Money Flow Paradigm Reverses Say’s Law

Economics became widely known as what Thomas Carlyle called “the dismal science” when Thomas Malthus predicted that the population growth rate will always exceed the food supply growth rate. Therefore, there could never be too much food because the population growth would at least keep up with (subsistence) and at worst exceed (starvation) the available food supply.  Demand would always increase to consume whatever could be supplied.  This led to what has become known as Say’s Law: “Supply creates its own demand” and the basis for supply-side economics. Economic growth, according to the dismal science, was always a supply-side phenomenon. You could take demand for granted and just focus on trying to increase supply.

From population explosion to population implosion

For centuries humanity spread out across the continents and populated the far corners of the world. It seemed like humans would eventually overpopulate the planet. Eventually, we would need to find another planet to colonize to keep on growing. Population growth was a given, until it wasn’t. Almost out of the blue, the unexpected happened. As countries reached higher levels of economic development, their population growth rates dropped. You might call this a Darwinian Natural Selection Paradox where when a species becomes more dominant and powerful, instead of increasing birth rates, its has falling birth rates.

Early on a Monday morning, I was about to begin my lecture about the international income distribution to my economics class at Notre Dame. But my students were all excited. They were all talking with one another about the great football game on Saturday where Notre Dame won at the last minute with an amazing play.  I couldn’t get their attention. Finally, I said: “Today we are going to talk about birth control.” My students were shocked. “Birth control?” they exclaimed. “The professor is going to talk about birth control. This is a Catholic university. He can’t talk about birth control.” But I persisted. “What is the most effective birth control method in the world?”, I asked. The students continued murmuring in apprehension and concern. Finally, I said: “The most effective birth control method in the world is per capita income. When per capita income rises above $6,000 per capita, birth rates drop like a rock.”[1]

With rising per capita income, birth rates drop. In rich countries, they have dropped below the replacement rate of an average of 2.1 children for each woman in her reproductive years. According to data from the US Census Bureau, the population growth rate in the United States in 2021 was just one tenth of one percent, which was the slowest population growth rate since the nation’s founding in the eighteenth century. Without immigration our population would be declining.

World population declines

Japan is ahead of many other countries in the transition to an economy where an aging population is dramatically increasing the ratio of non-working elderly relative to a shrinking active workforce.   In the absence of much immigration, Japan must increase its productivity in terms of output per worker to make up for its shrinking number of workers. Japan’s population was at its maximum in 2010 with 128 million people, but shrunk to 125 million by 2021, and is expected to fall below 100 million before long. In 2022 Japan’s birth rate fell to its lowest level ever and its marriage rate fell to the lowest since World War II. Consequently, with older people living longer than ever, the elderly’s share of Japan’s population has grown substantially. The elderly generally demand fewer products and services except for health services than young families, but eventually need more personal medical services. Health costs rise while government revenues fall, and aggregate demand is sustained through massive deficit spending necessary to keep the workforce fully employed. 

Over 90 percent of the world’s countries currently have a birth rate below the population replacement rate with at least 20 countries expected to cut their native populations in half by 2100 including Japan, Italy, Spain, Portugal, Germany, Thailand, and South Korea, among others. Russia’s population peaked at around 147 million and is currently heading down toward 142 million because of an aging population, falling birth rates, relatively higher death rates including military deaths and suicides, and emigration (especially young people) exceeding immigration. China’s economy has recently reached a level of per capita income over $10,000 with its population reaching a peak and then declining significantly thereafter. Populations are increasing primarily in poor regions of Africa such as Nigeria and Ghana, where the natural resource curse[2] keeps most of the population in poverty with just over $2,000 income per capita. 

Around the turn of the millennium, millions of people in China were moving out of poverty into what for many would become what we would call a lower-middle-class lifestyle. This improvement in their economic well-being was quickly changing “the dismal science” into something not quite so dismal. As noted above, Japan had already gone through this transition and had a birth rate well below the 2.1 child per woman of child-bearing age known to be the replacement rate for maintaining a constant population. Japan, Germany, Italy, Russia, South Korea and many other developed economies already have shrinking populations. As a result of China’s historic one-child policy (which it dropped in 2016) and its rising per capita income, China’s population is reaching a peak and will start declining.

If it weren’t for immigration, the United States would have a falling population as well. To some extent American immigration has enabled the United States to offset its declining birth rate. For a given level of technology and, therefore, productivity, a declining workforce means a decline in gross domestic product (GDP) and less money from the earnings tax which funds the Social Security system. Consequently, elderly people who depend on Social Security have a vested interest in encouraging immigration, especially because they are retired and, therefore, no longer in the workforce to compete for jobs with immigrants. The elderly have a special interest in encouraging immigration or at least a guest worker program in farming such as in picking fruits and vegetables in California farms to keep the cost of food low, where food and medicine constitute a greater portion of the budgets of elderly people relative to younger people who have expanding families needing lots of basic products such as home furnishings, clothing, and cars and trucks. Of course, immigration could tend to keep wage rates low to the extent that they substitute for instead of complementing the current workforce. However, there is not a fixed number of jobs in this world to be fought over (what economists refer to as the “Lump of Labor Fallacy”). Rather, through infrastructure spending and other expenditures, governments can increase the demand for workers and, thereby, increase wage rates in addition to maintaining full employment as long as it is not so much as to cause excessive inflation.

Distorted money flow reverses Say’s Law to read: “Demand creates its own supply.”

Despite the rising deficit and health costs, and in the absence of sustained government stimulus spending over the long run, deflation with falling prices and wages threatens to dominate, rather than the widely feared and reviled inflation, as measured by the typical market basket of goods and services used to calculate the consumer price index (CPI), or, alternatively, measured as the personal consumption expenditures (PCE) index. As baby boomers die and the population declines, consumer demand shrinks, while technology expands and speeds up the global supply chain. More can be produced and moved through ever increasing automation and driverless vehicle technology. Say’s Law may have worked back in the day when populations were exploding and every crumb of supply was snatched up, but today the problem is a distorted money flow diverting money primarily to those with the lowest marginal propensities to consume (the wealthy) while leaving the poor and middle class up to their eyeballs in debt. In the United States to counter high levels of unemployment the Federal Reserve uses quantitative easing (QE) to pump money into the New York financial markets which drives up stock and bond prices to benefit the wealthy. But when inflation threatens, the Federal Reserve punishes the poor and middle class by raising the cost of borrowing, while the wealthy get a higher rate of return on their bonds and certificates of deposit. In either situation, one requiring economic expansion, or one requiring economic contraction, the Federal Reserve inadvertently acts to reward the rich and punish the poor. (See Karen Petrou’s book “The Engine of Inequality” and Christopher Leonard’s book “The Lords of Easy Money.”) The Federal Reserve is implicitly following Say’s Law and supply-side economics while ignoring the fundamental changes in globalization, productivity and population that have taken place to reverse Say’s Law to invoke demand-side economics as revealed by the money flow paradigm. Note that this is not the Federal Reserve’s fault. They have just not been given the correct set of tools by Congress to properly control the economy (as explained in my forthcoming book “Distorted Money Flow” and in earlier commentary at ).

Workers are no longer paid the value of their marginal products

In the United States before 1976 worker compensation kept up with worker productivity, but after 1976 productivity continued increasing, but worker compensation flattened out in real terms. In other words, workers are no longer paid the value of their marginal products. Consequently, over the long run, in the face of an increasing money flow distortion where a larger and larger proportion of the quantity of money flows to the wealthiest people who have the lowest marginal propensities to consume, aggregate demand threatens to fall short of aggregate supply, because the bottom 90 percent of the population can no longer buy back the value of the goods and services they are producing unless government maintains and expands its flow of stimulus money to them, paid for through deficit spending or the pre-distribution (more money to Main Street before taxes) and/or redistribution (more money to Main Street and less to Wall Street after taxes).

Money flow paradigm reveals distorted money flow that has reversed Say’s Law

In conclusion, by following the flow of money and its effects on economies everywhere, the money flow paradigm has revealed the fundamental problem of the distorted money flow that has greatly restricted demand while providing excessive amounts of money for supply. This has reversed Say’s Law which said: “Supply creates its own demand” and replaced it in facing a reality very much the opposite where “Demand creates its own supply.” The money flow paradigm has shown that where supply-side economics made sense back in the day, it no longer applies to the world as we know it which is today better represented with demand-side economics.

[1] Historically, having a child was viewed by some people as an investment, especially after the advent of agriculture, and during the industrial revolution with the use of child labor in manufacturing. Eventually, this developed into a slave trade where the costs of raising a child were bypassed with the capture of fully grown slaves from Africa. Entrepreneurs in London could invest in the slave trade where the hard work of others provided a good return on investment. Hard work paid off, but not for the slaves. Their hard work paid off for the investors. This natural product of capitalism and free enterprise was abolished through government intervention when laws and regulations were passed banning child labor and slavery. Even today companies that follow the “I-win-you-lose” mindset treat their employees as just another factor input such as coal or fuel oil and not as team members. On the other hand, most successful companies follow the “win-win” strategy and recognize the dynamic creative potential (the agency) of their employees.

[2] Ironically, countries with large deposits of natural resources, which can cause an excessive demand for their currencies, are unable to produce and sell other products at competitive prices given the high value of their currency. This has been labeled the “Dutch disease” by The Economist magazine in reference to the high price of the Dutch guilder when Dutch natural gas and oil were in great demand before the Netherlands adopted the Euro as its official currency.

International Trade – U.S. dollars flowing around the world

What are the implications of the U.S. importing lots of products from abroad? Does our trade deficit imply that we are getting ripped off and need to impose trade restrictions? For example, consider our trade with China. China takes its resources, and its people work hard producing products for us. In return, instead of sending lots of our products to China, we send them pieces of paper with George Washington’s picture on them (U.S. dollars). Ordinarily, all those U.S. dollars would find their way into the international currency exchange markets driving down the value of the U.S. dollar and raising the price of the Chinese yuan. That would make Chinese products more expensive for us to purchase and U.S. products cheaper for China to purchase.

You would think that making U.S. products less expensive for the Chinese people to purchase would be good for China. But traditionally most Chinese have been very poor and not able to afford even lower priced U.S. products. A more immediate problem for China’s government has been the flow of peasants from rural areas into the urban centers where products are produced for export. China needed a way to avoid high levels of unemployment and keep its citizens employed through the manufacture of products for export. Instead of allowing those U.S. dollars to go into the currency exchange markets, China used those U.S. dollars to buy U.S. Treasury securities. In other words, China gave us products, we gave China U.S. dollars, and China gave us our money back again by investing money in U.S. financial markets by buying U.S. Treasury securities. Who is getting ripped off here? (Hint: it is not us.)

Issuing a lot of U.S. Treasury securities attracts U.S. dollars situated abroad that would otherwise drive down the value of the U.S. dollar in international currency exchange markets. This makes it more difficult for the Federal Reserve to suppress inflation through the supply-side. Overseas investors, especially sovereign wealth funds, may move U.S. dollars into New York financial markets leaving a stronger U.S. dollar in international currency exchange markets than would otherwise be the case. Japan and China have purchased large quantities of U.S. Treasury securities with U.S. dollars that would otherwise have gone to drive down the value of the dollar, which would have lowered the price of U.S. exports and increased the price of imports into the U.S. helping move toward a better balance in tradable commodities and services.       

However, some foreign governments (e.g., China) may have motives for investing in U.S. Treasury securities other than seeking an attractive return on investment in the form of interest payments. China requires that Chinese exporters turn in U.S. dollars to the Chinese government in return for renminbi (yuan) to keep those dollars out of foreign exchange markets. China’s return on investment in U.S. Treasury securities may be less in the form of interest payments and more in keeping its population fully employed to maintain both economic and political stability by maintaining either a low value for the yuan in international exchange markets or, somewhat equivalently, a high value for the U.S. dollar. 

It is important to consider the underlying cause of trade imbalances, especially those that have kept the U.S. dollar strong.  China and several European countries, for example, have highly unequal internal wealth distributions such that an insufficient amount of money is flowing to their average people to sustain full employment without substantial exports. In other words, United States consumers and other foreign consumers make up for the lack of adequate demand by China’s domestic consumers. The extreme wealth inequality in China and those European countries mean that the people in those countries cannot afford to buy back the value of the goods and services they are producing, but the wealth of those countries has gone to wealthy elites who are eager to invest their money in the United States financial markets. 

Even elites in poor, developing countries are often eager to invest their money in the New York financial markets instead of investing in industrial development in their own country. This phenomenon can be viewed as another form of colonial exploitation, with the development of poorer countries held back in favor of providing more wealth to the already wealthy by driving up prices in the U.S. stock market. The U.S. stock market, and stock markets in general, have become alternatives or substitutes for real investment in the productive capacity of economies throughout the world.  Simcha Barkai published a carefully researched paper that revealed that business revenues were going increasingly to profits (financial capital) as opposed to the cost of labor or real capital (e.g. physical or intellectual capital).

This distorted money flow has created a financial economy that is more and more separated from the real economy. Ironically, it has been restraining and undermining productivity and economic growth rather than supporting and encouraging it. Yes, money is cheap for businesses to borrow, but demand is chronically inadequate without extraordinary stimulus from governments. Businesses have no incentive to expand their operations, but instead they buy up or undercut smaller competitors to increase their market share and prices.

Another major reason for the strength of the U.S. dollar in foreign exchange markets is the role of the U.S. dollar as the world’s primary reserve currency. In order to avoid the instability and risk associated with fluctuations in the value of trading one country’s currency for another, some major entities purchase imports with U.S. dollars and sell exports denoted in U.S. dollars to avoid the ups and downs of the foreign exchange markets. Trade in crude oil and other major commodities is traditionally done in terms of U.S. dollars. Consequently, as international trade continues to increase over time, the demand for U.S. dollars increases to keep the U.S. dollar highly valued in foreign exchange markets. 

In other words, a country whose currency serves as a major reserve currency is in basically the same boat as a country that suffers from the natural resource curse, otherwise known as the Dutch Disease, a term coined by The Economist to refer specifically to how the value of the Dutch guilder was driven up when the Netherlands discovered massive amounts of natural gas within its territory, and generally to any country selling large quantities of a natural resource in high demand.  A reserve currency country and a country suffering from the natural resource curse have great difficulty selling their exports because of the high price of those exports in that country’s currency in the foreign exchange markets. In other words, under these circumstances the exports of the United States and the Netherlands would be basically priced out of international markets. The Dutch escaped the Dutch Disease by dropping the guilder and joining the Euro currency union where their natural gas exports were much less impactful with little effect on the strength of the Euro overall. As a reserve currency it is not only desirable, but necessary, for the country with the reserve currency to run a current account deficit to increase the amount of their currency in foreign exchange markets to keep from being completely priced out of the markets for its exports or see its exporting industries shrink as a result of its reserve currency status and the ever increasing demand for its currency in international markets.

On the other hand, the advantage of a strong currency are low prices for imports which save consumers money and helps make up for extreme income and wealth inequality within the United States. This is particularly helpful for retired elderly people who are on fixed incomes. In real terms the Chinese and other foreign producers are taking their natural resources and working hard to produce products for us, but instead of sending comparable products to them, we are sending them pieces of paper with George Washington’s picture on it (U.S. dollars). For the most part, tariffs on Chinese goods entering the United States are not paid by China. Walmart, in competition with other businesses around the world, buys goods in China and ships them to the United States. When those goods arrive in Long Beach, California, the Federal government requires that Walmart pay a tariff on those goods from China. Walmart can compensate itself to some extent by passing along the cost of the tariff to Walmart customers. Since many of the items Walmart buys from China are relatively inexpensive to begin with, the elasticity of demand for those items may be relatively high relative to the elasticity of supply so Walmart is able to get away with passing along most of the cost of the tariff to Walmart customers without suffering a significant drop in demand for those particular items. When the price of a great pair of Chinese memory foam sneakers rises from $9.98 to $12.48, it is still a great deal relative to alternatives.

The world works for us and we work for ourselves, yet we are told that we are being exploited by others by importing actual physical goods and services and paying for them with pieces of paper (U.S. dollars). The actual truth is the exact opposite of what those U.S. citizens who see themselves as “victims” tell us, the world is working hard and sacrificing their resources to keep us fat and happy!  In reality, we are the ones in the dominant and exploitative position in foreign trade. The absence of tariffs works to our advantage. The lumber and steel tariffs we placed on Canada only increased the cost of housing, automobiles and appliances in the United States. We need to remove those tariffs so we can get Canadian lumber and steel for less.

Yes, the overseas competition for the dollars of U.S. consumers means that the wages and jobs of U.S. workers are suppressed. Tariffs do not necessarily solve this problem since they would raise prices without guaranteeing that the money from the higher prices would go to workers in the form of higher wages and more jobs. Both the flow of dollars from abroad into U.S. financial markets in New York and the role of the U.S. dollar as a reserve currency in foreign trade have kept the value of the U.S. dollar strong in foreign exchange markets. The high value of the U.S. dollar makes U.S. exports expensive for people in other countries to purchase. A strong dollar means that we export less than we would otherwise and end up primarily producing our own goods and services for our own citizens.

The idea that there are a limited number of jobs in this world, and we must fight over them is what economists call The Lump of Labor Fallacy. The number and quality of jobs in the United States is not fixed. Fiscal and monetary policies can create as many jobs as we need. The current shortage of workers is in part due to stimulus policies that have been implemented in response to the COVID-19 pandemic. We should not raise prices in Walmart, Target, Amazon and many other low cost venues by imposing tariffs on imports coming from abroad. A better approach is to gain a tighter control over the number and quality of jobs here in the U.S. to keep our workers fully employed while still enjoying the low prices offered by imports from abroad.


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Lawrence C. Marsh ( is Professor Emeritus in Economics at the University of Notre Dame and author of the 2020 book: Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone ( .
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High Oil Prices Aid Anti-American Regimes in Russia, Iran, and Venezuela.

Some key anti-American governments are highly dependent on oil revenues. A large portion of the budgets of Russia, Iran, and Venezuela depend on money from oil and natural gas. The United States consumes the most oil of any country in the world. If demand for oil and other fossil fuels in the United States were cut dramatically, their prices would fall, and that would sharply curtail the activities of our adversaries. Should we send more troops overseas to curb the bad behavior of these regimes, or, instead spend that money on switching our economy from fossil fuel dependency toward an economy built on renewable energy, and thereby deprive these regimes of a substantial part of the revenues they need to continue their anti-American activities?

Transitioning the American vehicle fleet from using fossil fuels to electricity will be a major step in that direction. Ford made news last month when it announced it will begin production next year of the F-150 Lightning, all-electric truck. As an added plus, the truck’s batteries will be able to power your house during an electric outage. There are also plans to integrate its Intelligent Backup Power system with a solar company to provide solar power to both charge the truck as well as your home.

At the moment, one of the drawbacks of an electric vehicle is the limited range of its batteries, which typically provide a range of 250 miles on a single charge. One solution already under way is the creation of a network of fast-charging vehicle battery stations by Tesla, local utilities (such as Evergy in Kansas City) and a growing number of private providers such as EVgo.

Another solution is to buy the electric vehicle, but rent the batteries. This significantly reduces the price of the car, but requires a rental payment. The advantage is that when your battery power runs low, you just stop at the highway service station for ten minutes to swap out the low-power batteries for renewed fully-charged ones. This greatly extends the driving range of your electric vehicle. This battery rental plan has worked well in Israel and other countries that have tried it. It may work even better in the USA where we often drive great distances, especially on holidays.

Economists generally tend to oppose most tariffs in favor of free trade. However, in matters of national defense some tariffs may play an important role. In particular, a tariff on imports of crude oil and gasoline could substantially reduce American demand for these commodities. This would drive down their prices on world markets and deny our adversaries the revenues they need to continue their anti-American campaigns. It would also increase the demand for electric vehicles in the United States.

Even if you believe that global warming is a hoax, but care about national defense, taking advantage of our adversaries’ weakness is just common sense. A tariff on crude oil and gasoline imports would be a good start. Tax breaks for wind, solar and other renewables could create new, higher-paying jobs and contribute to economic growth, instead of sending more soldiers to fight in those never-ending Middle Eastern conflicts. Vladimir Putin doesn’t want you driving an electric vehicle. He needs you to keep driving your gas-guzzling car or truck. Putin will be very annoyed and disappointed with you if you purchase one of those recently announced electric Ford F-150 Lightning trucks or any other fully-electric vehicle.

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