Those claiming #demand drives the economy (which is wrong) tend to be quite confused about what it means to demand, and on what basis demand exists. They are, strangely, less confused about supply, which is the much more complex economic concept. Let's start at the beginning:
demand is formally defined as the willingness and ability to pay. The reason for this definition is that the point of demand is to explain something about the economy. Demand means action (buying) with respect to specific goods at specific price. Without such action, there is no
effect on the economy. Supply-and-demand analysis aims to explain real market prices. Demand is different from wants, which are endless. We can want a vacation on Jupiter, but that has no economic impact. It's merely dreaming before an entrepreneur provides that service. Wanting
does not say anything about the price we would be willing to pay or the quantity we would buy at that price had that good been offered. Just like you can want (but not demand) things that don't exist, you can want (but not demand) existing things at prices that no one willingly
accepts. The demand for a Porsche 911 at $20K would be much higher than it is at $200K. This makes demand a problem for the supplier: the seller must figure out what to produce and how, so that costs can be kept lower than the price charged. Producers choose the production volume
based on what they guess or anticipate that customers are willing to pay: at any price there will be a specific quantity demanded. Lower prices mean higher quantity demanded, and vice versa. But this quantity demanded is not a function of the good offered, but of the situation
in which it is offered. Say Porsche figures out how to keep costs low enough to charge $20K for the 2025 edition of the 911. If in that market some entrepreneur offers a flying car for $30K, the $20K for the Porsche might not be enough to sway customers. They do not demand the
911 at $20K if there is a flying car for $30K. Consumers make their purchasing decisions based on comparisons: they attempt to get as much (subjective) value as possible for their purchasing power. We can learn many things from this, including that there can be no demand for a
good that does not yet exist--demand is for a quantity of a specific good at a specific price. Production is undertaken because the entrepreneur anticipates that there will be (not is) demand, but whether there will be actual demand depends on consumers' relative valuation of
the good at that time. The reason entrepreneurs typically fail is not that there is lacking want for their goods, but that there is not enough quantity demanded at a price that cover their costs of production. This is because consumers economize on their purchasing power; they
don't spend their hard-earned dollars on anything that would give them satisfaction. They spend money on goods that are sufficiently valuable given alternative uses for the purchasing power and, ultimately, the time and effort invested in earning it (instead of simply enjoying
themselves). This fact provides further insight: consumers need money (something offered in exchange) to demand a good. The exchange value (purchasing power) is created through production. Thus, the ability to demand comes from one's supplying of production (or, in the case of
credit, the promise of producing). In a highly specialized market economy, workers typically earn their purchasing power working in businesses; their salaries are part of the costs of production for the entrepreneur *before* the final good is offered for sale. If the entrepreneur
has misjudged the future market situation and fails, those employed in his/her firm will still have earned purchasing power to spend on other goods. In other words, production--whether or not the good produced ends up of value to consumers--facilitates consumption. Consumers can
demand by virtue of their earned purchasing power, which means production must precede consumption in two ways: the good they demand (buy) must be produced before it can be consumed, and they must produce before they can demand. This is the essence of Say's Law, and explains why
spending necessarily comes after producing. While production is directed toward where entrepreneurs anticipate that consumers will spend their money, it is incorrect to say that demand drives the economy. Demand (consumption) is dependent on prior supply (production). It is
impossible to demand (be willing and able to pay) goods that do not exist and using money one has not earned (or borrowed). Claims to the contrary tend to depend on fundamental misunderstandings, including the error that demand is to have wants and that the anticipated future
demand somehow "is" (rather than is hoped for) when production commences. Demand is situation-dependent and in reaction to as well as made possible by supply: one can only demand goods that have been offered (which implies production) with money one has earned (from production).
I summarized the logic in this article published at the Mises Institute web site: mises.org/wire/more-spen…
