Demand Signals

Economics, in some sense, is the study of choices. The study of how your choices and my choices affect economic variables and economic outcomes. This is, in part, why economics cannot be completely separated from other social science disciplines concerned with human behavior, such as history, psychology, sociology, political science, and anthropology.

One advantage of capitalist economies over other modes of production is the freedom it gives to its citizens to participate in economic life--to make choices mostly free from constraints. This freedom isn't without necessary prerequisites, qualifications, or undesirable results, however.

Instead of being organized around a central planner, our economy is organized around 'demand signals'. Production decisions aren't made by the state, but by producers usually thought of as capitalists but are really more likely small business owners, CEOs, Boards of governors, etc. They obtain funds, at least initially, from banks through loans or from the public through sales of stock. In order to obtain those funds, they must have some prospects for selling their proposed product. This puts production decisions largely in the hands of bankers, who estimate the expected rate of return on the proposed investment, or stockbrokers who do the same. For the former it means getting the loan paid back, the latter a rise in the share price.

Yet both are looking at expected rate of return, a hard to gauge variable that because it is based on uncertain expectations of the future depends more on current sales or current demand. This is where our choices come in, or our demand signals.

You see, we demand with our money and the purchase of a good or service sends a signal to the producer or to the bankers making lending decisions. That signal is usually to invest more in that product or service--to increase investment, or to raise the price of that good or service to obtain more profits with which they too use to purchase goods and services to send signals to their suppliers. It is this interconnected web of demand signals using paper money (or money from bank accounts) that organizes real output in our economy.

We don't have a central organizer or planner who has to guess how much to produce, or to guess how much we want or need of any one product or service. We send signals through 'the market' and 'it' organizes production along those signals.

There are many implication or conclusions to be drawn from this. Perhaps the most important are the moral implications. Demand signals are a choice made by persons and are thus subject to morality or, rather, have a moral impact as all decisions made by persons do. We need to consider the impact our economic choices are making on society writ large. Purchasing illicit material sends a demand signal to that supplier that more is needed. By purchasing immoral goods or services, we are telling the market to produce more immorality. To be sure, the suppliers that make it possible are also morally complicit, but where there is demand, you will often find a willing supplier.

We can also purchase too much of a moral good or service, making it immoral. This sends a demand signal to the market to produce more of a good or service for the society as a whole than would be morally acceptable. Purchasing goods from morally lacking companies--such as those who abuse laborers or support immoral causes--also sends demand signals to them validating their practices.

There are more purely economic implications, like purchasing goods from companies located outside the country or your state or city sends the demand signal to them to produce more and takes away the demand signal from the local business. That is, local business income drops and less money stays in the community if you shop at anonymous Big Box Store.

We should also consider that some persons or organizations have more power over these demand signals than others. Businesses set prices which can affect demand signals. Higher prices will often cause a drop in quantity demanded, unless that good is highly 'price inelastic' or a necessity, like healthcare, that we will demand no matter the price (assuming its life-saving healthcare).

Those who control the means by which we confer demand signals also have a lot of power. Here I am talking about banks and their control over the monetary system, and in particular the central bank and the state in conjunction with it. Banks have the power to create money and obtain state money from the Federal Reserve at the fed funds rate as needed. The state creates money when it spends and destroys it when it taxes. The decisions made by these entities can cause aggregate demand to fluctuate wildly from too much to too little.

If we don't have enough of the means of making demand signals--money, then production drops or ceases, companies fail, unemployment rises, and economic stagnation ensues. To boost aggregate demand signals, we need more money--the means by which we demand. We can get it from banks, but they aren't lending because they don't have high estimates for the expected rate of return. They are sitting on loads of cash or reserves and aren't lending because they don't have enough demand signals telling them they'll get their loan paid back.

The state could also spend more money into our pockets or tax us less to enable us to confer more demand signals to producers, yet they are threatening to do the opposite on the incorrect notion that they don't have the means to do so.

To be sure, the opposite can also happen. Too many aggregate demand signals will tell producers to produce more until they run out of real resources--no more labor, raw materials, or capital to use in producing more. They will then raise prices if they don't before getting to that point, which will cause inflation if this happens economy wide. At this point, our banks or government would need to decrease our ability to make demand signals.

Right now the economy as a whole doesn't have enough demand signals for a prosperous economy, but perhaps a worse problem is that there are many people who don't have enough of the means to make demand signals (again, money) to scrap a living consistent with human dignity. The means by which we obtain demand signals--work--isn't always available to everyone. Capitalist economies, although good at organizing production, have always left a portion of society unemployed, putting them into a poverty trap or cycle because poverty begets more poverty. Many say the opportunity is there for them, because it is provided by law, but there is no law to guarantee everyone a job or a basic living, only laws that establish that you can if you are so able.

Not everyone is given the same ability or freedom or opportunity to make demand signals consistent with human dignity, and many are denied that opportunity repeatedly. The supposed efficiency of capitalist economies, of the free market, has repeatedly throughout history shifted demand signals from poor to wealthy, giving some more than they need to live a life of dignity (and worse making it very difficult for them to live a life consistent with Catholic Social teaching (MT 19:24)) and leaving many without enough.

As Catholics, Christians more generally, and all people of good will, we must consider all this when making our daily decisions. We must think about the effects our demand signals will have on society and we must sculpt policy--the rules of the free market--to make sure everyone has the opportunity to live a life of dignity. There is no question the free market via our demand signals has shown its great ability to organize production in a free and mostly efficient way, but there is also no question that it produces immoral results of which these are just a few: production of immoral goods and services, production of too much of the wrong things, padding the pockets of multinational corporations mostly unconcerned with the well-being of the local community, too much power given to a few with selfish goals over the system of demand signals, not enough demand signals in the economy as an aggregate causing unneeded harm for many if not everyone, and great inequality in demand signals where those that have too much suffer from greed and avarice and those who have too little suffer from destitution and oppression.

This is the great lesson from Catholic Social Teaching, if there is just one. We must pervade all our choices with charity and concern for our neighbor striving for justice and the common good. Our demand signals must reflect our concern for our neighbor, our desire for their good and our own good. We must send signals to producers to produce the right things and the right amount of things for a good and just society.

It is not just policy that matters for living the Church's social doctrine, but ALL our decisions! For they all have an impact on the results and morality of our socioeconomic system.