Keynesians Do Not Appreciate Demand

Keynesians approach macroeconomics from the demand side. But they do not appreciate what demand actually is.

Demand requires purchasing power

Demand has two well-known dimensions: willingness to buy and ability to pay. Willingness without ability is mere desire, and it is boundless. The substance of demand, therefore, lies entirely in the ability to pay, the purchasing power.

Money is not purchasing power

Money is often seen as purchasing power. People accept money because it can buy other goods and services. Without the goods and services as support, money would have no value. Therefore, purchasing power needs the support of the goods and services that are beyond money. And the goods and services are matters of production. Hence, demand cannot be analyzed in isolation from production.

Supply opens a demand, illustrated by the Crusoe's economy

On an isolated island, Robinson Crusoe realizes that there would be no consumption without production, meaning no fruit unless picking it, or no fish unless catching it. However, after Friday joins him, they can divide tasks. For example, Robinson goes picking fruit while Friday catches fish. Although they no longer have to do everything themselves, production remains the prerequisite for consumption. Picking no fruit, Robinson will eat no fish because Friday would not give him fish for free. Conversely, catching no fish, Friday will eat no fruit because he has nothing to exchange for Robinson’s fruit.

The significance

Demand is a matter of production or supply. There is no such thing as excess capacity, only erroneous capacity, which means there is too much of what nobody wants, and too little of what everyone wants. Some goods are overproduced because other goods are underproduced. For example, the overstocking of apples is due to the short supply of fish. Vice versa, the overstocking of fish is due to the short supply of apples. Therefore, not only the excess stock, but also the short supply needs to be addressed to overcome the so-called "excess capacity." This is indeed a structural issue.

What are the right goods to produce?

Scholars do not know, neither do government officials. It is up to entrepreneurs to try in the market with their own resources. Therefore, addressing the so-called insufficient effective demand requires market-oriented reform, which primarily means protecting property rights, deregulating, and cutting taxes.