Supply, Demand, Production, Consumption: Tomato, Tomato, Potato, Potato

Ok, so the title doesn't work so well in type. Humor me. I thought I'd take a moment to look at a particular relationship between supply, demand, production and consumption that most people never really come to understand. Like many of the things we commonly believe about economics, most of us have an idea about these concepts that is completely wrongheaded. I suppose we can chalk that up to us having brains that were thoroughly washed, waxed, and polished to a sparkling finish in our illustrious public schools. But I hope to show you a very simple and overlooked relationship here that I consider to be quite profound. You might even call it the secret of capitalism. Most of us can connect the ideas of demand and consumption. When we think about these things, we think about going to a grocery store or a market, where we look for things we want to buy and pay money to get them. Maybe we think about a great bull market or an auction, where buyers compete with one another, driving up prices with their bidding. Likewise, when we think about supply and production, we think about a factory or a farm, where the things we like to buy are produced. Perhaps a few of us think about out jobs, where we slave away making widgets, or keeping the paperwork for the widgets our company makes overseas. When we think about the relationship between supply and demand, or consumption and production, we usually think about those annoying curves we saw in our economics textbook. They crossed one another, and that was supposed to say something about equilibrium, or price, or margins. Or something like that. Those college years make everything a little hazy, don't they? The point is, we usually see these things in competition with one another. We think about supply and demand of an individual good, with producers trying to get the highest prices out of competing consumers, and consumers trying get the best price out of competing producers. Where the curves cross is where the business happens. "At the margins." But this isn't all there is to it. Its time to "expand our minds" and horizons for a moment. Put down that lighter, Ben! What if I told you these concepts were only two sides of the same coin? That there really was hardly any distinction between the two? Here is the secret of capitalism's success. Why do we show up for work each day? Sure, I like my job okay, but like most people, if I didn't get a paycheck every week, I'd have to find other ways to spend my time. I need that paycheck. Everyone does. We've got bills to pay. We need to consume. And because we need to consume, we need to produce. Production is really just nascent consumption. The only reason it happens is as a result of the desire of individual economic actors to consume. When we labor away, it is for the dream of future satisfaction of our desires through consumption. And there are lots of great things out there for us to enjoy! So we are motivated to produce ever more. We labor to put goods out in the market that others will enjoy for the purpose of receiving the goods of others which we enjoy, and the harder we work, the more we enjoy, and the more others are able to enjoy our efforts! Its not a matter of struggle with one another. It's a win-win! Dare I say? Its cooperation! On top of this, the more we innovate, the more we "invest" for the increase of our efforts, the more we increase our per-capita and per-hour productivity, and the less we have to work to produce more, and the less we have to work to consume more. This is the "capital" of capitalism. Capital is that portion of our production, our sacrificed consumption, which we devote to the increase of our efforts so that we are able to consume even more, with less work, in the future. Capital is what multiplies our efforts. It can be tools, ideas, education, any number of things. But its increase is what multiplies our efforts, in effect making us humans more and more valuable. It lifts us up from the mire of raw animal effort to survive on this earth. Every object which is consumed must be produced. The secret to good economics is the recognition of this very simple fact, the embrace of its consequences, and the submission to the demands it places on us. It is an obvious and simple law, with far reaching consequences. We cannot escape it. We cannot avoid it. It is not a choice. What makes capitalism work so well? The desire to consume coupled with our efforts to produce. The ability to invest in capital securely. The discipline to sacrifice the consumption of today for the betterment of tomorrow. These cause the law work for us, in our favor. These words are beginning to have odd connotations, aren't they? Discipline? Security? Sacrifice? This doesn't sound like "red in tooth and claw," does it? Capitalism doesn't have to be. It isn't supposed to be. Capitalism isn't about struggle, at least with others. It is about a struggle with one's self. It is about honesty. It is about honor and discipline. It is about dedication, and respect. When these break down, so does capitalism. The law begins to work against us. More later...