Posted by KeepTalking:
Now let us introduce money into the transaction. My neighbor does not have a goat, but he is willing to give me a gold coin in exchange for the chickens. I know that I can go to the village market and acquire a goat for the gold coin so I make the deal. Thus far I have exchanged one commodity, the chickens, for another commodity, the gold coin. I now take the coin to the market and acquire a goat. I submit that it is aburd to claim that the gold coin, being a currency, represents demand where the chickens did not. I agree that the coin, the medium of exchange, represents demand, but it doesn't do so in any way that the chickens did not also represent demand.
It leads right off the rails, what a surprise. The only economy in which a demand is always also a product or service is a barter economy. Once you include currency into the mix, you are no longer dealing with a true barter economy. Some bartering may still exist, but it will not be the default mode for all transactions. Currency does represent demand in a way that chickens do not represent demand. If no one has a goat that they are willing to trade for chickens, then my demand for goats will not be met by my offering chickens. That is the problem with a barter economy, there is no guarantee that you can trade your chickens for a goat. Currency removes this problem by introducing a medium of exchange. You can sell your chickens for money, then buy that goat for money, the guy with the goat does not need to have a demand for chickens. He will accept money in lieu of whatever it is for which he has a demand.
First of all, let me thank you for being the first person on this thread actually to address the issue at hand and to comment on this point. Other posters have offered mostly evasions laced with sarcasm or insisted that I somehow provide empirical evidence for what is an analytical claim.
Gold is commodity. So using a gold coin as currency should clearly demonstrate that the demand here is still a product or service. Gold is product. It has value in itself so people are not reluctant to accept it. In other words, in a market economy using gold as a medium of exchange demand is still a product or service.
Now most people will agree that the gold coin is also a commodity and that is why people accept it as a medium of exchange. Even though they have little use for the gold itself, they know that someone, somewhere, does want it and so it has value in an exchange. But gold is a commodity and therefore derives its value from that fact. It is useful to someone, somewhere. And being scarce, it has a relatively high value for its weight. In a fiat money system, the medium of exchange has no value it itself. It merely represents a value. Somewhere, somebody wants it. Typically that somebody is the government which declares its fiat money to be acceptable as legal tender in the settlement of debts in a court of law and/or also accepts these representations as fulfillment of a tax obligation.
In that case, what is the product or supply that the fiat money represents for the government? You are the one who started this thread off by saying that government cannot create jobs. Jobs are required to make products which become supply, but if the government cannot create jobs, then there is nothing to produce, no supply, and no product. One or both of your notions is wrong, and I am pretty sure that it is both.
Fiat money is contract. It represents a product in the same way that a mortgage represents a house. So fiat money represents the product or service that you provide in order to acquire it. If I give you a bank note redeemable in gold, you will accept it in lieu of gold as long as you trust the bank that issued it to deliver the gold. Fiat money is not redeemable in gold, but most people still accept it because the government insists that it be accepted for the payment of debts and taxes. The confidence in the money is different from what it represents. The government's decree assures confidence in the money, but the money still represents a product or a service just as a gold note represents gold.
I do not deny that the government can create a job. It takes money from you and me, and it hires someone, for example, to provide free medical care. The money that it takes from you and me would have been spent would have been spent for doctor's visits let us suppose. But since the government took our money, we don't spend it at the doctor's office. We go to the free medical doctor that the government provided. So yes, the government created a job, but the job would have existed anyway if the money had been left in the private sector. But the government cannot produce NET job creation. (I must qualify this, because it is theoretically possible for the government to create jobs by doing what the private sector does which is to invest money at a high rate of return thus increasing the supply of products and services which also increases the demand for products or services, but that is not generally seen as a responsibility of government and the government has not generally been very good at it as we have seen in places like Maoist China and the Soviet Union. I believe I did qualify this earlier. In any case, the jobs issue is not what this particular post is about).
Fiat money is a contract rather than a commodity. It is essentially an IOU that is generally accepted within the community because of its usefulness in payment of taxes and as legal tender.
So, it's not a product or service, gotcha.
I didn't say that fiat money was a product or service. I said that demand was a product or service. Fiat money represents a product or service just as a gold note represents a product.
How does this change the status of products or services in an exchange? Not at all. The fiat money is useful in an exchange because, like gold, it represents a product or service that I desire not because it has any value in itself that the seller himself is anxious to acquire.
So, say I have no money and no product or service to offer, but really want a chicken. The chicken costs $10, so I rob someone of their $10, and go buy a chicken. What product or service does the $10 I paid for the chicken represent?
It represents a service that you performed called "theft" which happens to be illegal. How is that relevant? If you stole the chickens it would still be theft.
If, however, I seek to introduce more money into the system that does not represent a product or service, as governments often do through the printing press or, more often, through manipulation of the banking system; I have not introduced any new products or services, and if I have not introduced any new products or services, I have not increased demand. What I have done is to reduce the value of the existing currency. I have cheated on the contract.
The inflationary aspect of governments printing more money not withstanding, you still have not established that demand is a product or service in any economy other than a barter economy.
What more do you want? We have a simple progression. We go from barter of products to the sale of products using another product, such as gold, as the intervening medium. So the medium is still a product and demand is still a product. So let's introduce an additional step to try to make it more clear. We use a gold-backed note instead of gold as the medium. The note represents a gold coin. The demand is still a product which is now represented by a paper note. Now we go from there to just the note which was acquired when I parted with a product or performed a service. The medium is now a contract, but the demand is still a product or service. There is still complete continuity here. What don't you understand about it?
This is why I contend that the "demand-side" economic theories (basically Keynesianism and Monetarism) are doomed to fail. The problem is that the approaches they recommend do not actually increase demand because demand is a product or service. It is not a medium of exchange. Such policies may succeed up to a point in that they allow producers to unload excess inventory without reducing prices at the onset of a recession, and this is good for corporate profits. But the ultimate effect of this is merely to delay the necessary re-structuring of those enterprises and of the economy as a whole, and this delay resuts in an even greater downturn in the future.
Okay, let's pretend for a minute that you are right, and supply is actually a product or service. How does thinking this way help to alleviate the above problem? Remember, governments cannot create jobs, per your OP, so how can they make additional products or services in order to increase the supply of demand?
I think you meant to say assuming that "demand is actually a product or service." No one is contesting the claim that supply is.
I have argued that the government can't do this. At least it doesn't do so efficiently for a number of reasons which would require an entirely new thread to discuss. But the government can leave this to the private sector because it does produce jobs efficiently because, among other things, private enterprise has the right to fail whereas government enterprises are rarely allowed to.
But I assume that what you are really asking is what the government should do to get out of a recession especially in a fiat money system, and how is the "demand is a product or service" issue relevant to it. What I am claiming is that demand is treated by most analysts as the medium of exchange and so they talk about the money supply and stimulus and so on as it demand is the currency. If you look at an economic textbook, it typically has a graph with an x and y axis. One axis, I forget which, is represented by units of product, the other axis is represented by dollars or some other currency. The demand side of the graph is assumed to be the currency and the supply side is the units. And that is where the confusion comes in as the student is left thinking that demand=dollars.
But an increase in dollars merely raises the price and, as I have already pointed out, this actually destroys capital. When the economy is in recession, prices fall. They should fall. It is a better "stimulus" than money creation. People can buy more because prices are lower. The company also gets rid of its excess inventory which is has to do if it is going to resume hiring. Some enterprises, however, will go under. They have to. It is these failures that give the economy its vitality. The enterprise fails, but the plant and equipment or furniture and shelves, the buildings, etc. do not disappear. In a failed enterprise, the stockholders lose and the creditors now own the business. When the creditors own the business, it is debt-free. So it now may be profitable even though the profits won't necessarily justify a sale price that will completely cover the debt. So the creditors may have to take a haircut as well. But what emerges from the process is a sound enterprise.
It is also necessary for recovery that consumers pay off debt and save up some money so that they can resume spending responsibly. The policy of low interest rates which we have now discourages saving and encourages more debt and consumption. This simply prolongs the day of reckoning. It has been quite clear that our low interest rate policy (which is part a parcel of the process of creating money) has not stimulated investment at all. Companies are not going to expand when consumers are not buying. So basically, we need the reverse of the policies that we have actually been following.
The result of this, in turn, is the destruction of capital. As the necessary reforms are delayed the enterprise continues to advance in the wrong direction and the inefficiencies mount up. So when the next downturn hits, an enterprise that might have survived a mild retrenchment early on now faces bankruptcy. And this problem is magnified many times over within the banking system because the finances there are so highly leveraged. If banks are suffering from solvency problems, a $10,000 loss can become a $100,000 loss or even a million dollar loss because of all the leveraged investments. This is the situation that the nation faces today.
Is it really a $10,000 or a $100,000 loss, or is it as you contend with your redefinition of demand, a 1,000 chicken or 10,000 chicken loss?
Perhaps you need to study up on financial leveraging.
So the demand-side approaches don't merely fail to solve the problem, they make matters worse.
Just not in any way you can demonstrate.
No, I can't demonstrate it, but I can, and just did, explain it. The only ones who can demonstrate it are Obama and Fed, and they are demonstrating it right now. The slow growth that has followed the last recession is well below normal. A recession is usually followed by extraordinarily high growth. Growth has been so slow that it could be little more than statistical error.
The more they delay the required restructuring, the more capital becomes destroyed, and we have to start over again at a lower level than we were at when the downturn began.
Also, failing to demonstrate how redefining demand as supply fixes the problem.
The policies makers consistently talk about "stimulating" demand by increasing the money supply (monetarism) or more government spending (Keynesianism). But such policies do not stimulate demand because they do not understand what demand is.
I hope this clarifies the point that I am making, and I also hope it clarifies why this distinction is significant.
It only clarifies that you either live in a place where bartering is the most common way of transacting (are you from Borneo?), or that you are so wrong that it is laughable.
If demand is not a product or service, what is it?
It is the willingness and ability to pay the price for a product or service. Only in a barter economy is it actually a product or service.
An ability to pay with what? Zimbabwe dollars? Monopoly money? You need to pay with something of value. Something of value is a commodity or a service or a contract that represents a product or service. If I just print off a lot of contracts, they will soon become worthless.
If it is a medium of exchange, what is it about that function that makes it demand?
Please link to the post in which someone has claimed that demand is a medium of exchange. Then ask them that question.
I have already referenced economic texts which clearly leave that impression. But my claim is not that economists claim that demand is a product or service. Rather, I claim that they presuppose it. They discuss it as if it were a medium of exchange without actually making that claim.
Are we to assume that a direct exchange that does not involve a medium is lacking in supply and demand altogether?
No. Wherever did you get that notion?
That would be the implication if demand was a medium of exchange.
I don't think these questions can be answered intelligibly without acknowledging that demand is a product or service,
but I invite the posters here to try.
Done. Your notion that demand is a product or service in any economy other than a barter economy has been thoroughly refuted. Thanks in advance for you admission that you were wrong.
You haven't refuted a thing. You merely demonstrated that you didn't fully understand the post. That may be my fault for trying to deal with the points too briefly. But your alternative definition, "the ability and willingness to pay" is clearly an evasion of the significant issue which is "what constitutes payment?" Frankly, people expect payment in something that is exchangeable for a product or service. So the "ability to pay" in your definition reduces to "a product or service."
