Why Economic Demand is a Product or Service
Some people seem to be confused by my claim that in economics the term "demand" is a product or service. In light of the way that economics is taught in schools these days this is understandable, but I would contend that logic dictates that this term does, indeed, refer to a product or service and does not apply, as seems to be the assumption of most people, merely to the medium exchange.
I have already given an example of this. If I am a farmer and I have three chickens and I exchange those chickens with my neighbor for a goat, which is the supply and which is the demand? It depends entirely on the point of view of the person in the exchange. For me, demand is what I have available to exchange for what I desire. I desire a goat. For me that is the supply that I am seeking. My demand, therefore, is the three chickens that I am willing and able to part with to acquire the goat. But for my neighbor, the situation is reversed. His demand is the goat, and his supply is the three chickens.
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.
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.
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. 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.
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.
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.
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.
So the demand-side approaches don't merely fail to solve the problem, they make matters worse. 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.
I hope this clarifies the point that I am making, and I also hope it clarifies why this distinction is significant. If demand is not a product or service, what is it? If it is a medium of exchange, what is it about that function that makes it demand? Are we to assume that a direct exchange that does not involve a medium is lacking in supply and demand altogether? 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.
Demand.
