Disappearing Acts

George Scialabba
April 7, 2014

Economics is full of wonderful concepts. One of my favorites is “effective demand.” Like a magic wand, it can make billions of people disappear.

Suppose a farm can produce 100 pounds of food and there are 100 very hungry people who’d like to eat it but have no money. You might think that there’s a demand for 100 pounds of food. Silly you! There’s a need for the food, of course. But this is civilization: you can’t demand something just because you need it. If food costs a dollar a pound and each person has ten cents, then there’s ten dollars of effective demand. If each person has 25 cents, there’s $25 of effective demand. In that case, any sensible farmer-capitalist would produce only ten or twenty-five pounds of food. Supply has to equal demand, and demand equals need plus money.