Primacy of Consumption / Production

[Bold Standard]

(Split from another thread. -sN)

Here's a nice von Mises quote: "Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. . . . Their buying and their abstention from buying decides who should own and run the plants and the farms. They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities. They are merciless bosses, full of whims and fancies, changeable and unpredictable."

I disagree with some of the sentiment of this quote.

First of all, it is possible to create demand for a product for which no previous market ever existed-- ie, computers, the internet, electricity, every new invention ever created, etc. The consumers only know they want their lives to be better, but it's the creaters and inventors who really set the terms for new products. If the producers refuse to produce, all the demand in the world could never make them produce (and government muscle would fare much worse).

Secondly, if consumers are so "unpredictable," then how is it that so many people make fortunes in the stock market? The ability to predict the behavior of consumers and producers is essential to that trade.

The only implication I agree with is that the only way to become successfull and wealthy is to trade values that people want for values that you want-- to a mutual profit.

Edited July 3, 2006 by softwareNerd

[Felix]

First of all, it is possible to create demand for a product for which no previous market ever existed-- ie, computers, the internet, electricity, every new invention ever created, etc. The consumers only know they want their lives to be better, but it's the creaters and inventors who really set the terms for new products. If the producers refuse to produce, all the demand in the world could never make them produce (and government muscle would fare much worse).

(bold mine)

The thing is not that they create a demand, but that they meet it. What good is creating computers if nobody wants them? The reason they are produced is because there is a (potential) market. Without people wanting something you don't produce it as you will suffer a loss if you do. Of course nothing will be produced if the producers just stop doing so.

Secondly, if consumers are so "unpredictable," then how is it that so many people make fortunes in the stock market? The ability to predict the behavior of consumers and producers is essential to that trade.

I don't like that "unpredictable" part either. But I guess that he means that people have free will and can do as they choose.

I read that quote as saying: "You can only make money if you create products you can actually sell to people, that means: products people actually want. People have free will so you can't force them to do anything, instead it's you who has to create value that's better than what's available elsewhere to compete in the marketplace."

[Bold Standard]

(bold mine)

The thing is not that they create a demand, but that they meet it. What good is creating computers if nobody wants them? The reason they are produced is because there is a (potential) market. Without people wanting something you don't produce it as you will suffer a loss if you do. Of course nothing will be produced if the producers just stop doing so.

How do you want something that doesn't exist? Something that you've never even thought of or maybe that you thought would be impossible?

Before computers existed, there was no demand for computers. A potential market, yes. But don't confuse the potential with the actual.

What happens is this: someone creates a new good or service, and then people want it. The producer actually creates the demand in the consumer.

I don't like that "unpredictable" part either. But I guess that he means that people have free will and can do as they choose.

I read that quote as saying: "You can only make money if you create products you can actually sell to people, that means: products people actually want. People have free will so you can't force them to do anything, instead it's you who has to create value that's better than what's available elsewhere to compete in the marketplace."

I don't know von Mises well enough to judge if he meant that or not. But I have read enough of his stuff to know you have to take some of his statements with a grain of salt. For example, if it were true that the consumers dictate what should be produced or not, then Keating (in the Fountainhead) would have been more successfull than Roark. He was the one who gave the masses what they wanted (and he was reasonably successfull because of that). Roark was the type who gave them what they didn't even know they wanted-- he gave them what they should want. And the people who matter will always seek out and employ the one who can do that. [edit: But they should always be left free to decide to do otherwise. Man is fallible, and someone could be wrong about what people should want. So the proper thing to do is to give them the opportunity to choose for themselves, and if you're right-- you win (and so do they).]

Pandering to popular conventions, sentiments, and trends is certainly superior to initiating force against producers and consumers (aka government intervention or "central planning"), but creating demand with new inventions and innovations is even better-- and if you do it right, with the right principles, it's arguably less "risky" in the long run, because of the (stochastic) predictability of humans qua markets.

Edited July 2, 2006 by Bold Standard

[Felix]

How do you want something that doesn't exist? Something that you've never even thought of or maybe that you thought would be impossible?

Before computers existed, there was no demand for computers. A potential market, yes. But don't confuse the potential with the actual.

The basic idea was that once you have your product out there, there has to be a market for it. If it existed before, good, if you created it that's even better, because it means more profits for you.

The producer would still have to anticipate demand. He can't just create crap. He has to create products for which there will be a market when he sells them.

Pandering to popular conventions, sentiments, and trends is certainly superior to initiating force against producers and consumers (aka government intervention or "central planning"), but creating demand with new inventions and innovations is even better-- and if you do it right, with the right principles, it's arguably less "risky" in the long run, because of the (stochastic) predictability of humans qua markets.

I couldn't agree more.

[IAmMetaphysical]

I would argue that a producer doesn't "create demand" by creating say a computer. The demand for the computer exists before the idea of computers because the computer does serve a human purpose, it fills a need; the need to compute at super fast speeds. Computers fill that need, or demand. There isn't a demand for Macs that is created once someone builds one, there is a demand for computational power that a Macintosh fills. The demand exists beforehand. All demand is human demand, and humans "demand" by their nature, certain things, certain somewhat universal things.

[LaszloWalrus]

Say's Law of Markets:

"Supply constitutes its own demand."

[Bold Standard]

Say's Law of Markets:

"Supply constitutes its own demand."

Ahh, I should have known good ol' Jean-Baptiste Say would come through for me! I hadn't heard that one before. Thanks, Laszlo.

I would argue that a producer doesn't "create demand" by creating say a computer. The demand for the computer exists before the idea of computers because the computer does serve a human purpose, it fills a need; the need to compute at super fast speeds. Computers fill that need, or demand. There isn't a demand for Macs that is created once someone builds one, there is a demand for computational power that a Macintosh fills. The demand exists beforehand. All demand is human demand, and humans "demand" by their nature, certain things, certain somewhat universal things.

But, see, there's not a demand for a computer, specifically. Just a demand for a better way of life, if one can afford it. But to say that "demand" for products that don't even exist is somehow present intrinsically in the market somehow, seems impossible to me. Maybe it's important to define "demand."

Do Say and von Mises both define "demand" the same way?

[LaszloWalrus]

Your welcome for the quoation. I have almost NO knowledge of economics (aside from the bit of Adam Smith that I've read and the OCON lecture by Richard Salsman talking about Say that I attended) and couldn't say much about the differences (or similarities) in how Say and von Mises define demand (except that Say probably took an inductive approach while Mises was a rationalist).

I don't think there can be a demand (in the economic sense) for a product or service that doesn't exist. It becomes more apparent if one phrases it in a question like this:

"How much does this non-existent good/service cost?"

The question is impossible to answer.

[Felix]

But, see, there's not a demand for a computer, specifically. Just a demand for a better way of life, if one can afford it. But to say that "demand" for products that don't even exist is somehow present intrinsically in the market somehow, seems impossible to me. Maybe it's important to define "demand."

I still don't see how you could actually create demand. You create a product. If there is demand for it or not is beyond your influence.

My understanding of Say's law is that it basically says: If you produce something for the purpose of exchanging it, you will exchange it and thereby meet a demand.

This seems really weird to me, because this doesn't include production prices. To me at least, production should be profitable. And if I have produced something and I can only exchange it for something that would have cost me less otherwise, all my productive work has been in vain. For me at least. If I've spent more money to get the product created than I get as a sales price later, one could very well say that I have found my demand. But I have problems with this since I believe that demand for a product should imply that it's profitable in the end. I mean, you can't really run a business that is not profitable. Yet Say's law doesn't really take this into account, does it?

Besides, there are books that are produced that end up being sold for a dollar because nobody wants to buy them and they are still not bought. If you have a look at ebay, you can buy like 30,000 ebooks for 1 cent and still many of these offers are not bought. It can happen that you have to go down with your sales price a lot! And if you do, you don't have a profitable business and go bankrupt if you proceed that way.

[Capitalism Forever]

Say's Law of Markets:

"Supply constitutes its own demand."

Actually, what Say's Law of Markets says is that "there can be no general overproduction." You can produce too many radios, or too many cars, or too many computer keyboards--but you cannot produce too much value as such. If you cannot sell product A profitably, there is always a product B that you could have sold profitably.

It was Keynes who mis-formulated Say's Law as "all supply creates its own demand," and then attacked this strawman. The correct way to say it would be "all sound supply creates its own demand," where "sound supply" means that you create products that people value more than the price you ask for.

[softwareNerd]

My understanding of Say's law is that it basically says: If you produce something for the purpose of exchanging it, you will exchange it and thereby meet a demand.

Not exactly. Change "meet a demand" in your sentence to "enable yourself to demand values" and you'll have it. Only by being a producer can a person be a consumer, demanding a product from others. Without producing anything a person can desire stuff, but does not demand it in an economically meaningful sense.

Classically, "demand" was described as: desire backed by the willingness and ability to pay.

The Keynesians often talk of "lack of demand" and "over production" relative to demand. However, when someone produces a value, he thereby creates the means to become a "demander" of someone else's value, via trade.

[Felix]

Not exactly. Change "meet a demand" in your sentence to "enable yourself to demand values" and you'll have it. Only by being a producer can a person be a consumer, demanding a product from others. Without producing anything a person can desire stuff, but does not demand it in an economically meaningful sense.

Classically, "demand" was described as: desire backed by the willingness and ability to pay.

The Keynesians often talk of "lack of demand" and "over production" relative to demand. However, when someone produces a value, he thereby creates the means to become a "demander" of someone else's value, via trade.

Hm. But doesn't this just drop the entire issue? If you "enable yourself to demand values" it automatically implies that you produce something other people would want. This basically ignores what I wanted to bring up, namely, that you can produce something, and then be unable to sell it profitably.

[Bold Standard]

Classically, "demand" was described as: desire backed by the willingness and ability to pay.

So, with that definition-- does it make sense to say that someone desires something nonspecific, that hasn't been invented yet? Maybe that they haven't even thought of? A new flavor of toothpaste? A self-cleaning automobile? Something they would be willing and able to pay for, if they knew about it, but that they didn't know about?

I'm still not sure..

[LaVache]

How do you want something that doesn't exist? Something that you've never even thought of or maybe that you thought would be impossible?

If people are currently using sliderules and datatables for computation, believe you me they want a calculator!

If you have ever used a product and thought, "That did make my task easier, but is it possible for something else to help me more?" then you have wanted something that doesn't exist.

People don't randomly invent things and hope that there is a market, they search out current market areas that they think they can improve, and invent something to do so.

[Bold Standard]

If people are currently using sliderules and datatables for computation, believe you me they want a calculator!

If you have ever used a product and thought, "That did make my task easier, but is it possible for something else to help me more?" then you have wanted something that doesn't exist.

People don't randomly invent things and hope that there is a market, they search out current market areas that they think they can improve, and invent something to do so.

But there seems to be a difference between "is it possible" and "it is possible." Like, for instance-- I have absolutely no desire right now to have a surgery. But if a doctor (producer) were to discover that I had some clandestine internal affliction, and needed to be operated on-- then his advice would certainly create a demand within me to have surgery. I never would have wanted surgery if he hadn't have told me I needed it.

I'm not saying my values don't come into the equation. But I would never have valued what he had to offer specifically if he hadn't offered it. Unless you can demand something nonspecific, in which case you could say "well, you desired good health."

Edited July 4, 2006 by Bold Standard

[JMeganSnow]

If people are currently using sliderules and datatables for computation, believe you me they want a calculator!

Not if the calculator is so expensive that it's not a worthwhile alternative to their slide rule. You fellows are talking past each other because you have different ideas of what it means to "create a demand". On the one hand, some are saying that a demand is just some human "problem" in need of a solution (so you can't create a demand, you can only fulfil one that already exists), whereas others are saying that demand is willingness to purchase a specific product, in which case no demand exists prior to the existence of that product. These views are mutually irreconcilable, so of course they're going to lead to a pointless circular argument.

The thing you're failing to realize is that, prior to the existence of a product that solves a problem, there is no problem. If you've never seen, heard of, or even imagined a calculator, you won't want something easier-to-use than a slide rule . . . you probably think that the slide rule is the best thing to come along since sliced bread! I think Ayn Rand said it somewhere in CUI (paraphrasing): what human needs are there other than a bearskin, a cave, and a chunk of raw meat? Anything beyond that is gravy; it's not solving a problem, it's elevating your standards.

This is why creators of new products and methods (like Howard Roark) often have to wait for the public to catch up with them. The more assertive ones will actually go out and demonstrate to the public why it's in their best interest to catch up. If you want to read a really interesting story of how a company literally created a demand for a new product, check out the story of cellophane, which is utterly ubiquitous today. They just stumbled into the discovery, but they needed to sell something, so they went looking for something they could convince people was a problem in need of a solution!

[Bold Standard]

You fellows are talking past each other because you have different ideas of what it means to "create a demand". On the one hand, some are saying that a demand is just some human "problem" in need of a solution (so you can't create a demand, you can only fulfil one that already exists), whereas others are saying that demand is willingness to purchase a specific product, in which case no demand exists prior to the existence of that product. These views are mutually irreconcilable, so of course they're going to lead to a pointless circular argument.

But are these two definitions for "demand" merely an optional gramatical choice, or do they arise from some type of conflicting premises? The point about Say being inductive and von Mises being a rationalist was interesting, but I'm not sure if that's the source of their different use of this word or not. Maybe it's because von Mises was German-- Felix is German, too. Maybe it's more clear in German that the word which translates to "demand" stands for a "problem in need of solution" rather than a "willingness to purshase a specific product." It seems like economists should have two words for these, because they both seem like legitimate concepts-- but "demand" seems to cover both of them usually, which is confusing. But then, I'm not an economist.

[Capitalism Forever]

"problem in need of solution" [...] "willingness to purshase a specific product." It seems like economists should have two words for these

In economics, "demand" always refers to willingness to buy. More precisely, demand is the willingness and ability to trade a certain quantity of a good for another good at a given exchange rate.

"Problem in need of solution" would not be a valid concept, for the reasons Jennifer explained. What comes closest to it is "business opportunity" or "potential value," or perhaps "wealth waiting to be created."

[softwareNerd]

But doesn't this just drop the entire issue?

In a sense, yes. It highlights that two different issues are being discussed in this thread. Producers are always producing things that they are unable to sell profitably. However, this is not the phenomena that Say (or Keynes) address. Keynes held that there can be times when there is a general, economy-wide lack of demand across all industries, not a steady-state situation where some (say 5%-10%) of the goods are disposed of at a loss.

Anyhow, this may not be the issue you want to focus on. So, before proceeding, it would be best to clarify the focus of this thread. What is the question on the table?

[LaVache]

If people are currently using sliderules and datatables for computation, believe you me they want a calculator!

Not if the calculator is so expensive that it's not a worthwhile alternative to their slide rule.

I'm going to stick to my statement that even if a calculator was impractically expensive (they were once, for most people at least) that many people still wanted one. Does the lowering of price somehow increase your desire of the product, or must the price simply be lowered to equal your level of desire (yes this may be a messy way of saying it, and no I don't have a formula for converting apples to oranges or cash to desire. However, if you have no desire for a product you won't buy it no matter how low the price goes, even if they're giving it away "I don't need that piece of worthless crud taking up space in my house."

*I know that desire and want are two different words, and neither word is demand, but I think you all get my meaning. If not ask and I will clarify to the best of my ability...when I log on next.

You fellows are talking past each other because you have different ideas of what it means to "create a demand". On the one hand, some are saying that a demand is just some human "problem" in need of a solution (so you can't create a demand, you can only fulfil one that already exists), whereas others are saying that demand is willingness to purchase a specific product, in which case no demand exists prior to the existence of that product. These views are mutually irreconcilable, so of course they're going to lead to a pointless circular argument.

Point taken, we do seem to be using different definitions.

The thing you're failing to realize is that, prior to the existence of a product that solves a problem, there is no problem. If you've never seen, heard of, or even imagined a calculator, you won't want something easier-to-use than a slide rule . . .

I believe that the man that invented the calculator definitely wanted something easier to use/more powerful than a slide rule (is slide rule two words? If so I apologize, I actually have one and should probably be able to spell it).

The "there is no problem" assumes that human beings have no imagination, which is false. While I may not be able to imagine exactly what something more powerful/easier to use than a calculator would be, I absolute do not accept that the calculator is the absolute pinnacle of man made personal computational devices...and quite frankly I would like something better. And when I get it I'll want something even better, and my (and others's) desire will help insure that we continue progressing technological and do not become complacent because "there is no problem."

Edited July 5, 2006 by LaVache

[Felix]

Maybe it's because von Mises was German-- Felix is German, too. Maybe it's more clear in German that the word which translates to "demand" stands for a "problem in need of solution" rather than a "willingness to purshase a specific product."

The German word for demand is "Nachfrage" which would directly translate as the noun describing the process of asking for something. So it's definitely "willingness to purchase a specific product" if taken literally. But I think it's also used as the other in economics.

[JMeganSnow]

I believe that the man that invented the calculator definitely wanted something easier to use/more powerful than a slide rule (is slide rule two words? If so I apologize, I actually have one and should probably be able to spell it).

Well, sure, he did, and, like most inventors, he probably spent more time on his better method than he saved by not having to use a slide rule. Personally I've always wished I didn't have to vacuum, but I didn't want a Roomba until someone actually made one. (Actually, I still don't want one, because they're almost as much work to use as just vacuuming yourself, and they miss corners and stuff. I prefer to wait for serious improvement instead of picking up every marginal one along the way.) Us non-inventor-y types tend to lag behind a bit. It helps us to not buy a Betamax.

[IAmMetaphysical]

I would then argue that the "willingness to buy" a product is not solely created by the producer or the consumer but instead is a joint effort of both. The "need" or "desire" for a better way of life is in the consumer, the insight into that need is in the producer. It is up to the producer to show the consumer he can benefit, it is up to the consumer to agree, or accept that he should benefit.

Edited July 5, 2006 by IAmMetaphysical

[Bold Standard]

(Actually, I still don't want one, because they're almost as much work to use as just vacuuming yourself, and they miss corners and stuff. I prefer to wait for serious improvement instead of picking up every marginal one along the way.)

Why are they as much work as vacuuming yourself? Are they hard to clean? I've seen that some of the newer ones even find their way back to the wall outlet and plug themselves in to recharge when they're through!

[Capitalism Forever]

I would then argue that the "willingness to buy" a product is not solely created by the producer or the consumer but instead is a joint effort of both. The "need" or "desire" for a better way of life is in the consumer, the insight into that need is in the producer. It is up to the producer to show the consumer he can benefit, it is up to the consumer to agree, or accept that he should benefit.

(Emphasis mine)

This is (perhaps unintentionally) the most explicit statement of the primacy-of-consumption premise I have ever seen. Consumptionists usually just speak as if it took an effort to have a need or a desire or to accept a benefit; they don't actually call it an effort. You were probably trying to state your own thoughts, which had been influenced by these premises, but--unlike the consumptionist ideologues--you were not making sure to wrap them in a veil, hence the amusing result.

To make things clear:

• An act of production takes effort.
  
• An act of consumption takes a need or desire.
  
• In a free country, the producers and the consumers are the same people.
  
• A producer may produce good A and consume it himself, or he may produce good A, trade it for good B, and consume good B. Even so, what he does is to produce wealth, and then consume the wealth he produced.