Where Does Demand Come From?

Here's the thing. Demand in the economy ultimately comes from workers buying things. That's the driving force of all economic activity. All the capital in the world will not create wealth, if it is invested in something no one buys. Or if it is not invested.

If you cut wages then you reduce demand. If you load workers up with debt so they end up paying interest and have less to spend, you reduce demand. If you close down whole industries, you reduce demand.

Brainwashing workers into believing they "need" the shit you sell is only effective *if* they have disposable income to spend.

It comes down to this: Someone has to buy the shit you sell. Or you are fucked. 

The only way to increase demand is by giving workers more money across the board. The trick is that if you raise wages by too much it creates inflation - the more people are willing to spend, the higher the price goes.

Having more billionaires doesn't really help.They do spend, but in a narrow range and often not locally. They don't pay taxes and they tend to hoard wealth rather than recycling it as poor people do. And they tend to pay too much, and thus force up prices (think the property markets in London or Auckland). The poorest people spend everything that they get, they spend it locally, and they look for bargains.

If you want to help your economy, you institute measures to help poorer workers. Minimum wage. Handouts. However this can be self-defeating because employers see the handouts as a rationale for paying less. In the UK a lot of people work full-time but cannot afford to live. This cannot be sustainable.

We have the weird situation of falling unemployment with falling wages - supply and demand theory is not supposed to work like this. The demand for labour ought to produce higher wages. When it doesn't, something is wrong. The wrongness is millions going to CEOs and shareholders instead.

In the end business people have to realise that paying out too much in dividends and not enough in wages is self-defeating. Replacing people with robots is self-defeating, because robots don't buy anything. Any reduction in wages is ipso facto a reduction of demand for goods and services. You want to sell more? Pay higher wages. Henry Ford understood this. He paid his staff well enough so that they could afford to buy his cars. But they also spent that money in local businesses, increasing the prosperity of the region and the nation.

The world is awash with unused capital sitting in tax havens gathering dust. But that doesn't increase demand or drive economies. The rational thing to do at the moment is give a greater share of profits to workers. That way everyone benefits. Indeed, it would create more jobs as demand picked up.

This is something that business people have to understand. At present they don't seem to.