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.

The Money Flow Paradigm

The long-term fundamental problem facing our economy is the enormous diversion of money flow from everyday people on Main Street to investors in the New York financial markets on Wall Street. This diversion began in the late 1970s and early 1980s and has continued in subsequent decades such that the people on Main Street are no longer able to buy back the value of the goods and services that they produce at full employment. This distortion in the money flow has driven up stock and bond prices and driven down interest rates and caused a majority of Americans to pile up large amounts of private debt. Yet this has not been enough to maintain full employment so the federal government has had to run large deficits under both Republican (massive tax cuts) and Democratic (massive stimulus spending) to keep most of the labor force fully employed. This has resulted in an ever increasing level of both private debt and public debt.

The money flow paradigm recognizes how the financial economy has become more and more separated from the real economy and how the diversion of the money flow from Main Street to Wall Street has become a serious problem that undermines economic stability by producing both inflations and recessions and requires the continual vigilance and action by those responsible for both our fiscal and monetary policies. The financial economy has become more of a gambling casino and less of a venue for providing money for investment in the production of new goods and services in the real economy.

During the French revolution Marie Antoinette was reported to have said: “Let them eat cake.” Today Marie Antoinette is essentially saying: “Let them eat plastic” as credit cards are widely distributed as an alternative to rewarding hard work and creativity with adequate compensation. Roth accounts reward heirs with tax-free inheritances while income taxes are used to undermine work incentives and discourage workers and entrepreneurs.

Several commentators have pointed out that the most important choice you make in your life is your choice of parents. If you choose rich, well-educated parents, you have a very high probably of doing well financially, while those who have chosen poor, poorly-educated parents cannot expect to get very far financially. Hard work pays off, but not for the person doing the hard work. The workers’ hard work pays off for the shareholder who reaps the reward for many years after an initial investment, which keeps doubling in value under compound interest and dividend reinvestment.

By following the flow of money, the money flow paradigm makes the problem clear, especially since the investors on Wall Street typically have much more wealth and, therefore, much lower marginal propensities to consume than the people on Main Street. The top ten percent of wealthy people purchase new goods and services with only about 8 percent of each additional dollar while the bottom ten percent in wealth consume about 94 percent of every additional dollar on new goods and services. Giving more money to those on Wall Street is very ineffective in stimulating the economy. Such attempts to stimulate the economy during economic downturns have been described as pushing on a string. Clearly you can get more bang for the buck by stimulating the spending of the people on Main Street instead of trying to stimulate the economy by buying bonds and mortgage-backed securities from the people on Wall Street. Applying Milton Friedman’s negative income tax, which targets low income people, would be much more effective and get much faster results than giving more money to the wealthiest Americans who just buy more stocks and bonds or bid up the price of Picasso paintings and exclusive properties with little or no effect on the production of new goods and services in the real economy.

Conversely, when excessive inflation is the problem, raising the cost of borrowing by increasing interest rates in the financial markets suppresses both supply and demand with the economy driven towards recession. A business that has maxed out its production trying to satisfy excessive demand with its existing lines of production would like to add another line of production but finds that the cost of borrowing the needed funds has gone up making it harder to afford a new line of production to increase supply. Meanwhile on the demand side the people hurt by the increase in the cost of loans are those trying to replace their rusty truck or obtain a mortgage to buy a new house. These tend to be the lower income people who do not have the cash on hand to buy a vehicle or a home without a loan. Why do we continue to use a cost-of-borrowing tool to fight inflation that suppresses supply and punish the poorest Americans in a very ineffective manner when instead we could be using a much more efficient return-on-savings tool?

The money flow paradigm tells us that a much more effective and efficient method of suppressing inflation is to increase the return on savings substantially without increasing the cost of borrowing. Private banks cannot afford to do this because they must earn more on loans than they pay on savings. But the Federal Reserve, which generates many billions of dollars in profits from its investments each year, is in a position to offer high interest rates on savings. In effect this is what was done at the start of World War II when the supply of new consumer goods and services was dramatically disrupted by switching to the production of tanks, warplanes, and warships and sending large numbers of young men to fight in Europe and Asia. High interest rate war bonds were vigorously promoted with celebrities singing and dancing and extensive advertising throughout the war until approximately 50 percent of American families had purchased war bonds. This helped substantially in constraining demand for consumer goods and avoiding inflation.

The Postal Savings Act of 1910 allowed anyone to go to any post office and set up a small savings account. Such savings accounts were restricted to some maximum allowable amount and were available to all Americans for over 50 years. Such government sponsored savings accounts still exist in a number of other developed nations. However, this promotion of savings by Americans was discontinued in 1966. Were such accounts available today, the government could offer an exceptionally high interest rate on savings to get low income people to put off buying that new pair of shoes in favor of investing $100 into their own postal savings account. As with the war bonds during World War II, this would provide a return-on-savings tool that would directly impact the real economy on Main Street instead of using the cost-of-borrowing tool that operates through Wall Street and suppresses both supply and demand and typically leads to a recession. Getting people to save more not only gives them a savings account to help them deal with an unexpected rent increase, a medical emergency, an automobile accident, or a job loss, but also provides the real economy with an automatic stabilizer to allow the economy to absorb some financial disruptions without triggering inflations and recessions.

By following the money flow, the money flow paradigm provides a much deeper and more realistic understanding of our economy and what we need to do to avoid inflations and recessions. It is much better at explaining how economics actually works than the old neoclassical, monetarist, and Keynesian paradigms and their more recent variations.

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Money Flow Paradigm

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The Money Flow paradigm recognizes that people are our most essential economic resource in both production and consumption. They are motivated to enhance their self-worth through activities that give them a sense of purpose. Money flow is a key ingredient in both production and consumption activities. In order for people to be fully employed and to fully benefit from economic activity, money must flow efficiently and effectively to everyone throughout the economy.  See Joan Robinson’s book “The Economics of Imperfect Competition” available free via your local library on Hoopla.  

Just as a healthy body requires that blood flows throughout the body so that no part of the body is deprived of adequate blood for any length of time, money must flow to everyone so that they can contribute to the best of their abilities in production and consumption. However, as George Cooper made clear in his book “Money, Blood and Revolution,” just as the heart is essential to blood flow throughout the body, government is essential in the free enterprise system to keep money flowing to all corners of the economy including to people in the inner cities and distance rural communities.

We have failed to appreciate the central and essential role of government in maintaining a healthy economy through proper money flow. The many variations of neoclassical, monetarist, Keynesian and other economic paradigms have seen the role of government as primarily passive with only occasional need to intervene in response to unanticipated economic instability. None of these earlier paradigms see government as continuously monitoring, adjusting and guiding the flow of money.

Our failure to recognize the proper role of government has led to the dangerous and distorted money flow that is undermining productivity and economic growth and leading to cycles of economic instability and collapse. In particular, large amounts of money are accumulating in financial markets and company coffers due to a highly distorted money flow that directs a disproportionate amount of money to wealthier individuals and corporations. This wealthy savings bubble is one of three bubbles recognized by the Money Flow paradigm.

The second bubble is the middle class debt bubble where credit card debt, mortgage debt, student loan debt, home equity debt as well as health care and other unexpected costs have created a situation where workers are unable to buy back the goods and services they are producing without the help of government. To keep money flowing and avoid financial collapse, government engages in unpaid for tax cuts and unpaid for expenditures that lead to the third and final bubble: the federal debt bubble.

The Money Flow paradigm sees the income and wealth inequality as an inherent problem in the continuous transitioning from a variable cost (e.g. unskilled labor) economy to a fixed cost (e.g. physical and human capital) economy that is greatly exacerbated by “pay-to-play” politics that rigs the rules and regulations in favor of special interests. As technological change speeds up, with millions of blue collar and white collar jobs being automated, the central role of government as the heart of the free enterprise system is ever more important.  Government can no longer wait until disaster strikes, but must anticipate and continuously proactively intervene in the economy to maintain adequate money flow to all parts of the economy. This is the key message of the Money Flow paradigm.

For additional details see the Optimal Money Flow book website at:

or the 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA:


The author has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link: