There’s going to be a lot of this: saying things that everybody already knows. Today: Demand.
Here’s my formula:
In economics, Demand equals Desire plus Ability to Pay.
Picture a rudimentary economy, involving just three people: you, me and Dupree. Dupree has thousands of dollars, and if he could, he’d spend most of them on Arcade Fire albums. If I’m a smart entrepreneur, I’ll immediately go into a recording studio, become Arcade Fire, produce a slightly disappointing second album, and rake in the readies.
In this same economy you have not a cent to your name. You live in utter destitution. Because you are destitute, you starve.
But if I were to produce food, you wouldn’t be able to pay for it. Dupree and I are already bloated – our larders are stuffed to bursting. So in this economy there is, at present, no demand for food. If we let the market do its thing, allocating supply to demand, no food will be allocated till Dupree or I feel peckish. And then, of course, the food will be for us.
You are going to die.
Perhaps this is too obvious to even be worth mentioning. Those without money or goods or services to exchange for commodities simply do not enter the economy. Any economy. The maximally destitute cannot, in the economic sense of the word, demand anything at all.
But we need to remember this. The economic meaning of the word ‘demand’ differs massively from the ordinary-language meaning. Economists know this, of course. But there can be slippery vacillations; there can be crude equivocations. Certain reassuring formulas are much less reassuring when we keep this fact in mind.
“These are the workings of the price mechanism – an automatic device that operates to balance supplies and demand for all goods and services marketed.” But how exactly are demand and supplies balanced? If there is too little of a certain commodity to satisfy people’s demand for it, the price mechanism operates to ensure that the poor can’t get any. Thus is demand balanced with supply! The excess demand has vanished!
But… um… the demand is still there. It’s just not economic demand any more. It’s real demand, real need – often fearsome need, a matter of life and death.
Or take this, also from Tony Cleaver’s ‘Economics: the basics’.
“A market society thus automatically responds to consumers’ wishes…”
Of course the operative word is ‘consumers’. Those with the most desperate needs will always and necessarily be those who are not consumers at all – this is precisely why their needs are so desperate. The market does not respond to them; except to allocate the resources they need to those with money.
All obvious, I’d say. I just wish it were more prominently mentioned in economics textbooks.