Perry’s ‘economics lesson’ not in demand

Speaking at a coal-fired power plant in Maidsville, W.Va., on Thursday, Energy Secretary Rick Perry made a strange argument about supply and demand, seeming to confuse the relationship between two of the essential forces in the economy.

“Here’s a little economics lesson: supply and demand,” Perry said, according to Taylor Kuykendall of Standard and Poor’s. “You put the supply out there, and demand will follow.”

If Perry was suggesting that no matter how much coal the industry produces, there will be demand for it, he was clearly mistaken. Of course, demand for coal — or any other item -- is not infinite. People will only buy so much of it at a given price, and producers will only be able to sell more if they bring down the price.

Another possible interpretation of Perry’s odd remark is that he might have been repeating a theory that was once widely accepted among economists. On this theory, demand and supply will always be in balance across the economy as a whole. These days, however, many economists view this logic as deeply and dangerously mistaken.

This reasoning is usually associated with the French economist Jean-Baptiste Say, who argued in 1803 that oversupply in excess of demand across the economy as a whole was impossible (although he did not use those terms exactly).

Say claimed that the money consumers use to buy goods and services must come from, ultimately, those same consumers selling something else on the market. As a result, the supply from producers on the market would always be matched by demand. According to Say, producers would use what they earned making sales to make purchases for themselves.

Or, as Say’s British contemporary David Ricardo wrote, “I think that demand depends only on supply.”

As later economists argued, however, people do not always use their money to buy things. Sometimes, they prefer to save money instead, or to pay down debts. That is especially the case during a panic, when firms and households are looking for security.