Supply doesn’t create its own demand

(~3000 words, reading time: 10-15 minutes)

This piece is inspired by yet another conversation with a confidently incorrect non-economist who talked to me about his beliefs about economics. This time, it is about the adage “Supply creates its own demand”. It’s intended for non-economists with a pure heart and an open mind. If either of these two conditions fail, you’ll likely be pissed. Experts will probably not learn anything from most of it, but at the end I unveil some fun facts I learned about the origins of the adage that were quite new to me and might be new and interesting for them as well.

Since I moved to Barcelona I have had the mixed pleasure of interacting with people who absolutely hate economics and economists. And although I do consider the resulting discussions somewhat valuable and interesting, the dominant feeling that lingers after every one is that of frustration and hopelessness.

Perhaps unsurprisingly, the people most passionate about wanting to prove to me that my field of expertise is logically or morally flawed display the least logical or moral foundations for their own beliefs. The intensity of their disdain for economics is only matched by their lack of understanding of even its basic concepts. Given this, a fruitful argument about more advanced topics that happen to be studied by economists is impossible.

So once again, I feel compelled to write on a topic of basic economics in the hopes that some terms get cleared up for the people who need it most, or, much more likely, that some interested people on the fence get curious and walk away better informed.

Today’s topic is the adage “Supply creates its own demand”, a phrase that’s been thrown around by virtually every self-identified anti-capitalist, anti-consumerist, and anti-globalist. The full argument is some version of the following:

Capitalist markets don’t satisfy people’s actual needs, the system artificially manufactures the desire to consume products for consumption’s own sake. The profits of this exchange create the means for more production of goods people don’t actually need, creating a cycle of production and consumption that leads to the rich getting richer, the poor getting poorer, a culture that institutionalizes the neglect of the (artistic) spirit, and the destruction of “the world” (meaning natural beauty, the climate, and the global ecosystem).

“Things that go hard when you’re 16” do not equal “how the world works”

The above story has a lot of things going wrong with it. It combines things that are unfalsifiable (assumptions about “actual needs” and stuff with the spirit) with things that are just empirically false (the poor aren’t getting poorer in any country and carbon emissions have been detached from GDP growth, yes subject to emissions from imports too) and is completely reliant on the conspiracy theory that some sort of agency is responsible for all of this, an agency that politicians, CEOs, bankers, traders, lawyers, marketing execs, police forces, the military, …, and academic economists (!) are supposedly a part of.

The argument is loosely related to excess aggregate supply relative to aggregate demand known in economics as ‘general glut’. In macroeconomics, “aggregate supply” roughly means the production of all goods in an economy whereas “aggregate demand” likewise means the sum total willingness to consume. General glut, oversimplified, thus indeed means an overproduction of “things we don’t need”.

General glut may or may not be behind business cycles, particularly the initiation of crises. And while its role (or even its existence) is debated, the mechanism by which it is supposed to initiate recessions or depressions is malinvestment and inefficient use of resources and labor, not some sort of Malthusian implosion of the ecosystem that the anti-capitalist crowd keeps warning about. Crucially, general glut within economic theory is always a transient state. It’s not a necessary consequence of “capitalism”, nor does the economic theory of general glut require or discuss any sort of cultural reinforcement.

In any case, what I will talk about today is the first bit of the story, where the markets (with institutional support) are supposed to manufacture the desire to consume. The way this is commonly expressed is the adage that I negate in the title “Supply creates (its own) demand”.

The reason I find this part especially problematic is because it rests upon a misinterpretation of what the terms “supply” and “demand” mean in economics. Moreover, once the above motto with the above story is sufficiently internalized as a result of early and repeated (downright propagandistic) exposure, it seems to stick forever, rendering the victim forever incapable of absorbing the most simple results of economics. Sure the victim can present as semi-literate in economics, they may even pass an “intro to economics” course with flying colors and believe they have knowledge and may convince laymen of it, but it is immediately obvious to any real expert that these people’s actual understanding of the concepts they talk about is exactly equal to zero.

The misunderstanding when it comes to supply and demand is two-fold, let’s deal with them separately.

Models, modeling, theory, and application

This is tedious I know, but we have to get through it.

The elementary misunderstanding related to supply and demand (as well as other aspects of economic theory) is that, strictly speaking, the objects “supply curve” and “demand curve” are abstract mathematical objects. They’re not real. As such, they occupy a unique realm of existence in language which makes them a bit trickier to work with than everyday terms.

Take the word “phone”. Today, the sentence “I took a photo with my phone” is as natural as breathing. If you said the same thing forty years ago, people would think you’re losing your sanity. The meaning of words related to physical objects can thus be more or less flexible. It’s not a misunderstanding of the “true nature” of the “phone” that I can take photos with it as technology and culture changed the meaning almost completely.

Abstract mathematical objects don’t have this property. The Marshallian definitions of supply curve and demand curve, the one economists use to this day, originate from the 19th century. As abstract objects used in economic theory, their meaning is much more restrained to their original meaning and cannot be altered willy-nilly by outsiders wanting to make a point. Even if that point were a good one.

Given a market for a single good, supply is a mapping between possible price levels and quantity willingly supplied by producers, whereas demand is a mapping between price levels and quantity willingly consumed by buyers. Given this context, the “law of supply” translates to “for higher prices, the quantity willingly supplied is higher” and the “law of demand” is “for higher prices, the quantity willingly demanded is lower”. It’s intuitive and easy to capture on a graph, making it a very attractive theoretical model.

Of course the value of any theory based on these objects is worth only as much as how much it can be empirically measured, verified, and used to improve economic outcomes. Lucky for us, supply and demand are incredibly robust. We’ve figured out good ways to measure them, the violations are super rare (but still important!) and they are remarkably easy to use. Just by using supply and demand you can design policies that are at least “directionally right”: if you want to lower the price of a certain good through market forces, you have to increase supply or lower demand. Only one of these options increases economic welfare, the other will lead to a lot of people becoming poorer and less happy. Any other method will create more problems than it solves. But that story has been told by Brian Albrecht better in the Wall Street Journal (paywalled) and on his blog.

The sentence “Supply creates its own demand” makes little sense once you understand the meaning of these terms. You can’t have one abstract mathematical function create another. ‘Supply’ can be used as a stand-in for the word “production” and ‘demand’ as a stand-in for “consumption”, reducing the wisdom into “Production [of a good] creates consumption [of the same good]”. Which is technically true as production of a good is a necessary condition for it getting consumed. This gives the adage a dangerous false sense of wisdom and I will talk about this in the next segment.

Instead, what the adage is taken to mean is “Production of a good creates the willingness to consume that good”. And once again, this goes hard if you’re 16. Furthermore, it makes a certain intuitive sense because fashion exists. Take the example of the (so far) fictional iPhone 67. People like the iPhone 67 not just because of its capabilities, but because it is fashionable, and marketing might have helped make it fashionable. That kernel of truth does all the heavy lifting in this sentence.

But notice that none of this means demand was actually created. The demand for a cool new toy that can keep me connected to the world, self-actualize, measure every biological signature I put out, and, importantly, makes me look cool with others, was always there. At no point in human history can we say that our willingness to connect, create, discover ourselves, or show status had to be manufactured. In fact, the more you know of history the more you know of the ways all these things manifested in the past. We now just have a new shiny gadget with which you can achieve all of that at once. The willingness never had to be created, least of all created with some sort of malicious intent.

I mean you can still feel bad for what this reveals about the human condition. But don’t bring supply and demand into it.

Shift of demand vs movement of the demand curve

Back to the adage meaning “Production creates consumption”. This is an objectively true statement that, coincidentally, can be perfectly captured by our trusty models of supply and demand.

Take the market for the iPhone 67. Suppose that supply is low compared to demand, and only a few people have it at the moment. In reality, this can even mean that most people haven’t even heard of it. It doesn’t matter for my story because the price is so high most people wouldn’t buy it even if they had.

Then, a new Apple plant gets built which is able to pump out a lot more iPhone 67s, maybe even lowering production costs. More supply is added. This means, for every possible price level, Apple is now able and willing to sell more iPhone 67s.

Visually, it looks like the supply curve shifts to the right, and we move along the original demand curve from the original equilibrium to reach the new one. The (theoretical) market equilibrium, the intersection of the supply and demand curves, changes as a result of the supply increase. Quantity sold increases, market price decreases.

Since more supply leads to more consumption, it is a perfectly accurate observation to say “Supply creates consumption”. It is backed up by the theory and by a mountain of evidence that is contained in that special subset of the collective body of human knowledge we call ‘economics’.

But notice that the higher consumption does not come from, nor has to bring about, an increase in demand. Consumption can rise even when demand is completely unaffected. In fact, it can rise even if the increased supply coincides with a decrease in demand.

A lot of students struggle conceptually with supply and demand. They confuse ‘shift of supply/demand curve’ with ‘movement along the supply/demand curve’ literally all the time. You’re not an idiot if you don’t get it for the first time and need to see it again.

However, you probably are an idiot if you see all this, and choose not to listen to the experts.

The origin of the adage: Say vs Keynes

As I was preparing to write this post I did a little research whether anyone else has already covered the topic. If so I would have just left this one alone, but to my small surprise, I didn’t see anything.

However, I did find the wikipedia page for “Supply creates its own demand” and “Say’s Law”, the latter of which I didn’t know much about before (I'd slept through my history of economic thought education). As a prelude to this it’s important to mention that prior to neoclassical economics and especially the game theoretic revolution, economic theory was much less formal than it is now, so the interpretation of economists' exact contributions is a bit tricky. So there’s a lot of discussion about “what the author really meant” that seems super interesting, but ultimately doesn’t really matter much for us today.

The somewhat simplified interpretation of Say’s Law, formulated by Jean-Baptiste Say in the beginning of the 19th century, is that in a market with multiple goods, “increased supply of good X increases demand for good Y”. The idea is similar to the general equilibrium: Production (and sales) creates profit, income, salaries, rents, that people can spend on other goods. If iPhone 67 production becomes cheaper and supply increases, the excess volume of trade in the new market equilibrium creates opportunities for purchasing, for instance, more chocolate donuts. To see this, consider the reverse, if we close an iPhone 67 factory (supply decrease for X), all the people who worked there are now unemployed and can’t buy as many chocolate donuts as they want (demand decrease for Y). One of the consequences of Say’s Law is that the aforementioned ‘general glut’ cannot occur (at least in equilibrium) as any increase on the aggregate supply side is met by an increase on the aggregate demand side.

In comes John Maynard Keynes, 120 years later, who attempted to refute Say’s Law. His argument was that if supply of good X increases, AND the extra income/profit from it is saved or hoarded, we may not necessarily see a demand increase of good Y. As such, Keynes outlines a mechanism under which transient general glut indeed can occur.

The twist is that in his treatise, Keynes summarized Say’s law as “Supply creates its own demand”. This is of course a vast oversimplification because without specifying that Keynes means “aggregate supply” and “aggregate demand”, it really sounds like Keynes is putting words in Say’s mouth that amount to “Supply of good X creates demand for good X”. He is not and his argument makes this clear but it’s really unfortunate wording. It turns a discussion about the existence of a transient ‘general glut’ into a discussion about the long-run self-propagation of production and consumption of even a single good.

The comic and the tragic

This is where the story takes a funny twist. Keynesian economics (also known as “demand side economics”) is often juxtaposed with neoliberalism (“supply side economics”) and thus it directly speaks to populist policymakers who invariably seek to subsidize demand (typically of housing in the name of providing “basic necessities”) while choking off supply (in the name of removing “extra profit”), leading to shortages and massive price increases.

Keynes is thus the darling of many left-wing economic populists who say they want to improve economic outcomes through extensive government intervention but in reality want to dismantle capitalism altogether. The same left-wing populists assert that we live in a constant state of general glut and advocate for (versions of) degrowth. By the way, today’s left’s infatuation with Keynes would never be reciprocated as he (and any economist worth his/her salt) regarded Marx’s Capital as “an obsolete economic textbook which I know to be not only scientifically erroneous but without interest or application for the modern world". But I digress.

So it’s ironic to me that their shorthand to prove that we live in their strawman version of general glut is “Supply creates its own demand”, citing Keynes’ version of Say, even though Say’s Law implies general glut cannot exist in equilibrium. Sadly, I’m pretty sure the irony is lost.

The tragic consequence of Keynes’ line “Supply creates its own demand” becoming a catchphrase for the self-evidence of the failure of capitalism and economic thought is that believing it automatically inoculates the victim against any real economic literacy. You can’t understand the laws of supply and demand if you view two conceptually and measurably distinct economic concepts dogmatically related to each other through a conspiracy theory.

If you don’t understand the laws of supply and demand, you will invariably propose or support economic populist measures such as price controls. Not only will you totally fail your stated policy goals, you will (help) create completely avoidable shortages, poverty, and political instability.

Barcelona, like many other great cities, currently experiences the “cost of living crisis”, one of the largest economic government failures ever (a mix of oversubsidized demand and artificial supply bottlenecks), yet it is full to the brim with people angry at “capitalism” and saying nonsense about supply and demand, while waving at me the fact that “they took an introductory economics class so they know what they’re talking about!”.

We can only solve real economic problems if we learn real economics. Luckily there are no deep-rooted social or historical reasons why we can’t solve such problems. Supply and demand are easy to get into once you really try. This is nothing more and nothing less than an epistemic crisis. We can always just stop believing nonsense and get out of it together.

March 16, 2026

Comments and questions can be addressed to peter.bayer7@gmail.com.