Dear Friends,
It seems to me, Keynes understood part of the truth, but only a small part. The reason I say this is because he gathered all demand under the same umbrella. Which is clearly not the case. Does demand for cocaine contribute to economic well being as much as food, or demand for the goods of production? Obviously not. Which is why I propose aggregate demand should have subcategories, unproductive demand and productive demand, and there should probably be a third, negative demand. Clearly though the aggregate demand aggregate supply equation has some relevance to the economic well being of a nation, it can’t be correct, or it would better model historic recessions. The Great Depression where Keynesian policies were used proved their ineffectiveness. So it needs improvement.
Unproductive demand is the purchase of necessities. Things that sustain life but don’t add to production. It costs us money to buy and keep these things. Necessities are usually the largest line item in aggregate demand. People need to eat, we need clothes and diversion. All of which constitutes a huge portion of any economy. Indeed much of the “productive” demand is to meet unproductive demand. It’s the baseline demand of an economy. Moreover, if supply of food is sufficient but people can’t afford it, there’s a price problem. If demand is insufficient to supply, price will naturally drop until people can afford it. Because pragmatic suppliers won’t let their wares rot, they’ll lower the price until they sell. Unless government gets in the way. If we apply a factor to this demand it would be a 1.
Productive demand would purchase the means of production. You could say productive demand is demand for assets. Things that pay us to own them. If you buy a lathe and don’t use it, it’s unproductive. If you use that lathe to make parts and sell them, that lathe is an asset, or… it produces supply. Productive demand is far smaller than unproductive demand. It grows the economy however. While unproductive demand drives the economy, productive demand expands it. Therefore, the greater the percent of productive to unproductive demand in an economy the greater the rate of expected growth. Economies with no or negative productive demand then are shrinking. Shrinking the ability to meet unproductive demand creates inflation. Productive growth then would have a factor of 2.
Negative demand includes drugs, and government spending that drains resources, by waste, fraud and abuse. These demands lower productive and unproductive demand. Many believe that government can pay for unproductive demand therefor increasing it. But people only eat a few meals a day. So increasing the money available for food only increases the price. As it transfers unproductive and productive demand into negative demand. People use the money freed up by government welfare to spend on drugs, tattoos and piercings. Leading to demand for medical services down the road. Warfare is always and everywhere a bad investment. If used it destroys productive capacity and if not it diminishes money available for other demand. A factor for this would be -1.
If we accept that part of John Maynard Keynes aggregate supply aggregate demand model is correct, but flawed, I think these additions might help. By adding weight to each demand. Productive demand would get doubled, unproductive demand would be multiplied by 1 and negative demand would subtract from aggregate demand. I think by weighting these factors of demand we can gain insight to inflation, growth and recessions, in the past, today and in the future. The Great Depression falsified Keynes theory, yet not my variation of his theme. In the 1930s, government demand replaced productive demand, harming the economy. Else there wouldn’t have been bread lines. Until WWII, when Lend Lease created productive demand to offset negative demand… and regulations were cut.
Sincerely,
John Pepin
