Last week, Department of Energy boss Rick Perry stuck his foot in his mouth when he said to a group of coal workers, “Here’s a little economics lesson: supply and demand. You put the supply out there and the demand will follow.” On its face, the statement seems to imply that supply creates its own demand. This is obviously not true. CNN and other cable news networks wasted no time pointing this out.
These errors are nothing new for Perry, who has a history of this kind of verbal faux pas. He sank his presidential campaign in 2012, when, during a primary debate, he famously forgot the names of the three federal departments he would eliminate. (The correct answer is all of them.)
What Perry got wrong is called Say’s Law, or the Law of Markets. J.B. Say was a French economist in the late 18th century who noted not that supply creates its own demand, but that production always precedes consumption.
Say wrote in his A Treatise on Political Economy wrote,
“A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value…As each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase”
Because of the division of labor, you work, producing goods or services for your employer. Your labor is compensated with money, which you use to buy things that other people produce. The more money you make, the more you tend to purchase. These are not controversial economic statements.
At the macro level, the Law of Markets says that aggregate supply will drive aggregate demand to a relatively equal level. This means that there can never be a general glut in the economy over the long term. When the market is allowed to operate freely, businesses that fail are liquidated into the capital the fuels new businesses ventures, some of which succeed. This is how economies grow.
Instantly, you can see why government doesn’t like the Law of Markets. If a free market produces a growing economy, it is much more difficult for them to steal the money to intervene in the economy i.e. socialize the costs of failing pet interests, bail out industries en masse, and wage aggressive wars around the world.
John Maynard Keynes was the one who coined the phrase “supply creates its own demand” as a way to discredit the Law of Markets. Keynesian economics advocates for widespread government intervention into the economy. He thought government could end the business cycle by stimulating demand when necessary and contracting when necessary, providing a smooth, growing national economy. Given that we are still feeling the effects of the government driven economic meltdown of 2008, that is clearly a laughable proposition.
Secretary Perry’s mangling of the Law of Markets shows that he doesn’t understand the underlying economic principles. Not surprising, given the GOP’s dismal track record on economics.