Rick Perry offered a ‘little economics lesson.’ It didn’t go so well.
Energy Secretary Rick Perry made a bizarre discussion of supply and demand and seemed to confuse the relationship between two of the key forces of the economy.
“Here’s a little economics lesson: supply and demand,” Perry said, according to Taylor Kuykendall of Standard & Poor’s. “You put the supply out there, and the demand will follow.”
People often talk about supply and demand in economics, but not the way Perry used the terms.
In essence, supply refers to whether goods and services are readily available in the market, and demand refers to how badly consumers want those products. Only the supply of a product does not create demand for it.
If Perry was suggesting that no matter how much coal the industry produces, there will be demand for it, it was clearly wrong. Of course, the demand for coal – or any other element – is not infinite. People only buy so much of it at a certain price, and producers can only sell more if they lower the price.
Another possible interpretation of Perry’s strange observation is that he could have been repeating a theory that was once widely accepted among economists.
According to this theory, demand and supply will always be in equilibrium throughout the economy as a whole. These days, however, many economists see this logic as deeply and dangerously misguided.
This reasoning is often associated with the French economist Jean-Baptiste Say, who argued in 1803 that over-supply in excess of demand across the economy as a whole was impossible (although he did not use those terms exactly).
Say said that the money consumers use to buy goods and services must ultimately come from consumers selling something else on the market. As a result, the producers’ supply in the market would always be matched by demand, since – according to Say – producers would use what they earned by making sales to make the purchases themselves.
Or, as David Ricardo, Say’s British contemporary, wrote, “I think demand depends only on supply.”
However, as later economists argue, people do not always use their money to buy things. Sometimes, they prefer to save money instead, or to pay off debts. This is especially true during panic, when businesses and households seek safety.
In that situation, then the supply of goods and services that the economy produces can exceed the demand for them. When the goods are not sold because nobody buys them, the factories will be inactive and the workers will be unemployed. Let’s say you recognized this problem after a financial crisis in England in 1825 and changed its melody.
The fact that Say seems to have been wrong initially is crucial to the way modern governments control panics.
Today, economists and politicians generally agree that during an accident, governments should put more money into the economy. When households and businesses have more to spend, the demand for goods and services will increase, putting the economy back into balance.