[brc]

production creates demand. Not because people want to buy it, but because the act of production gives you something to trade.

The people who build iPhones (Apple employees) produce something valuable (iPhones). Everyone else has to produce something to trade for an iPhone - a bushel of wheat, a written work, a clean window, a haircut, a night of entertainment.

The act of production and trade is what creates wealth and economic growth.

People get lost and separated from this basic understanding because if you create and give everyone money, then everyone can go and trade the money with Apple employees for an iPhone. But this is not long term sustainable, and you actually cheated the Apple employees because the money they are getting is worth slightly less than when they set out to build phones. And it's clear that the extra money has not made the world as rich as it would have been from people actually producing something else to trade. This is patently true even though the mythical gdp number went up, giving the illusion of an increase in wealth.

[millstone]

> production creates demand. Not because people want to buy it, but because the act of production gives you something to trade

What are you describing is called Say's Law. There's various ways it can be false, and the US economy experienced lots of them.

An example of how production does not create demand: people can save money for the future. A person who wants to save more will produce more (work harder) and reduce their spending. If everyone does this simultaneously, we get a glut: supply exceeds demand, and real production will fall.

Note the simple remedy: give everyone money, everyone can increase their savings, and resume their old level of demand. Here money did increase real output. And (even in your example) everyone got money, so the Apple employees were not cheated. Lost real income from iPhone sales is compensated by the additional money they received.

https://en.wikipedia.org/wiki/Say%27s_law

[brc]

Of course I know it is Say's Law. My purpose here is to post it for people to understand the principle.

Giving everyone money does not work. You can only increase the size of the economy and wealth of the people within by producing more. That much is self evident, yet people have been bamboozled by muddied thinking that aggregate demand is all. I don't try and convince the hardened Keynesian thinker with Krugman in their favourites, but merely to explain to people who instinctively know that current macro thinking is broken, but haven't worked out why.

[millstone]

I'm not sure where you're going with that. Ok, so we become wealthier if we produce more. The next question is, how do we shape public policy so that our economy produces more?

If you tug on that rope, you find that supply is connected to demand, and demand is connected to things like the money supply. So choosing the correct money supply can increase real output.

I think you're arguing against a strawman, something like "if you give everyone money then we'll all be richer because we have more money." But nobody's saying that.

[meric]

Here is the mechanism that will fully elaborate brc's point.

Elderly consume more than they produce. The young produce more than they consume to save for retirement.

A lowering of interest temporarily induces additional borrowings which will be invested in capital in the short run. Inefficient companies that were going to go bankrupt and release their physical capital for more efficient use, will be kept alive, staving off job losses.

In the long run, low interest reduce elderly's income on their savings. Reducing elder's income reduces demand for the goods the young produce. Since the young cannot produce at a loss, they produce less and have less income to save with. The causes reduced savings, which in turn means reduced investment, and thus even less spending, less income, which means deflation. This deflation is further enhanced from the increased supply caused by the increased investment in capital when interest was first lowered. And if you keep lending to companies at near zero interest rate with money from nowhere, increasing inefficiency in capital means lower yields in stock markets general, also lowering income in the long run, and lower job growth.

The Fisher equation[1]: Nominal interest rate = Real interest rate + Inflation.

The initial thrust of lowering interest will boost the economy temporarily. Keep down nominal interest rate long enough, and the economists will get the deflation they so dread.

Now you know why the EU and the U.S. has trouble with lack of inflation "even though" interest rate is so low for the past so many years.

[1] https://en.wikipedia.org/wiki/Fisher_equation

[brc]

The whole point of Keynesian theory is that, in times of economic contraction ('a glut' in the old money), you should borrow from the future and buy things - any things - now.

You could make the argument that buying worthwhile things - like dams or power stations - makes this true. But for two things : if it's worth building a dam for positive return, you should do it at any time, as soon as you can. The second is that governments do not spend money on buying good things. In 2008/9 they spent money buying and crushing old cars, which is about as close to paying people to dig holes and fill them in as you can get.

The believers in 'aggregate demand is all' absolutely do believe that giving people money makes us all richer. They may not say it like that, but that's what they mean.