Say’s Law

Posted by PITHOCRATES - September 2nd, 2013

Economics 101

(originally published August 6, 2012)

Keynesians believe if you Build Demand Economic Activity will Follow

People hate catching a common cold.  And have long wanted a cure for the common cold.  For a long time.  For hundreds of years.  But no one had ever filled this incredible demand.  All this time doctors and scientists still haven’t been able to figure that one out.  Despite knowing with that incredible demand, and our patent rights, whoever does figure that one out will become richer than Bill Gates.  Which is quite the incentive for figuring out the ingredients to make one little pill.  So why hasn’t anyone found the cure for the common cold?

There are many reasons.  But let’s just ignore them.  Like a Keynesian economist ignores a lot of things in their economic formulas.  In fact, let’s try and enter the head of some Keynesian economists.  And have them answer the question why there isn’t a cure for the common cold.  Based on their economic analysis you might hear them say that we have a cure for the common cold.  Because a high demand makes anything happen.  Or you might hear them say we don’t have a cure because enough people haven’t caught a cold yet.  And that we need to get more people to catch colds so we increase the demand for a cure.

Keynesians believe if you build demand economic activity will follow.  Like in that movie where they build a baseball diamond in a cornfield and those dead baseball players come back to play on it.  So Keynesians believe in government spending.  And love stimulus spending.  As well as taxing people to give their money to other people to spend.  Because having money to spend stimulates demand.  Consumers will consume things.  And increase consumption.  So suppliers will bring more things to market.  And create more jobs to meet that consumption demand.  Unless people save that money.  Which is something Keynesians hate.  Because saving reduces consumption.   Which is about the worst thing you could do in the universe of Keynesian economics.  Save money.  For in that universe spending trumps saving.  In fact, spending trumps everything.  No matter how you create that spending.  Keynesians actually believe taxing people so they can pay other people to dig a ditch and then fill that ditch back in stimulates economic activity.  Because these ditch diggers/fillers will take their paycheck and spend it.

Today People wait Anxiously for the next Apple Release to Learn what the Next Thing is that they Must Have

Of course there is a problem with this economic theory.  When you take money away from others they haven’t created new economic activity.  They just transferred that spending to someone else.  The people who earned that money spend less while the people who didn’t earn it spend more.  It’s a wash.  Some spending goes down.  While some spending goes up.  Actually there is a net loss in economic activity.  Because that money has to pass through government hands.  Where some of it sticks.  Because bureaucrats have to eat, too.  So the people receiving this money don’t receive as much as what was taxed away.  So Keynesian stimulus doesn’t really stimulate.  It actually reduces economic activity from what it might have been.  Because of the government’s cut.

And it gets worse.  Because this consumption demand doesn’t really create jobs.  We get nothing new out of it.  What do people demand?  Things they see.  Things they know about.  For it is hard to demand something that doesn’t exist.  You see a commercial for another incredible Apple product and you want it.  Thanks to some great advertising that explained why you must have it.  In other words, when you give money to people all they will do is buy things they’ve always wanted.  Things that already exist.  Old stuff.  It’s sort of the chicken and the egg thing.  Which came first?  Wanting something?  Or the thing that people want?

Raising taxes on Apple to create a more egalitarian society by redistributing their wealth will let people buy more of the old stuff.  But it won’t help Apple create more new things to bring to market.  Things we don’t even know about yet.  If we tax them so much that it leaves little left for them to invest in research and development how are they going to develop new things?  Things we don’t even know about yet?  Things that we will learn that we must have?  Once upon a time no one was asking for portable cassette players.  Then Sony came out with the Walkman.  And everyone had to have one.  Once upon a time there were no MP3 players.  No smartphones.  No tablet computers.  Now people must have these things.  After their manufacturers told us why we must have them.  Today people wait anxiously for the next Apple release to learn what the next thing is that they must have.

Say’s Law states that Supply Creates Demand

Supply leads demand.  We can’t ask for the unknown.  We can only ask for what the market has shown us.  Which is why Keynesian economics doesn’t work.  Because focusing on demand doesn’t work.  Giving people money to spend doesn’t stimulate creativity in the market place.  Because that money was taxed out of the market place.   Reducing profits.  Leaving less for businesses to invest into research and development.  And reducing their incentive to take big risks to bring the next big thing to market.  Like a phone you can talk to and ask questions.  Again something no one was demanding.  But now it’s something everyone wants.

Jean-Baptiste Say (1767–1832) was a French economist.  Another brilliant French mind that contributed to the Enlightenment.  And helped advance Western Civilization.  He observed how supply led demand.  Understood production was key in the economy.  He knew to create economic activity you had to focus on the producers.  Not the consumers.  Because if we encourage brilliant minds to bring brilliant things to market the demand will follow.  As history has shown.  And continues to show.  Every time a high-tech company brings something new to market that they have to explain to us before we realize we must have it.  Or said in another way, supply creates demand.  A little law of economics that we call Say’s law.

If Keynesian economics worked no one would have to have a job.  The government could print money for everyone.  And the people could take their government dollars and consume whatever was in the market place.  Which, of course, would be pretty sparse if no one worked.  If there were no Steve Jobs out there thinking of brilliant things to bring to market.  Because supply creates demand.  Demand doesn’t create supply.  For fists full of money won’t stimulate any economic activity if there is nothing to buy.  So using Keynesian stimulus as a cure for a recession is about as effective as someone’s homemade cure for the common cold.  You take the homemade concoction and in a week or two it cures you.  Of course, the cold just ran its course.  Which is how recessions end.  After they run their course.  Which can be a short course if there isn’t too much Keynesian intervention.

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Canada may have National Health Care but they don’t Pay for all Life-Saving Drugs

Posted by PITHOCRATES - August 18th, 2012

Week in Review

You ever go to a microbrewery?  Where they will have numerous homebrewed beers to try?  Brew masters can create new flavors and tweak them until they find special ones people love.  And then they sell them.  Pretty simple.  Unlike bringing new life saving drugs to market.

Making new drugs is a costly endeavor.  It takes a lot of research.  A lot of pouring through data.  Studying how disease develops in the body.  Looking for things.  Thinking about things.  Hypothesizing about things.  Resulting in a proposed new drug.  Then experimentation.  Figuring out dosages.  Looking for side effects.  Adjusting chemical formulas.  The few promising ideas advance forward.  While the majority become discarded dead-ends.  After a lot of time human trials begin.  Where more times than not a brilliant idea fails to show a positive result.  And the drug is abandoned.  The tiny few that do show promise make it to the next level.  And eventually to FDA approval.  For some usages.  A new cancer drug may be approved for one or two types of cancer.  Providing a very limited market to recoup all those sunk costs.  So these new drugs carry high price tags.  Some drugs may receive FDA approval for other uses.  Some uses may lose their FDA approval as the drug may not show enough benefit to justify the cost.  Or the side effects.  Making it very difficult to recover costs on some drugs.  As well as funding new research and development on other drugs.

Developing new drugs is costly.  It takes enormous amounts of capital.  And time.  That someone has to pay for.  Even in countries with national health care systems.  Even in America under Obamacare.  For they may tax everyone to pay for health care.  But they must rely on others to make everything that’s good in those health care systems.  Especially those life-saving drugs (see Saint John man struggles to pay for cancer drug posted 8/13/2012 on CBC News).

A Saint John man and his family are struggling to figure out how they will pay for an expensive cancer drug that could prolong his life…

But the drug will cost $10,600 a month and it is not covered by the provincial government…

The couple appealed to the Department of Health for financial help to pay for the drug. But the provincial government also refused…

The New Brunswick government announced in 2009 that it would cover Avastin under the provincial drug program for people with metastatic colorectal cancer.

The Saint John man has a brain tumor.  While New Brunswick will authorize payment for Avastin for metastatic colorectal cancer it will not authorize payment for its use to treat brain tumors.  Because so far Avastin has not shown the same positive results in treating brain tumors that it has in treating metastatic colorectal cancer.  Provincial budgets are limited.  As they are at health insurance companies.  If they spend enormous amounts of money on treatments that offer a minimal chance of success they can’t spend that money on treatments that show far greater chances of success.  Meaning that overall more people will go without treatment.  And overall survival rates will fall.

There really is nothing more heart wrenching to know that there is a drug out there that may help but its cost puts it out of reach.  But it is important to understand what it took to get that drug to this level.  A drug company may have spent money developing it for 10 years or more before seeing a dime in revenue.  Contrary to popular belief, these drug companies aren’t evil corporations.  People work at these drug companies.  And as noble as it may be they can’t work without pay for 10 years.  Especially when a lot of their employees have PhDs with enormous student loan debt.  So the drug companies borrow a lot of money and take a lot of risks.  Even the successful ones that show fantastic profits can lose everything in one class-action lawsuit.

So there are great profits because there are great costs.  And great risks.  Which no one would take if there wasn’t a chance for great profits.  Which is why there is so much research and development at these drug companies.  Because we will reward the one that finds a cure for cancer with great profits.  Which is what we want.  Because we want their drugs.  The more they bring to market the better our treatment options.  And the more treatment options there are the quicker we’ll find those life saving-drugs.  That are so successful in treating patients that everyone will authorize payment for them.  Without worrying that doing so will cause other people to die.

Canada may have a national health care system but that doesn’t change this fact.  Nothing is free.  And taxpayers’ pockets just aren’t deep enough to provide the Utopian health care system people think of when they think of national health care.  It’s often not what people living outside these systems think they are.  They have real budgets.  Long waiting times.  Rationing of services.  And treatments.  As the Avastin drug clearly shows in Saint John.  And the more people a national system covers the worst it will be.  Because on top of everything else there will be a great health care bureaucracy pulling even more limited funds out of the health care system.  Where Obamacare will be the worst of them all.  Because of the advanced nations America has the greatest population of them all.  And will have the greatest number patients of them all.

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Say’s Law

Posted by PITHOCRATES - August 6th, 2012

Economics 101

Keynesians believe if you Build Demand Economic Activity will Follow

People hate catching a common cold.  And have long wanted a cure for the common cold.  For a long time.  For hundreds of years.  But no one had ever filled this incredible demand.  All this time doctors and scientists still haven’t been able to figure that one out.  Despite knowing with that incredible demand, and our patent rights, whoever does figure that one out will become richer than Bill Gates.  Which is quite the incentive for figuring out the ingredients to make one little pill.  So why hasn’t anyone found the cure for the common cold?

There are many reasons.  But let’s just ignore them.  Like a Keynesian economist ignores a lot of things in their economic formulas.  In fact, let’s try and enter the head of some Keynesian economists.  And have them answer the question why there isn’t a cure for the common cold.  Based on their economic analysis you might hear them say that we have a cure for the common cold.  Because a high demand makes anything happen.  Or you might hear them say we don’t have a cure because enough people haven’t caught a cold yet.  And that we need to get more people to catch colds so we increase the demand for a cure.

Keynesians believe if you build demand economic activity will follow.  Like in that movie where they build a baseball diamond in a cornfield and those dead baseball players come back to play on it.  So Keynesians believe in government spending.  And love stimulus spending.  As well as taxing people to give their money to other people to spend.  Because having money to spend stimulates demand.  Consumers will consume things.  And increase consumption.  So suppliers will bring more things to market.  And create more jobs to meet that consumption demand.  Unless people save that money.  Which is something Keynesians hate.  Because saving reduces consumption.   Which is about the worst thing you could do in the universe of Keynesian economics.  Save money.  For in that universe spending trumps saving.  In fact, spending trumps everything.  No matter how you create that spending.  Keynesians actually believe taxing people so they can pay other people to dig a ditch and then fill that ditch back in stimulates economic activity.  Because these ditch diggers/fillers will take their paycheck and spend it.

Today People wait Anxiously for the next Apple Release to Learn what the Next Thing is that they Must Have

Of course there is a problem with this economic theory.  When you take money away from others they haven’t created new economic activity.  They just transferred that spending to someone else.  The people who earned that money spend less while the people who didn’t earn it spend more.  It’s a wash.  Some spending goes down.  While some spending goes up.  Actually there is a net loss in economic activity.  Because that money has to pass through government hands.  Where some of it sticks.  Because bureaucrats have to eat, too.  So the people receiving this money don’t receive as much as what was taxed away.  So Keynesian stimulus doesn’t really stimulate.  It actually reduces economic activity from what it might have been.  Because of the government’s cut.

And it gets worse.  Because this consumption demand doesn’t really create jobs.  We get nothing new out of it.  What do people demand?  Things they see.  Things they know about.  For it is hard to demand something that doesn’t exist.  You see a commercial for another incredible Apple product and you want it.  Thanks to some great advertising that explained why you must have it.  In other words, when you give money to people all they will do is buy things they’ve always wanted.  Things that already exist.  Old stuff.  It’s sort of the chicken and the egg thing.  Which came first?  Wanting something?  Or the thing that people want?

Raising taxes on Apple to create a more egalitarian society by redistributing their wealth will let people buy more of the old stuff.  But it won’t help Apple create more new things to bring to market.  Things we don’t even know about yet.  If we tax them so much that it leaves little left for them to invest in research and development how are they going to develop new things?  Things we don’t even know about yet?  Things that we will learn that we must have?  Once upon a time no one was asking for portable cassette players.  Then Sony came out with the Walkman.  And everyone had to have one.  Once upon a time there were no MP3 players.  No smartphones.  No tablet computers.  Now people must have these things.  After their manufacturers told us why we must have them.  Today people wait anxiously for the next Apple release to learn what the next thing is that they must have.

Say’s Law states that Supply Creates Demand

Supply leads demand.  We can’t ask for the unknown.  We can only ask for what the market has shown us.  Which is why Keynesian economics doesn’t work.  Because focusing on demand doesn’t work.  Giving people money to spend doesn’t stimulate creativity in the market place.  Because that money was taxed out of the market place.   Reducing profits.  Leaving less for businesses to invest into research and development.  And reducing their incentive to take big risks to bring the next big thing to market.  Like a phone you can talk to and ask questions.  Again something no one was demanding.  But now it’s something everyone wants.

Jean-Baptiste Say (1767–1832) was a French economist.  Another brilliant French mind that contributed to the Enlightenment.  And helped advance Western Civilization.  He observed how supply led demand.  Understood production was key in the economy.  He knew to create economic activity you had to focus on the producers.  Not the consumers.  Because if we encourage brilliant minds to bring brilliant things to market the demand will follow.  As history has shown.  And continues to show.  Every time a high-tech company brings something new to market that they have to explain to us before we realize we must have it.  Or said in another way, supply creates demand.  A little law of economics that we call Say’s law.

If Keynesian economics worked no one would have to have a job.  The government could print money for everyone.  And the people could take their government dollars and consume whatever was in the market place.  Which, of course, would be pretty sparse if no one worked.  If there were no Steve Jobs out there thinking of brilliant things to bring to market.  Because supply creates demand.  Demand doesn’t create supply.  For fists full of money won’t stimulate any economic activity if there is nothing to buy.  So using Keynesian stimulus as a cure for a recession is about as effective as someone’s homemade cure for the common cold.  You take the homemade concoction and in a week or two it cures you.  Of course, the cold just ran its course.  Which is how recessions end.  After they run their course.  Which can be a short course if there isn’t too much Keynesian intervention.

www.PITHOCRATES.com

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The UK’s NHS chooses Expensive Drug from US Drug Maker Merck because it’s Better than Anything they Have

Posted by PITHOCRATES - March 11th, 2012

Week in Review

What’s the difference between pre-Obamacare US health care and the UK’s National Health Service (NHS)?  Incentive.  In the US there is an incentive to pour billions of dollars into research and development.  To produce the next super drug.  Whereas in the UK drug companies only make as much as the government allows.  Or is willing to pay.  Creating a disincentive to pour billions of dollars into research and development.  Which is why the NHS’ new hepatitis C drug comes from the US (see Merck’s hepatitis C drug wins UK cost endorsement by Ben Hirschler posted 3/9/2012 on Reuters).

U.S. drug maker Merck & Co’s new hepatitis C drug Victrelis was recommended for use within Britain’s state health service on Friday, despite its hefty price tag.

Critics will say that we shouldn’t allow Merck to charge so much for their drug.  That it is wrong to profit off of disease.  That the US should stop this price gouging like they do in the UK.  So should we?  Well, to answer that question all you have to do is to consider who made this new hepatitis C drug.  And who was that?  The US, of course.  Because Merck COULD charge this much for their drug.  Which just goes to show you that when you want the best you’re better off relying on the profit system than altruism.  Because profits provide incentive to make the best.  While altruism doesn’t.

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