Article by Cal Nogov on Feb. 10, 2016
So I came across this meme the other day.
In this article, I’ll only be examining item #1 on the meme. “Middle class spending creates jobs by demand.”
This is kind of a half truth portrayed as truth. The economic law of ‘Supply and Demand’ is a balanced equation. Meaning you need both sides of the equation to function. You need both supply and demand to create sustainable jobs.
Here, he looks only at the demand side and says –see, this is what creates jobs–. So let’s examine the demand side only. Let’s say there is lots of demand for product X. No jobs are created. You can demand all you want, but until someone is willing to enter the equation on the supply side or until the technology exists or the capital is available to produce product X, nothing happens. Wanting is wishing.
Let’s examine the supply side only. An entrepreneur is willing to produce product X and has the capital to do it. He builds a factory. He buys equipment. He hires workers. He’s creating jobs. He gets product X produced and brings it to market and finds out there is no demand. He goes bankrupt. He created jobs, but because there was no demand, those jobs were unsustainable.
Demand alone is not enough to create jobs. Supply alone can create jobs, but not sustain them. Without supply there can be no demand and therefore no jobs. Without demand there can still be supply and jobs. (Those jobs just won’t last long.)
Entrepreneurs do this all the time. They invest capital and hire workers only to find there is no demand for their product or service. (remember here demand and want are different things. I want a Ferrari, but since I’m not willing to fork over that much money to buy one, I’m not included in the demand side of the equation. Demand is when you want the product AND are willing to spend the money to buy it. Demand changes with price. I may demand product X at $5 but not at $10. Though I may still want it.)
Government also creates demandless jobs. No consumers demand more worthless government bureaucracy jobs or to pay someone to dig ditches and fill them back in. These jobs are only sustained through theft(taxes) and borrowing(issuing bonds). Ultimately these jobs will disappear as well if the underlying private sector economy is not good. There will be little or no money to tax and borrowing can only go on for so long.
A rich man may also create jobs for personal reasons or no reason at all without any demand at all from the middle class or anyone else.
The demand for products is often WHY jobs are created but not HOW jobs are created. HOW jobs are created is through entrepreneurs. Entrepreneurs create jobs by risking their capital and hope there is enough demand to make a profit and subsequently sustain those jobs. Jobs are created by entrepreneurs through savings (sometimes borrowing) and investment (investment in capital goods -factories/machinery- and inputs -materials/labor- to produce a product).
Robert Reich peddles his fiction to simpletons depicting demand alone as what creates jobs because he’s a paid propagandist and it seems somewhat logical. He tries to convince people the WHY is the HOW. But that my friend is the cart pulling the horse. Entrepreneurs create jobs through their actions. The middle class spending is only the motivation. Motivation without action produces nothing.
I’ll leave you with this analogy that portrays the absurdity of Robert Reich’s propaganda.
Cal: Mr. Reich, How are babies made?
Robert Reich: Because people want them.