I would argue that the purpose of an economic system is to deliver goods and services when, and where, they are required, and that employment is merely a bye-product of that effort....
Socred,
I agree that the economic system's function is to deliver goods and services when demand "requires" it. But I'd reword the statement slightly. I would substitute the word "demand" for the term "goods and services...required."
The purpose of an economic system is to meet the demand of consumers. It's consumer demand that drives the economy. It is the expenditure of consumer income to purchase goods/services that creates demand. Total consumer spending is the dollar-value measurement of aggregate consumer demand.
For the moment, I'm going to go along with the above statement. This statement also equates to the following statements:
Increasingly, technology is allowing each worker to produce more goods in a given amount of time.
Increasingly, technology is enabling the same number of workers to produce more goods, and create more wealth over any given amount of time.
However, producers will not produce more goods if there is no increased demand for them. If less workers are employed to produce the same amount of goods, it causes less aggregate wages to be paid out. This, in turn, reduces consumer spending power. It reduces the dollar-value of aggregate consumer demand. It results in less goods being "required" (demanded). This, in turn, results in less goods being produced in the future. Less production requires less workers, reducing employment and aggregate wages still further. Thus, reduced consumer demand
itself causes further reductions in consumer demand--due to reduction of the aggregate labor/consumer income that determines demand.
Since prices are "sticky," no immediate reduction in prices occurs from reduced demand. Instead, the immediate response is reduced production--causing reduced employment of workers who provide production. As above, this further reduces aggregate wages, spending power, and aggregate demand. This causes still further declines in production, since a smaller dollar-value of production can be purchased. This is a self-perpetuating cycle, where reduced Aggregate Demand feeds back on itself--because reduced Aggregate Demand causes still further reductions in Aggregate Demand.
It's true that the "purpose" of the economy is to provide for the "required" goods and services. (Economists would replace the word "required" with "demanded"). Rewording this into an equivalent statement, it is true that aggregate production is produced to meet aggregate anticipated demand. And again, it is technically true that employment is not the
function of the economy. It is a "by-product."
But employment is a mandatory by-product. It is this employment "by-product" that creates the "requirement" for goods and services. Thus employment itself is "required" for goods and services to be "required." As such, employment becomes a "requirement" as well. In fact, employment is
the ultimate requirement of an economy. Employment is responsible for both demand and production. Employment provides the needed income to purchase goods and create production demand. Employment provides the labor needed to produce the supply of goods to fulfill production demand.
Thus employment is absolutely essential to the economy. It is employment, and the income it provides, that limits consumer demand. It is aggregate wages, and aggregate consumer income, that ultimately funds ALL consumer spending. It is the expenditure of these wages that create consumer demand.
Providing goods & services when "required" certainly IS the immediate
purpose of the economy. But this very "purpose" itself, is also "required." This required purpose is the fulfillment of Aggregate Demand. It's the underlying driving force of our economy, and all other economies that have ever existed.
Aggregate Demand is the engine that drives our economy. It is the driving force of production. Without Aggregate Demand, there'd be no production. Without it, there'd be no economy, since there'd would be no "purpose" to fulfill, no "requirement" to meet.
Meeting the
requirements of Aggregate Demand
is the very
purpose of our economy.
Though Aggregate
Consumer Demand is directly responsible for only 70% of economic activity, it is indirectly responsible for much of the remainder as well. Either directly or indirectly, Aggregate Consumer Demand is responsible for nearly all Aggregate Demand, if Government Spending is excluded.
(If Government Spending is included, Aggregate
Income is responsible for nearly 100% of all Aggregate Demand.)
Though Capital Investment
* is considered separately, it's entirely dependent on consumer demand. Capital investment occurs
only in response to consumer production demand. More precisely, Capital Investment occurs only when returns are anticipated from capital investment. None occurs if no returns are anticipated. Returns are based on profits which, in turn, mandate sale of production.
No production sales --> no anticipated production demand --> no anticipated return on investment. And,
reduced production sales --> reduced anticipated demand --> reduced anticipated returns.
In the long run, Investment Demand is directly related to anticipated Consumer Demand.
Goods are not produced without an anticipated demand. Thus capital investment occurs ONLY in response to anticipated consumer demand. Even when investment goes into providing capital goods for other producers, the ultimate cause of Investment Spending is Consumer Demand.
It is consumer demand that creates investment opportunities. A microeconomic increase in consumer demand for a good creates an investment opportunity for production of that good.
A macroeconomic increase in aggregate consumer demand for goods creates an aggregate increase in overall investment opportunities. Since an increase in aggregate consumer income increases aggregate demand, it increases aggregate investment opportunities as well.
An increase in consumer income increases anticipated returns on investments in aggregate. Again, Capital Investment is almost directly proportional to Aggregate Consumer Demand.
Government spending adds to aggregate demand. Government spending is funded by taxes on sales, usage, property, income, or some derivation of income (e.g., Corporate taxes, etc.). Government borrowing, and resulting interest payment, is financed by anticipated future income of Americans. Thus Government spending is dependent on Aggregate Income as well.
Exports sales are financed by foreign consumers, and funded by foreign consumers' income. Imports are financed by American consumers.
Thus, the ultimate source of ALL spending is the income of workers and consumers, either directly or indirectly (The ultimate source of producer profits, executive salaries, bonuses, and dividends is the consumer--from sale of goods or services to consumers.)
The employment of consumers is mandatory for the economy to function. Technically, employment is not the immediate "purpose" of the economy, but it is an absolute requirement. The expenditure of income is "required" to create the economy's "purpose"--that of providing goods and services demanded. Without employment, and the income it provides, there'd be no "purpose" to fulfill, nor any requirement to meet.
And there'd be no economy as a result.
* Only Capital Investment is considered "Investment" when used in the calculation of GDP. Investment in bonds, securities, etc. is not considered investment in GDP calculations. All non-capital equipment expenditures are excluded from the GDP "investment" total.