May 10, 2007

Stating the bloody obvious.

Filed under: Economics — duncan @ 8:03 pm

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.


  1. I agree entirely, although it took me some time before I could shake the image of Owen Wilson squandering his talent while rolling round on a bed covered in hundreds of copies of Neon Bible while The Decemberists look on, muttering discontentedly.

    The thing that’s always intrigued me about demand is the way that the demand for things that actually exist is only a tiny fraction of the larger set of possible things that could exist and be demanded, because the nature of a thing in demand economics is a combination of the actual product or service and the price it’s set at. So (stating the obvious, obviously) there’s virtually no demand for a toaster that costs £3,000, while there’d be huge demand for exactly the same toaster that costs 50p. The fact that you have to treat entirely hypothetical product-with-price things as being effectively real when thinking about demand (because there can clearly be demand for things that don’t exist yet, which is why you enter the market), while at the same time having to dismiss the effectively infinite set of possible things (because there are real-world constraints, people don’t make the sort of calculations that it demands, etc) has always struck me as odd.

    Basically, what it think I’m saying is that the idealised market of free-market economics is stupid, because it itself exists only in a subset of that infinite spectrum of demandable things – because the calculations of an idealised market don’t make any sense in a world where everything always has a cheaper alternative. So the supposedly idealised market is every bit an non-ideal and constrained and biased as the real-world markets. This is not the only reason that idealised markets are stupid, but hey.

    But maybe economics books talk about this.

    Comment by Tom — May 13, 2007 @ 12:21 am

  2. Hey Tom.

    I don’t know what the economics books say, because I’m an ignoramus. But your comments all sound cogent to me. It’s barmy, innit? Unfortunately, as with so much else in economics, this stuff still belongs in the ‘head-fuck’ box for me, rather than the ‘subject of careful analysis’ box. I’ll try to do some work on my filing system this weekend.

    As for “Owen Wilson squandering his talent while rolling round on a bed covered in hundreds of copies of Neon Bible while The Decemberists look on”… According to my blog stats I’ve already had ten hits from people searching for that exact phrase. There’s demand for you.

    Comment by praxisblog — May 14, 2007 @ 8:14 pm

  3. Of course, as regards your example (toasters for £3000 versus 50p), that’s what the demand curve is meant to tell us. Any combination of given product and price can always be placed on the demand curve, and we can figure out what the demand for it is meant to be. Toasters for 50p: plenty of demand. Toasters for £3000: not so much. That’s the downwards sloping demand curve.
    But I figure you don’t mean that (right?). You mean that something odd is going on in the relation between possibility and actuality in the demand and supply curves and cross. And I’m inclined to agree. Unfortunately, as yet, I know nothing. I’ll do some reading and thinking, and keep you posted.

    Comment by praxisblog — May 15, 2007 @ 6:55 pm

  4. Yeah – obviously, there’s whole branches of economics devoted to analysing the demand curve upon which my hypothetical examples lie. And that’s all dandy. I think my point was that, when you step back, even though the lines drawn to make the infinite space of possible product/prices non-infinite aren’t arbitrary lines (they’ve got well rehearsed, if not necessarily coherent bases), the existence of those lines gives the lie to the notion that “the market” can ever be a conceptual artefact that is supposedly free of pre-conditioned biases. Because to get a market, you must rule out the infinite, yet to rule out the infinite, you have specify rules for the ruling out. And they’re unruly.

    Gah. I must try writing these comments sober one time. I can’t help feel that would decrease my confusion. Or, more horrifyingly, increase it.

    Comment by Tom — May 16, 2007 @ 12:39 am

  5. Okay, sorry, I think I see more what you mean. (Why focus on these particular hypotheticals, when we could, if we’re postulating hypotheticals, throw just about anything imaginable into the mix?)
    Hmm. Anyone feel like answering this? Amartya Sen? Joseph Stiglitz? Are you guys out there? No need to be shy.

    Comment by praxisblog — May 16, 2007 @ 7:23 pm

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