Econ 101-Understanding Demand and Supply

It is easy to understand how Republicans and the Oligarchy that controls the USA have confounded the electorate with hair-brained economic ideas when even someone as bright as Thom Hartmann does not understand the basic concepts of supply and demand.

 

On his show last week he blithely stated that Steve Jobs invented demand for the iPhone by creating a new product.  Since smart phones prior to the iPhone were difficult to use at best (Palm for example), sales sky rocketed for an easy to use product.  Therefore we are to understand Steve Jobs “created demand’ where there was none?

 

Thom claimed this supported the Supply Side economics theory and Ronald Reagan’s “idea”.   It was cutting taxes for the wealthy so they could innovate and create new products that caused economic growth.  Thus Jobs and Apple created Supply which was then in Demand and va-va-voom the economy grew, or at least the Chinese economy grew.  However, Thom was wrong on both points that are fundamental to the ridiculous ideas that underpin Supply Side Economics, Greenspanism, Milton Friedmanism, Libertarianism, Ayn Randism or whatever you want to call the crazy theories that support the economic “ideas” that have driven the country to third world status.

 

First the idea that Steve Jobs was motivated by tax cuts, or the tax rate Apple paid, or the tax rate he paid is just silly.  Jobs, like most people, was internally motivated to do what he loved.  After Apple went public he stated he had more money than he could ever spend in his life from just Apple’s IPO.  So money was not his motivation.  He was doing what he wanted.  That is what people do when they are healthy and free.  They do what they love, and what he loved was creating products that were simple and easy to use that unlocked creativity latent in people.

 

Cell phones were in general use throughout the world prior to the invention of the iPhone.   However, every phone company wrote their own software.  Their software was terrible.  Why?  Because consumers had no choice, they had to use Verizon’s software on Verizon’s phones.  Anyone who used those phones had the same experience:  horrible software that was tied to difficult and frustrating to use hardware.  The phones that could reach the internet were slow and designed to take you to a “home page” that tried to separate you  from your money.  The user experience was the last thing Verizon thought about. But consumers had no choice.  If you wanted a phone to carry around in your pocket that was it, you used the software the companies provided.  And it was awful.  I remember reading this report from Nokia about their phones.  Their CEO and management were “shocked” to find cell phone users limited themselves to only 17% of the “features” available.  I was not shocked.  Using the “features” took hours of time and was frustrating at best.  I bought an expensive “feature” phone with a 3.2 megapixel camera.  When I downloaded the pictures to Verizon’s web site, they were postage stamp size, not 3.2 mp but more like 200 pixels.  I asked Verizon how to get the 3.2 mp pictures off the camera and they did not even know.  That was the state of cell phones pre-iPhone.  There was a tremendous, breathtaking Demand for phones that could take pictures, check email, surf the internet and work as a phone easily.

 

Steve Job’s ability to negotiate with AT&T so that Apple could write the software and control the user experience was essential to the success of the iPhone.  In one moment a company that wrote great software was offering an alternative to horrible phones for a small increase in price (to those who could afford it).  Steve Jobs tapped in to a pure gold vein in the mother lode of a gold mine.   There was huge pent up demand for the product.  It would be like if BMW or Porsche came out with an electric car than ran on solar power, never needed charging, had zero fuel cost for its life, and was only 20% more than existing cars.  There is a huge demand for that product.  Inventing that product would not be a case of Supply inventing Demand.  The Demand is there.

 

Just so with the iPhone, the pent up Demand was huge.  So the Demand was there but the Supply was lacking.  All Jobs did was recognize the Demand and chart a path towards that golden vein.  If AT&T and the other phone companies had not allowed Apple to use the iPhone on their networks, Apple would had to buy a network in the USA to get its product to market.  The gold was still there but they would have to approach it from a different angle.

 

So the Demand is there for many new products.  However, the new products are not keeping up with Demand.  The innovator often taps into the zeitgeist of the Demand and thereby creates a product which sells in huge numbers.  It does not mean that the Supply and Demand roles have been reversed and that Supply Side economics has a “grain of truth”.  Demand drives the economy plain and simple.  Innovation is tapping into Demand that exists but like a hidden silver mine is latent and untapped.  The wealth innovation provides comes from the Demand that is already there but is unseen and untapped.

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