On the “End” Demand

Let’s talk here about the market demand, or more specifically about the end consumer demand, a concept without which the modern economics makes little sense. The meaning of this type of demand can be understood if we imagine the movement of goods on a market. For example, let’s consider a production of steel. Some company mines the ore, for what reason? In order to sell it and gain a profit. Some company enriches the ore, for what reason? To re-sell and also to gain a profit. Some company melts the purified ore into steel, for what purpose? To gain a profit. Someone is engaged in research in materials science. What for? So that they can sell the research of steel so that a better technology for steel manufacturing process could be developed. A better technology should make it easier and thus more profitable to sell steel…

In other words, any product keeps gradually moving towards greater and greater perfection, and the money goes to the various manufacturers who perfect the said product. And so two question arise: where do the money come from and who is at the end of this sequence? Finding answers to these questions is important as the demand in the steel-manufacturing example above is intermediary. In other words its purpose is production of new goods or services for resale. A novel technology may be developed (a new grade of steel at a processing plant or some vehicle parts at a car manufacturing plant) or it can be a service (for example, a warehouse to store steel ingots), the essence remains the same, gaining profit from resale of goods.

Even if a firm buys chairs or office supplies, it would seem that it buys them for its own use, yet in reality it still transfers the costs to the end consumer (this is the concept of  the “prime cost” of the goods or services which is calculated quantitatively as the amortization). No government would let companies to spend as much money as they want, expenditures are strictly by the scale of taxation depending on many different factors one of which is the prime cost (i.e., the scale of a profit) of a particular firm.

No matter how long a production chain is at some point the process of resale ends. This happens when a product reaches the end consumer. An ordinary person buys a stereo to listen to music or a car to drive to and from work. At this point the transfer of cost is done, as an average citizen is not engaged in the resale of the goods or services he uses. Yes, while citizens may sell their labor (or not sell if they choose to), but that has nothing to do with the value of their assets, their interests and preferences. Individual consumers (or as they say in microeconomics, households) are the final step in the demand!

Are individuals the only ones who generate this demand? No, there is one more subject that generates the demand, the state. The state purchases goods and services (for example, for its armed forces) is not particularly interested in costs and profits, the state itself never resells. More precisely, the “goods and services” that the state sells have nothing to do with the ones sold by private businesses. Note that depending on a particular political system adopted by a state the ratio of the private and public demand may be different; however, most of the world countries today have more or less liberal economic policies, in which the share of the private demand usually increases rapidly.

Let’s repeat once again, in today’s economy the sale of any good (or service) is done to that once a commodity or service was part of another product that will be purchased by the end customer. There is no other kind of demand in the current economic system, as if, for example, a jewelry manufacturer makes a unique piece of jewelry, which then is put on a display for advertisement, the company still lists that piece as one of its assets. Thus, one way or another, the piece of jewelry is at least potentially may become for sale.

The following conclusion could be made from the above; the total volume of the end consumer demand limits the total volume of production! Any overproduction just does not make sense! But then, how fast can the economy grow? And here are a lot of intricacies! The first one is the redistribution of demand among different countries. For example, Russia sells oil which theoretically should lead to the growth of the Russian economy; however, as the domestic production declines in Russia all the time, at the expense of imports, sale of oil led to the growth of the economies of the countries that export their goods to Russia, particularly, the European Union and China. Another example is the activities of transnational corporations that scavenge their natural resources of “weaker” countries and exploit labor of their citizens at significantly lower costs.

The second method is to distribute economic resources to the end consumers. The Keynes economic theory is built around this principle; however, the experience had shown that this model has limitations. Unfortunately, a discussion about these limitations is beyond the scope of this article. Yet, there is a third method, which unfortunately has a serious drawback. This method urges to use the demand planned for the future today. This of course will lead to a decrease the future demand; however, most a liberal capitalist governments care little about such insignificant things as the future.

It should be noted that any producer makes an assessment of the future demand. For example, when a farmer grows wheat, he does not know whether it will be used the next week, month or year, but he is certain that the wheat will not be used at the moment he harvests it. The only question is how far into the future one can go without experiencing unpredictable situations. And in fact, precisely this method has been in use since the early 80’s in the United States and Europe and then in the former Eastern Bloc countries after the fall of the Soviet Union. That is the economic policy makers began to increase the time interval at which the final demand is taken into account to keep the economic growth stable.

Technically, the demand was increased by making policies that allowed citizens apply for loans for goods and services consumption (which before that they could almost never do), and as a result of this “loaned” income, the demand began to rise sharply. At the same time, since the early 80′s real, the disposable household income (or rather, the purchasing power) in the United States on average did not grow at all. The income remained the same as in the late 60’s because of the economic crisis of the early 70’s.

As a result, the “formal” GDP in the United States grew over the years, while the consumer income, being fixed, stayed the same. Although the expenditures of the US government over those years; however, they still make up a small part of the total GDP as is expected with a liberal economic system. There is no way now to build up anymore debt and, in fact, the debt constitutes the lion’s share of the assets of the financial system. Moreover, there is a situation now that, for some reason which is beyond understanding within this economic theory, the growth of household expenditure had been extrapolated into the future for an indefinite period, and under this “fictitious” demand has released new assets, completely forgetting that this demand has already been included in the debt of the households. As a result, the current crisis is likely to continue because of all of these economic manipulations.

A discussion of the consequences of this crisis is not the scope of this article; however, a general conclusion could be made here:

- The purpose of any sale is to increase the length of the chain of intermediaries before it reaches the final consumer. If there is no final demand for a good or a service then there will be no intermediaries;

- An end consumer is someone who buys a product or a service for personal use and not for resale;

- The total amount of goods and services (in its monetary equivalent), which are on the market, is limited by the “final” demand and by the time interval over which it is taken into account. The crisis of the last few years due to the fact that financial institutions have tried to take into account the “too far” in demand. As one of the modern American politics: “We already ate our demand for two generations to come”;

- A decline of the current “end” demand and of the time interval over which it is taken into account on the market, will inevitably cause a decline in the world’s GDP (GDP in itself is the added value) and in itself is the expression of the “end” demand.

  Тranslated by Anton Toukaev. All rights reserved.
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Link: http://worldcrisis.ru/crisis/1053381