Why demand doesn't drive an economy

It feels like ages since I last posted....

I started a new job and have been really busy ramping up to the new environment and trying to get a handle on all the inventory of servers this new place has with minimal documentation.

Anyway, I had a thought the other day on why so many economists (mostly Keynesians) have such a backward view of the economy.  Mainly they think that demand drives an economy.

I'm going to debunk that idea and it will center around the fact that people, even economists, cannot strictly adhere to definitions.  Like the way many people argue, they hold two different meanings of the same word and then, at the right time, switch the meanings mid-argument to supposedly win the argument.

So what drives an economy?

Let's examine what goes on in our economy that still runs pretty freely.  For example, I just left my previous employer for a new employer.  The new employer needed someone to perform some tasks that required a certain set of skills.  I possess a certain set of skills and after interviewing to see how good of a fit I would be, we entered into an agreement or contract where I would offer my labor in exchange for money.  Now keep in mind, I accepted money not because I could eat the dollar bills but rather because I have confidence I can then turn around and use that money to buy the things I want....food, shelter, an Amazon Prime membership...etc.

So money is the oil in the economy that allows people to exchange thing more easily than barter.  Sure my employer could pay me with skim milk, protein powder, heat and electricity and other tangible goods.  But then my employer wouldn't be able to do exchange the goods and services they are good at because they'd be too busy milking cows, creating protein powder and managing a generator to keep me happy.  In fact, without money, people wouldn't be productive enough to help anyone but themselves.

Even with barter, an economy can exist but is rather limited due to the constraints of reality.  What reality is that?  That people are different and have different values and preferences.  This is why barter cannot overcome what is called a 'double coincidence of wants.'  Try going on craigslist to find some free stuff.  Even when it's free...think of how many things people want to unload that you don't want.

So it's important to realize that an economy doesn't exist until people learn to exchange with one another.  That's an important concept when one tries to establish what defines an economy.  When people exchange, each party in the transaction benefits.  Values are met and preferences are satisfied, or at least to the point where both parties are voluntarily compromising towards.  When the exchange happens, this is where economic supply meets economic demand (think of the classical supply and demand curves).

It should now be obvious that economic demand doesn't drive the economy because something of value must first be created.  In order for an exchange to occur, both parties must possess something that the other wants.  Without this condition, an exchange doesn't occur and you don't have an economy.

Where mainstream economists get it wrong is they forget this whole concept that I just explained and look at people like Steve Jobs and say, 'The only reason why he makes more and more iPhones is because he wants money or his economic demands.'

This is where they are switching definitions.  They are confusing human motivation as economic demand.  As I said earlier, each person is different with their values and preferences.  These values and preferences is what motivates each of us to seek out and fulfill.  So while it is true that our desires motivate us to work harder and harder it doesn't necessarily translate into creating something of value or anything worth exchanging with someone else.  Even though our motivations lies at the heart of human action, it is the output of that action and whether it satisfies someone else's preferences or values that drives an economy.

There are thousands of soon-to-be entrepreneurs trying to figure out what the market wants because they want nice sports cars, a fancy house and other things that have already been produced.

Consumption is the fun part of the economy.  It's production that's the hard part.  You simply cannot consume something before it is produced.  Any five-year-old can understand that watching Survivor.