Sunday, October 25, 2015

Demand Also Depends on Resource and Time Constructs

Even though money represents the resource capacity of all exchange, economies are also affected by the terms in which production and consumption are defined. How much of any given population is able to fully participate in these settings? Those participation levels matter, for the degree of services and asset formation that is possible.

These issues affect the inaccuracies of demand and supply, as framed in Keynesian terms. However, supply side interests - particularly those representative of non tradable sectors - continue to stand in the way of conditions for optimal demand. The fact that entrenched interests also limit marketplace potential, makes it too easy for the Keynesian model to maintain its intellectual prominence. Demand and supply factors are still engaged in a process of undermining one another, in spite of present attempts to keep economies out of recession.

Hence my initial response to a recent post from Roger Farmer (entitled "Demand creates its own supply"), was "Oh my". I will try to wrap my head around his explanations and also take note when he provides further explanations regarding supply in an upcoming post. But in the meantime I at least need to respond to this:
The Keynesian theory of aggregate supply asserts that firms will increase or decrease the number of workers they employ in order to produce as many goods as are demanded. The French economist John Baptiste Say, famously asserted that supply creates its own demand. Keynes turned the proposition on its head. Demand creates its own supply.  
Keynes argued that the economy is typically producing at less than full employment. And as long as there is any voluntary unemployment everything that is demanded will be supplied.
For one, there is a lack of recognition that different dynamics exist for greater supply in tradable goods, than for non tradable goods whenever the (basic) product in question is time based, such as healthcare. In the present, it has become possible to generate more product (i.e. supply and demand) in tradable goods without increasing employment in these areas. Whereas more demand for time based services should mean more employment, but because of redistribution issues and limitations in knowledge use, this does not necessarily occur.

When non tradable product is time based, knowledge based services production faces several limitations for the fulfillment of supply and demand, which run counter to the production capacity of tradable goods. Product which includes time based application of knowledge sets, tends to only be available in certain time frames. Therefore only a percentage of any given population has the potential to be consumers of time based services at any given moment. This constraint is also affected by the limited quantity of service providers in certain knowledge sets which are actually sought by populations as a whole.

Further, the fact that knowledge based services still rely on asymmetric compensation from other wealth, means demand for services production will remain artificially constrained so long as services are not generated through direct, symmetrical means. Consider how these limits in employment aggregates affect asset formation, for instance. In part because of limits in knowledge based services production, nations are now experiencing limits in traditional production as well.

Much about our quantitative realities, depends on how resources are allowed to be utilized in environments as a whole. This particularly matters, given the fact that investment is not just about money, but about priorities for time value. No amount of money or investment will increase the availability of services providers who have derived marketplace value by virtue of their own relative scarcity. Too much monetarily backed investment also ends up chasing too little time backed investment, in part because of the lack of a marketplace for time.

The fact that the Keynesian model does not take money into consideration, is enough of a head scratcher as it is. A lack of consideration for the dynamics of time based product, only makes it more difficult to derive practical value from this model - either for purposes of monetary policy or for circumstance in the real economy.

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