Demand and labor
Some economists claim that firm revenues depend on sales to consumers and therefore, in effect, consumers provide the funds that businesses need to hire labor and other inputs. Such a train of thought may seem reasonable, were it not for another classical insight. John Stuart Mill realized that there was a "fundamental theorem" regarding capital which was often misunderstood even in his day.
What supports and employs productive labour, is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour when completed. Demand for commodities is not demand for labour. The demand for commodities determines in what particular branch of production the labour and capital shall be employed; it determines the direction of the labour; but not the more or less of the labour itself, or of the maintenance or payment of the labour. These depend on the amount of the capital, or other funds directly devoted to the sustenance and remuneration of labour.
From a macroeconomic perspective, the level of saving determines the level of total demand for, and thus the total employment of inputs. It sets an upper limit on sustainable production. From a microeconomic perspective, consumer demand for final goods determines the relative demand for inputs, and thus the pattern of employment of those inputs in the production of particular goods and services. At one level, capitalists and entrepreneurs steer the economy. At a different level, consumers (indirectly) steer the economy. Classical economists often emphasized the first; while Austrians frequently emphasize the second.
- Murray N. Rothbard. "Chapter 2 - Direct Exchange", Man, Economy and State, online version, referenced 2009-07-04.
- Larry J. Sechrest. "Capital, Credit Expansions, and the Subsistence Fund" (pdf), referenced 2010-22-04.
- John Stuart Mill. "Principles of Political Economy" , (emphasis in original), referenced 2010-22-04.