Natural Demand: The Keynesian Farce

In 2005, a group of engineers came up with an innovative alternative to the traditional silicon photo-voltaic solar panel and began aggressively marketing it. Through existing connections in the industry, they were able to acquire start up capital for Solyndra, named for their long cylindrical form solar “tube” panels. They applied for Department of Energy loan guarantees in 2006 but were not successful until 2009, when the Obama administration took over during a very uncertain economic period, fully embracing the socialist Keynesian economic theory.

The Obama campaign promised “government investments” in “shovel ready” projects to boost the economy, and billions of federal loans soon filled dozens of “green” companies’s coffers, including $535 million to Solyndra. They built a new manufacturing facility and hired two thousand employees to produce copper indium gallium selenide cylindrical solar panels. While Solyndra had increased their manufacturing capabilities (and cost overhead), sales of their panels remained more or less flat. Then silicon prices dropped dramatically, making traditional silicon solar panels vastly less expensive.

With their sales suddenly plummeting and desperately short of cash, Solyndra executives asked for further federal loans. The Obama administration, having hitched their political reputation to Solyndra as the poster child of their green energy job initiative, granted another $75 million of loan guarantees in February 2011, keeping the company afloat for another six months. By August 2011, the company closed its doors and filed for Chapter 11 bankruptcy protection, laying off all of its 3,000 employees in short order. Over $600 million in federal loans simply vanished.

Shovel-ready was not as shovel-ready as we expected.
-President Barack Obama

We started discussing the principle of Natural Demand and how government taxation can negatively impact economic growth by reducing available discretionary capital in the economy. Now we’ll talk about how Keynesians continue to assert that government spending can supplement or replace Natural Demand, by allocating spending on goods and services elsewhere in the economy. Through this spending, Keynesian economists believe government can not only overcome the loss of growth caused by taxation but stimulate an economy, creating jobs in the micro economy, like priming a pump.

While there are several serious problems with this theory, not the least of which being the conspicuous failure to produce the desired “pump priming” effect when it has been implemented during recent recessions, the theory yet persists. To understand why Keynesian economic policies fail, we must first understand what Natural Demand really is. Put simply, when the market is left alone to its own devices, Natural Demand is the amount of a good or service that people will actually consume.

While it’s not possible to determine Natural Demand exactly at any given point in time, because people’s circumstances, needs, and wants can change hour to hour, the concept itself remains fairly intuitive. To illustrate it a bit more clearly, let’s look at an example of a family about to go out to eat. When they get into their car, they have a lot of options to choose from, but what they actually choose comes down to a few limiting factors:

  • First, what is it that they can afford? No matter how expensive their tastes may be, their pocketbook will restrain their choices for them. If the family has to choose between a steak dinner and utility bills, they are likely to settle for tacos, instead of steaks.
  • Second, what is it that all of them are willing to eat? It doesn’t do the parents any good to go out to eat at a fancy restaurant where an otherwise nice outing turns into an excruciating battle of wills. Pizzas, burgers, or tacos are an easier sell to kids than the seafood that the parents like so much.
  • Third, how much do they need? No matter how hungry they are, the 3 year old is never going to eat more than a 3 year old can eat. The family is unlikely to purchase an more than they can eat.

While there are other factors, these three elements suffice: what can they afford, what do they want, and how much do they need. Now considering every family within the same physical area, how much all of they can afford, what they want, and how much do they need, all together constitutes Natural Demand for the restaurant industry in that market. Simple enough?

He who knows that enough is enough will always have enough.
-Lao Tzu

Now, what people demand from day to day is fairly nebulous a concept, because what people want, need, and can afford can change from day to day, or even hour to hour. Suffice it to say, there are very real limits to how many couches a family will demand at any given time, even if those limits are difficult to nail down at any given time. A house, as well as a family budget, can only fit so many couches, after all, but it only takes one cat to bump that number to at least one.

It’s when people get it into their heads that they want to manipulate demand for their own purposes that things can get messy economically. History is filled with examples of failure after failure of companies that only existed so long as they were supported by their government, such as the East India Company or Solyndra. These policies always fail, and the reason they always fail comes down to the same miscalculation: bureaucrats believe that “Artificial Demand” modifies people’s economic behavior, yet somehow consumers never seem to act differently.

It’s ultimately why Solyndra failed. It’s not that the cylindrical form solar panels weren’t innovative or technologically sound. They seem to be, for all intents and purposes. The market simply didn’t want them. Was it because companies couldn’t afford hundreds of solar panels? Was it because companies were buying competitive goods? Was it because they didn’t see energy costs as a problem, especially when traditional energy prices were falling? Probably some of all of the above.

Regardless, Solyndra failed because they produced something for which Natural Demand simply did not exist for.

Anyone who has been stealing must steal no longer, but must work, doing something useful with their own hands, that they may have something to share with those in need.
-Ephesians 4:28

Consistent with the evidence of thousands of failures before and since, Solyndra’s failure demonstrated even half a billion in federal loans can’t make people buy something they don’t want. Had the company not received the more than half a billion dollars in federal loans, the company would have gone out of business anyway, but without wasting half a billion dollars of federal loan guarantees. The only difference between the two situations is the United States would have saved itself hundreds of millions of dollars in debt.

This simple fact is what condemns Keynesian economic models. If the economy would have not only been no worse off but actually have been better off without additional federal debt, then their argument that government spending can not only stimulate the economy, but also do so while not damaging GDP growth is provably false. The problem with Keynesians is that they don’t even acknowledge these failures, somehow writing them off as necessarily stimulative. If only casinos were so forgiving.

Meanwhile, the entire point of a free and capitalist economy is people buy what they can afford, want, and can use. The reason capitalism works as well as it does is that it makes no attempt to alter what the market is going to do, because capitalists recognize the market is going to do what it’s going to do, almost not matter what we may want it to do. People don’t buy couches they don’t need, no matter how much we need them to buy couches. The same is the same for solar panels or automobiles.

Only Natural Demand drives the economy, in conjunction with the market’s ability to provide a supply. Leaving more capital in the hands of the people, and they will buy only the things that they want and need, no more and no less. If politicians or bureaucrats truly want to improve the economy for the sake of their constituents, they should focus on those things that maximize Natural Demand.

That means stop taxing personal incomes, so that income can be directed at the pursuit of happiness. That means reducing corporate taxation so that businesses are not punished simply for doing business within the United States. That means reducing the functions of government to fit within the constraints of this economy. Among many other reasons, this why the Founding Fathers wanted a limited government, so that capital could remain in the hands of those whom it most benefits.


Liberty is For The Win!


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