The Consumption or Demand Motive

The consumption or demand motive is one of the most important maxims of Adam Smith’s economic system, aside from his Labour Theory of Value.

This maxim states that all economic activity is rooted in the people or the demanders in society and not in the producers or the suppliers in society. This is opposite from the current maxim of Economics of Say’s Law which states that production is the root of all economic activity and is the source of demand. Smith very clearly explains that such a maxim is a mercantile sophistry:

“By such maxims as these, however, nations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.. But the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind, though it cannot perhaps be corrected may very easily be prevented from disturbing the tranquillity of anybody but themselves. 

That it was the spirit of monopoly which originally both invented and propagated this doctrine cannot be doubted; and they who first taught it were by no means such fools as they who believed it. In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people. (Wealth of Nations Book 4, Chapter 3)

 

This different paradigm can lead to different supply curves and business behaviour:

Economics of Marshall and Samuelson | Socio-Economics of Smith
Competitive, cut-throat business environment for small companies; Monopoly power for giant companies | Friendly competition, or competition with natural moral limits throughout
3-3 Equilbrium_13In Economics, big suppliers can cut supply to achieve shortage and high prices. Suppliers also have an interest in building demand for expensive but useless products such as the Apple Watch, leading to over-exploitation of natural resources. Small companies have difficulty in entering. | billy2Downward sloping supply curve as people want “to buy whatever they want of those who sell it cheapest”. Businesses will less likely attempt to create useless products or those that cannot be sustainably produced because of limited resources. Small companies can easily enter because of the bond of friendship.
auction-bidSellers have more economic power. Buyers have no choice of sellers but instead must compete with each other. | flea-marketBuyers have more economic power. Buyers can choose the seller they like.
The success of the producers is the measure of the economy’s success, as Gross Domestic Product | The success of the people to buy what they need and want is the measure of the economy’s success, as Purchasing Power

 

 

 

 

 

 

39 Without a doubt, it was the spirit of monopoly which originally invented and propagated this doctrine.

  • Those who first taught it were by no means such fools as those who believed it.
  • In every country, it is always the people’s interest to buy whatever they want the cheapest.
    • This proposition is so very manifest that it is ridiculous to take any pains to prove it.
    • It could never have been questioned had not the sophistry of merchants and manufacturers confounded the common sense of mankind.
      • Their interest is directly opposite of the people’s interest.”
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