In many ways 2021 was a year defined by supply shortages. Whether it was life-saving vaccines at the beginning of the year, or more mundane things like coal, steel and semiconductor chips - supply chains around the world were caught unaware by a sudden surge in demand - led by re-openings and fiscal stimulus checks. In this backdrop, I found myself contemplating the relevance of a classic economic theory proposed by a certain Jean-Bapitste Say - and a rather controversial one at that.
Say argued that Supply creates its own demand. And while there have been many economists who have disagreed with what he had to say, his point was rather simple - that in order to be able to demand and purchase a good, an individual should first create something of value and offer it for exchange.
Of course, one can puncture a few holes into this theory - First, modern economies use money as a medium of exchange rather than barter - so money supply can have its own effect on supply and demand for goods - e.g. tighter monetary conditions can cause individuals to hoard money rather than spending it on goods and services. Second, producing a good that is not of value (at any price) may not create any demand - e.g. a producer who manufactures a black & white CRT television today is unlikely to be compensated for his efforts - even though he/she may have been handsomely rewarded for the same good 50 years ago. But I do not intend to wade into this debate for now.
What I find quite relevant about Say’s law today is its applicability to the process of innovation. What drives a significant amount of economic growth (and demand) around the world today is the act of creating new goods and services which did not exist previously. Supply of innovations creates demand for them. For instance, the act of inventing the smartphone has fostered a whole éco-system of component suppliers, app developers and online sellers. This has possibly created employment for millions around the world, and those individuals with their earnings have in turn created demand for new goods and services.
Next, let’s take the world of pharmaceuticals and healthcare for example - there are lifesaving drugs today that did not exist a mere decade ago - treatments that help ameliorate (though not yet fully cure) cancer, manage diabetes and cardiac ailments. Within months of the outbreak of COVID, our scientists were ready with multiple vaccines and therapeutic drugs to fight the epidemic. There are nutritional supplements in existence today - for humans as well as animals - that money could not buy when our ancestors were around.
Look at the world of video games - an industry that did not even exist half a century ago is a thriving economic engine today and one that is growing increasingly sophisticated. You can now purchase in-game items with virtual currency, attend a concert within a game and create NFTs that sell for millions within a ‘metaverse’. I find this a fascinating corroboration of Say’s Law - supply creating demand where none existed.
This also creates a whole new dilemma for policymakers. Are we adequately measuring the cost of living and inflation? Most measures of inflation today capture prices of a fixed basket of goods over time. To be fair, this is perhaps the most scientific approach and one that captures what is relevant to the vast majority of citizens - basic necessities of life. But I would argue that a discretionary good of today may be a staple, a necessity of tomorrow. Try going a day or two without a smartphone and an internet connection and you will realise what I am talking about - connectivity is to our lives and times what electricity was to that of our parents. While policymakers may base their decisions on a basic cost of living, life has moved well beyond that.
This also has massive implications for wealth and savings - what you deem a satisfactory nest egg today may prove grossly inadequate tomorrow. Who knows what fantastic new contraptions you may feel the need to purchase 30 years from today! It’s a brave new world indeed.
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