Those who think that the destruction of war increases total “demand” forget that demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods....
It should be obvious that real buying power is wiped out to the same extent as productive power is wiped out.
The book was written in 1946, at a time when Europe's productive capacity had been decimated by war. In the US today, our productive capacity has been gutted by globalization and offshoring, especially because we had the reserve currency of the world, which we could dole out without having to produce a thing. We abandoned the supply / demand relationship that Hazlitt described; our demand was no longer limited by what we produced. We've been able to buy things with dollars, even after those dollars ceased to represent anything at all (i.e. since August 1971).
We buy things for nothing, no supply of real goods required. Other countries want our backed-by-nothing dollars because oil and various commodities are only sold in dollars. We have had a monopoly and an insane advantage over the rest of the world. If China wants to buy crude oil from Saudi Arabia, it has to pay them in dollars. Thus our currency has always been in demand, and even as our factories closed, we could print more money and maintain our standard of living.
Most of the country seemed not to notice as our textile mills left for Asia and our steel plants closed. Granted, the incomes of the working and middle classes have been stagnant or declining in terms of real purchasing power, but this was masked by taking on debts, mainly credit card and 2nd mortgage debts. Between government debts and private citizens' debts, we've been living well while producing less.
There is no free lunch, of course. We've come to a situation now where our only option for dealing with our debts is to depreciate the currency and pay our creditors back in shrunken (if not nigh-worthless) dollars. Even if the government attempts to avoid that, demand for dollars is waning, which will cause the depreciation anyway. This process will wipe out most of the assets of the working and middle classes.
Our supply of produced goods should have represented our demand, as Hazlitt explained it. We should have bought goods in proportion to the goods we produced. To break that relationship and live high on the hog without producing much is clearly unsustainable. "The American way of life is non-negotiable" is an absurdity. Nobody gets something for nothing, forever.
It should be obvious that real buying power is wiped out to the same extent as productive power is wiped out.
We will come to recognize this again when the currency collapses. The suffering in Allentown and Youngstown will be the suffering of the whole nation, when demand for our primary export (dollars) evaporates. Nothing good can ever come from reduced production. Real wealth is production. Collective, national wealth, in fact, is pretty blue-collar. Disdain for such blue-collar, concrete wealth might explain why the ivory tower folks thought this ridiculous "service" and/or financial economy could ever work. The idea that CDO's and business consulting are necessary goods was just a mass hallucination designed to explain why we still had the highest quality of life on the planet, despite producing less and less. We simply convinced ourselves that we were still producing something.
But you can't eat derivatives contracts, you can't clothe yourself in credit default swaps, and you can't make a shanty out of collateralized debt obligations.
Well we're waiting here in Allentown
For the Pennsylvania we never found
For the promises our teachers gave
If we worked hard
If we behaved
So the graduations hang on the wall
But they never really helped us at all
No they never taught us what was real
Iron and coke
And chromium steel
And we're waiting here in Allentown
Well said, supply really creates demand, I personally don't understand why economists talk about demand at all, may be they just want to make it appear that problems in the economy are caused by people who want to spend all the money they've earned, but rather save some.
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