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Is an Increase in Demand Key for Economic Growth?

Whenever the so-called economy shows signs of weakness most experts are of the view that what is required to prevent the economy sliding into recession is to boost the overall demand for goods and services.

If the private sector fails to increase its demand then it is the role of the government to fill this void.

Following the ideas of Keynes and Friedman, most experts associate economic growth with increases in the demand for goods and services.

Both Keynes and Friedman felt that the great depression of the 1930’s was due to an insufficiency in aggregate demand and thus the way to fix the problem was to boost aggregate demand.

For Keynes, this could be achieved by having the federal government borrow more money and spend it when the private sector would not. Friedman on the other hand advocated that the Federal Reserve pump more money to revive demand.

There is however never such a thing as insufficient demand as such. We suggest that an individual’s demand is constrained by their ability to produce goods. The more goods that an individual can produce the more goods he can demand i.e. acquire.

Note that the production of one individual enables him to pay for the production of another individual. (The more goods an individual produces the more of other goods he can secure for himself. An individual’s demand therefore is constrained by his production of goods).

Observe that demand cannot stand by itself and be independent – it is limited by production. Hence, what drives the economy is not demand as such but the production of goods and services.

In this sense, producers and not consumers are the engine of economic growth. Obviously, if he wants to succeed then a producer must produce goods and services in line with what other producers require ie. consume.

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