Misty Tiger wrote:The little people are the majority in this country. They are the ones who keep spending especially during holiday seasons.
The little people - i.e. Aggregate Demand - are influential in the short-run. But in the long-run, economic growth is determined by supply-side forces.
This is because in the short-run when demand increases the price of a firm's output increases (heightened demand induces an increase in the aggregate price level) but the price of a firm's inputs remains relatively constant (wages are relatively sticky, inputs are bought on contract etc.)
^. Firms respond to this by increasing their own production, which requires an increase in their own demand for inputs - think workers, capital, etc. Except these are finite, and as the stock of free inputs falls their price increases. At some point the economy is going to reach capacity: there's going to be no free inputs which aren't prohibitively expensive remaining. When this happens, prices of output are forced to rise, demand falls, people are made redundant, we might have a recession, etc. Point is, we return to a stable equilibrium
*.
The implication here is that in the long-run, supply is fixed. The little people can push up us and down across a settled equilibrium, but our growth is ultimately bounded by supply forces. Thus, imperative to sustained long-run growth is facilitating inexpensive production and cheapening inputs
** or making them more productive, otherwise. Bringing this all back to the theme of this thread, you can still be correct. Third-level education increases the productivity of our labor force and, thus, can positively affect aggregate supply there, too.
However, focus on retail sales or consumption is misguided
*** if you care about your economies long-run growth.
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* Under conditions of zero technological progress, we return to the exact equilibrium we were presented with before the increase in demand.
** N.B. This does not mean not having a minimum wage is an optimal strategy. That's a whole other kettle of fish.
*** In fact, yous probably have it backwards. An upwards shift in long-run consumption implies a downward shift in savings and, thus, the price of loanable funds. If investment (a key determinant of effective supply) is falls as a result of this, that might constrain the economy's potential in the long-run. (I use 'if' and 'might' because, at current, this may be irrelevant).
^ This is the justification for engaging in stimulus during recessions, too.
That the King is insane is now old news.