at least one red hat, then this would be a fairly good example of artificial demand (on a less ridiculous level, theres probably an artifical demand for college education today, since the large number of students getting government subsidies means that most people end up going to college, with the result that you pretty much have to go to college if you want a decent job).

Edited by Hal
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CF, I don't understand the logic of that post.

There is no such thing as excessive output. Production is the creation of values; producers may now and then be wrong about what kinds of things to create...

This means that there is "production" of goods that nobody wants. (i.e. excessive output)

Just redefining production so that it means profitable production (creation of value) won't help here.

...in which case they destroy value, and their production won't figure into the economy's output --but as long as they can profitably sell their products, they are creating values for both themselves and their customers, which can never be a bad thing.

Here you contradict yourself in saying that people do want the products even though you accepted right before that it could be that they don't.

Not all creation is profitable. You said that yourself.

And why don't unprofitable goods enter the economy? It's the only way to cut your losses. Here you redefine output so that it means profitable output. Again: it's only a redefinition of terms.

To say otherwise would be to say that values are not valuable--an obvious contradiction.

This doesn't follow from the above.

It just means that it is possible to do a lot of work and then have nobody who wants the end result at a price above your costs. Something that happens everyday.

According to your new definitions, which make everything profitable , well, by definition, this of course couldn't happen. But it does. There are books that can't be sold profitably (even though they are made) and most movies end up with a loss and it's only the bestsellers and blockbusters in between that make the respective companies profitable in the end.

You can't just redefine the core terms in the middle of the argument to prove an invalid point.

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Doesn't propensity to spend enter into this equation?

The marginal propensity to spend is always one, or very close to it. The marginal propensity to consume may be less than one, which means that you save some of your earnings, but most of what you save will end up being invested--in other words, spent on capital goods.

As I wrote on another thread, a penny saved is simply a penny spent by somebody else. The only way to make a penny and not have it spent is to keep it in a yieldless form (gold, coins, or bills), which you wouldn't want to do beyond your current payment needs. A bank account is safer, more convenient, and yields interest too. And the cash you keep for your current payment needs is cash you are going to spend.

If you loan someone a dollar that you were going to save and not spend

Loaning the dollar IS saving it.

Are you saying that producers can only be wrong about what kind of thing they produce and not also err on the volume of production, too.

Let's put it this way: They can err on the particular mix of products they create. Say, they could make a million apples, a hundred cars, and zero spaceships, when in fact they would be better off making a hundred thosand apples, a thousand cars, and four spaceships. But it can't be that they make too many apples AND cars AND spaceships AND anti-cancer drugs AND hurricane prevention technologies AND crime investigation innovations AND everything you can concieve of. There can be no general overproduction ; as long as there is life, there will always be "problems," which are in fact opportunities for improvement. The challenge is not that we may run out of problems, but whether we are able to create the values that will solve them.

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If banks start granting large loans to people of low economic class, then you would expect to see a rise in the consumption of goods aimed at poorer people, and the associated changes in production that comes with it. None of this is Keynesian economics, its just common sense.

It is indeed common sense, and I don't dispute it. And it's also true that it's not Keynesian economics. What Keynes said was something else: he said that there can not only be an overproduction of pencils, but also an overproduction of everything--a general overproduction.

One context in which 'artificial demand' is definitely valid is when it comes to government interference. If there was a law saying that everyone had to own at least one red hat, then this would be a fairly good example of artificial demand

That's correct. Again, though, Keynesianism holds (and Lathanar talks about) an "artificial demand" for everything other than money. When they say "demand" without saying demand for what, they usually mean aggregate demand--which is the demand for any non-money goods in terms of money, or in other words the willingness and ability to exchange money into other kinds of goods. In a free country, such demand can only result out of one thing: having earned the money, by having produced something of value to somebody. Money is merely the means of exchange, and thus aggregate demand is merely a waystation between yesterday's production and today's production.

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CF, I don't understand the logic of that post.

And I don't understand the logic of your reply. Looks like a stalemate! :P

I suggest that you read my responses to LaVache and Hal after your post; perhaps they will help clarify things.

Edited by Capitalism Forever
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I'm sorry, color me stupid, but to me you have not explained anything.

Anything produced has a value, I know that, I don't think most people would disagree. But at some point you produce so much that you can no longer make a profit and start selling at a loss.

I am making mechanical pencils, everyone has pencils, life is good, soon everyone has two pencils and no need for any more, but I just keep on producing them to the point where I have a huge warehouse of pencils with no buyers. I call that excessive output, overproduction, whatever, if that isn't then what is it? You tell me the term doesn't exist, which I can live with, but you offer nothing in its place as if this scenario is impossible.

I am making radios, I have a small demand and a very nice profit margin. I want to increase sales without lowering my price, but there is no demand, no buyers able to meet my price. I start offering anyone who wants it an installment plan, saying I'll 'sell' you a radio on the promise of payment later increasing sales and keeping my profit margin when I should really be lowering the prices. With the increased demand I start putting up more factories and hiring more people to produce even more. I call that artificial demand, buyers that would not have existed normally at the prices I had set. If that is not the term, what is the term, don't tell me it doesn't exist.

If I am making radios, selling them on installment and posting huge amounts of sales and then the economy takes a downwind and people lose their jobs then can no longer afford to pay for the radios, they have to return them. Suddenly I have a warehouse of radios and nobody can buy them, so I reduce my workforce because I have excessive output which puts more people out of work and more people returning radios. What do you call that one.

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Ok, so I went reading some Keynes, and I must say, I don't much like it so far.

Seeing if I understand what your saying or not, the only way you can have a demand for something is if you have something of value which you produced to trade for it. Since there can be no demand without production, unlimited production can only lead to unlimited demand. Is that pretty much correct? In that context, the terms excessive production loses it's meaning. Demand can only exist where there is production, so artificial demand loses it's meaning.

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Soooo...the real issue here isn't that there is an artificial demand, because people usually wouldn't get the loans if they didn't want (demand) to buy the product.

However, it sounds like the only thing that is artificially created by giving loans to those that may be able to afford them is the artificial ability for the products? No, not trying to coin new words or terms here (and I did study a wee bit of Keynes back in college. I actually thought he was brilliant at the time..but, hey I was 20...and then I went out in the real world, and got a job and grew up.)

So the loans don't create any kind of fake demand, no. But they do help increase demand. because these people wouldn't buy the product without these loans.

That's what we are getting at in this thread, right?

Just trying to understand the gist of it.

Edited by Sherry
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I've always understood that the demand for a product includes only those who want the product and are able to afford it, not everyone who wants it. People who want something they can't afford, do not contribute to the demand of a product.

For example, I may want a private jet, but I have nowhere near the money one costs. I would buy one, say, if it cost $50,000 (the figures are arbitrary). How would I figure into the calculations of private jet manufacturers? Answer, I wouldn't. A $50,000 private jet is a non-existent product. The demand is potential at best.

Of course, some manufacturer might develop one, figuring there would be a large demand for dirt cheap private jets. If he does, then the potential demand becomes an actual demand. But even at such low prices, they'd still be out of reach for the majority of the population.

Suppose then some politician declares that flying is a human right, and manages to pass a bill authorizing a low interest, no collateral government loan to anyone who wants a CheapJet. Where would the money come from? Would such loans create a real demand? Will the money ever be repaid? Even if it is, it will never be repaid to those who made it, would it?

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I've always understood that the demand for a product includes only those who want the product and are able to afford it, not everyone who wants it. People who want something they can't afford, do not contribute to the demand of a product.

For example, I may want a private jet, but I have nowhere near the money one costs. I would buy one, say, if it cost $50,000 (the figures are arbitrary). How would I figure into the calculations of private jet manufacturers? Answer, I wouldn't. A $50,000 private jet is a non-existent product. The demand is potential at best.

Of course, some manufacturer might develop one, figuring there would be a large demand for dirt cheap private jets. If he does, then the potential demand becomes an actual demand. But even at such low prices, they'd still be out of reach for the majority of the population.

Suppose then some politician declares that flying is a human right, and manages to pass a bill authorizing a low interest, no collateral government loan to anyone who wants a CheapJet. Where would the money come from? Would such loans create a real demand? Will the money ever be repaid? Even if it is, it will never be repaid to those who made it, would it?

Ok, so what if the jet manufacturer itself started handing out installment programs to let those not normally able to afford it do so? What do you call that? That is my question, I have always called this artificial demand.

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Would inflationary credit expansion be a better term for it?

yeah, I think that would be closer to it, perhaps. Because the demand is there, because they got their hands on the funds or credit to create the demand. Whether they actually have the ability to pay back the funds is another story. That's why I refer to it as artificial ability.

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Seeing if I understand what your saying or not, the only way you can have a demand for something is if you have something of value which you produced to trade for it. Since there can be no demand without production, unlimited production can only lead to unlimited demand. Is that pretty much correct? In that context, the terms excessive production loses it's meaning. Demand can only exist where there is production, so artificial demand loses it's meaning.

Yes, that's pretty much correct. The important thing is to differenciate between demand for specific products, such as pencils or radios, and demand in general, or aggregate demand, or as some Keynesian economists misleadingly call it, plain "demand." You can have too many pencils, sure. You can have too many radios as well. But you cannot have too much wealth, or too much value, or too much prosperity.

Why not? Because prosperity means living well and long, and values are what you need for it, and wealth is the sum of values you have. A pencil will be valuable to you if you want to write, but it will cease to be a value when you are done writing and want to sleep. Then, you'll need another kind of value: a bed. And when you've got your bed, you'll value other things, like window blinds to make you sleep better, an air conditioner so you're not too hot, a guard service so you don't have to worry about burglars ... or some yet-to-be-invented product that will help you sleep deeper and sounder so you can spend more of your time awake. The specific things you value change over time, but the need for values is eternal.

So when a producer sees that his pencils aren't selling anymore, what he should do is look around and see what other things people could value instead. The answer is not to make less, but to make something else. To invent. To innovate. To use your mind. That is what production is all about--and, if you look at all the things we have today that they didn't have in 1920, you'll see that it's what the producers actually do in the real world.

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So the loans don't create any kind of fake demand, no. But they do help increase demand. because these people wouldn't buy the product without these loans.

When you say "demand," always make sure you know--at least implicitly--the demand for what product you are talking about.

Let's say I save some money and it ends up being loaned to a guy called Jack who buys a Corvette from it.

  • Does this increase Jack's demand for Corvettes? Sure it does. If I hadn't loaned the money, Jack would not be able to buy the Corvette.
  • Does this increase the total demand for Corvettes? That depends on what I would have done with the money if I hadn't loaned it.
    • If I would have spent it on a Corvette myself, then my demand for Corvettes has decreased due to the loan, which cancels out the increase in Jack's demand for Corvettes--so the total demand for Corvettes is unchanged.
    • If I would not have spent it on a Corvette myself, then the total demand for Corvettes has increased.

    [*]Does the loan increase the total demand for GM's products? Again, it depends on what I would have done if I hadn't loaned the money to Jack.

    • If I would have loaned it to a company that would have bought a truck from GM, then the decision to loan the money to Jack has decreased that company's demand for GM's products, canceling out the increase in Jack's demand--so the total demand for GM's products is unchanged.
    • The same applies if my alternative to the loan would have been to buy a GM vehicle other than a Corvette myself.
    • If I would have spent the money on a cruise in the Caribbean, then the total demand for GM's products has increased.

    [*]Does the loan increase aggregate demand ?

    • If the alternative to the loan would have been to buy a Corvette myself, aggregate demand is unchanged, as the increase in Jack's demand for Corvettes is canceled out by the decrease in my demand for Corvettes.
    • If the alternative to the loan would have been to loan the money to the company that wanted a truck, aggregate demand is unchanged, as the increase in Jack's demand for GM's products is canceled out by the decrease in the company's demand for GM's procucts.
    • If the alternative to the loan would have been a cruise in the Caribbean, aggregate demand is unchanged, as the increase in Jack's contribution to aggregate demand is canceled out by the decrease in my contribution to aggregate demand.
    • The only way for the loan to affect aggregate demand is if my alternative to loaning the money is to store it in a hole I dug in my back yard, or do something similarly stupid. But the kind of person who would do that with the kind of money that buys a Corvette is not the kind of person who is likely to make that kind of money.

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It is indeed common sense, and I don't dispute it. And it's also true that it's not Keynesian economics. What Keynes said was something else: he said that there can not only be an overproduction of pencils, but also an overproduction of everything--a general overproduction.
Oh, fair enough then. I only know the absolute basics about Keynesian economics but if thats what he actually said then it does sound dubious.

That's correct. Again, though, Keynesianism holds (and Lathanar talks about) an "artificial demand" for everything other than money.
I've only seen the term 'artificial demand' used in the context of particular goods - for example an artificial demand created for <consumable_good_X> via a massive advertising campaign, or an artificial demand for military goods due to government spending, and so on. An 'artififcial demand' for everything doesnt really make sense so again if that's what Keynes said then it also sounds silly. Edited by Hal
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So when a producer sees that his pencils aren't selling anymore, what he should do is look around and see what other things people could value instead. The answer is not to make less, but to make something else. To invent. To innovate. To use your mind. That is what production is all about--and, if you look at all the things we have today that they didn't have in 1920, you'll see that it's what the producers actually do in the real world.

I totally agree with what you're saying. What I want to know however, is what is it called when you keep producing pencils even though there is no market for it. Could that not be called excessive output or overproduction?

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