Friday, January 13, 2012

Aggregate Demand

Even among Conservative Economists, the solution for job creation is to increase Aggregate Demand including government spending.  This blog is the only one that offers an alternative to the conclusions of Supply and Demand Theory.  In N Theory it is not Aggregate Demand, but Wealth that increases the willingness of the consumers to spend.  Even in Supply and Demand Theory it is the spending of money that increases Aggregate Demand (the total demand for goods and services over a specific time period).  For instance, it is the amount spent in a year on goods and services.  We can all agree with that definition, but it gets complicated when we compare this amount to Aggregate Supply (the volume of goods and services produced within the economy at a given overall price level) and then make predictions about the quantity sold (the main criteria for the number of jobs in the economy.  In other words, the price of goods sold equals the cost of goods produced including a profit. 

Now all the terms are in money.  We are talking apples to apples.  Therefore, the number of jobs in an economy is related to the amount spent on goods and services.  N Theory does not argue Supply and Demand Theory is wrong in this commonsense explanation, but disagrees about the role of government plays to increase spending (Aggregate Demand).  Supply and Demand Theory states if government increases spending (Aggregate Demand),  Aggregate Supply will increase as well.  This equation did not work during the Great Depression and did not work after the Great Recession.  Government spent lots of money, but the number of jobs created was minuscule.  N Theory explains that it is not the amount spent by government that matters, but the wealth and security of consumers (Buyers) that creates jobs.

In conclusion, it is not government spending that stimulates an economy, but a sense by consumers and manufactures that sustained spending will increase.  Consumers need confidence to take money out of savings or borrow to make a purchase.  They get this confidence when they feel their wealth is stable or increasing.  This  additional spending is stimulative since it expands the Money Supply by an amount equivalent to the profitability created.  Likewise, Manufacturers need confidence of increased consumer spending so they will take risk to expand their business and hire new employees.  Government spending actually discourages consumers and manufactures since government spending implies a problem in the economy and likely increased taxation.  It also implies a consumer or manufacturer's wealth is unlikely to increase and might actually decrease.  Government can spend us into a recession, but never out of one.

No comments:

Post a Comment