Final Demand

There is the concept of “final demand.” It refers to the sale of whatever the product is to the buyer who will actually use it. So intermediaries and speculators don’t count. Just the party who actually intends to use whatever it is that is being sold contributes to final demand.

For the economy to work, that party has to have the means to pay for the thing on offer. If the party who needs or wants the thing has no money, the thing goes unsold. The seller is forced to drop the price to move the item.

This is how deflation starts. Lack of demand forces price reductions that leave employers with less revenue. They respond with layoffs and dismissals that further reduce final demand. The process is self-reinforcing and the result is an economic depression.

So this process of substituting machines, which are not consumers and do not contribute to final demand, for human beings, who are consumers and make the wheels of commerce turn with their purchases, reduces costs to the seller in the short run at the expense of sales in the long run. The employees of the seller may not be buyers of its product but they do contribute to the overall pool of final demand. When that pool dries up, the effect spreads throughout the system.

It is true the machines have to be made and serviced and some people are needed for this work. But they are fewer in number than those who are displaced by automation. So the question is what can replace the circulation of wages as the source of final demand?

The game of Monopoly is driven by the initial stakes each player receives plus the $200 they collect each time they pass go. Right now the central banks of the world increase the money supply through the banking system. The money is every bit as fictional as the $200 in the game. The difference is it goes through the banks and only creates final demand when somebody takes out a loan they have to pay back.

So in Monopoly, the $200 is an unconditional gift and in the real economy it is a loan. The problem with loans is the same problem we have with final demand. The lack of income is as much a problem for banks as it is for the sellers of goods and services. People either have too little income to qualify for the loan in the first place or default because they cannot keep up the payments.

Had the Federal Reserve deposited all of the money it has created since 2008 into the accounts of individuals, final demand would have been much more robust than it has been. The problem with this solution is that politicians might abuse the creation of money and stimulate Weimar Germany style hyperinflation. In addition, there is a moralistic aversion to money for nothing, even if it's just to keep the economy moving.

With the exception of Social Security, the right has largely dismantled the New Deal. The effort has been relentless. Welfare was a part of it and those monthly welfare checks contributed to final demand.

I was a welfare worker for a few years. I saw the recipients in their homes. There were definitely people on the dole who should not have been. I saw teenage girls having babies and using their AFDC check to gain independence from their mothers. There was one family I remember who had been wealthy but were reduced to penury when both the husband and the wife got cancer.

But deserving or not, the recipients contributed to final demand. Their checks got spent. Every last penny went to buy something. So when Bill Clinton ended welfare as we knew it, he reduced final demand.

The right believes in Say’s law which holds that supply creates its own demand. I have always seen Say’s law as a half-truth. The availability of something will stir the desire for it. But desire is only part of final demand. Without the means to pay, the desire has no economic effect at all. Both desire and means are required. The people involved in the production of something add a little money to the pool of final demand but well less than what would be needed to buy all that they produce.

So, in the end, it seems to me that something like Monopoly money will have to replace the wages lost to automation.