Questioning the Laws of Economics

Scarcity is the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources.

The principle of scarcity (not to be confused with the state of scarcity, where means are not sufficient to meet ends) is one that is taken for granted by not only capitalist, but even mutualist and Marxist theorists.  It has been repeated for a very long time, but not because it is so simple as to be tautological, not because it is impossible to falsify, and not because of compelling and irrefutable evidence.  The principle of scarcity has always been nothing more than an assumption, an unsupported and ahistorical assumption, used to make unsupported and ahistorical conclusions.  I don’t think it’s reasonable to assume that human wants are “unlimited”, let alone so unlimited and or so intemperate that it creates a “fundamental problem” for society.  What the principle of scarcity is actually describing is not wants but possibilities, possibilities “between competing ends,” as if there is some context in which we can consider all ends to be equally important or desirable.

Scarcity as a generalized principle is an extremely generous assumption: Certainly it would be possible for at least some resources to far exceed in quantity what we will ever demand.  This could especially be the case when considering that in practice, total supply and total demand are largely irrelevant except in the long run: It’s the rate of each that is relevant, and we (and our environment) certainly produce many things today at a greater rate than we consume them.  It is admitted by some economists (of the real or the armchair variety) that the existence of actual abundance would mean that market logic could no longer apply, and therefore they would become free goods.  The example often cited is air, though Robert Owen and subsequent leftists have long pointed out that it’s not the abundance of air that precludes charging for it, but the inability to exclude others from it.  In the case of a near-equally abundant good, water, exclusion is possible and thus paying for water is extremely common.  Taking the contrapositive of this, it isn’t scarcity that results in people paying for things, it’s merely the ability to exclude people from things, to “middle” them, turning them into commodities or putting tolls before their use.

The phrasing itself of the principle of scarcity is curiously Malthusian, as well.  We could rightly and uncontroversially say that scarcity is “the basic problem that arises because resources are limited and possibilities are unlimited,” or more interestingly, “a situation where desired ends exceed actual means,” but instead we choose to say, “The basic economic problem that arises because people have unlimited wants but resources are limited[1],” or “the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources[2].”  The “basic problem” in economics is that people are incapable of living within their means.  In fact, this actually is a Malthusian conception of the problem, because it is exactly the premise of “An Essay on the Principle of Population”: People are incapable of living within their means, therefore they will always live in squalid poverty unless we take control of them.  This basic principle of scarcity is implying nothing different than the conclusion of Thomas Malthus; the basic problem that economics solves is how to engineer the economy to solve this “basic problem,” only an economy is made up of people, so they are what is being engineered.

The basic structure of the capitalist economy plays right into the engineering of people:  Trading commodities for money eliminates context from the production, transfer, possession, use, and most critically the past of commodities, reducing all this complexity down to mere and unintelligible quantities.  When purchasing a commodity, you have no idea what it took to produce it, what the costs were, who produced what parts, what sort of conditions they were produced under, where it all came from, how much profit is being made, how many costs are being externalized.  Was my smartphone made by a worker who committed suicide?  How much of my computer is made from metals mined by slaves or children?  On the other side, as the producer, how many of the people buying the cigarettes I make are spending money on that rather than feeding their children?  Would people buy the TVs I make if they knew that the people that assembled it work 14 hours a day for less than an American makes in an hour?  Even the producers are consumers of factors of production, and could raise exactly the same questions further up the supply chain.

It’s completely up to the seller to reveal this information, and therefore primarily up to someone else to inform your decisions.   The commodification and pricing process sorts all “wants” into classes of quantitative equivalence; though a hungry person who wants five dollars’ worth of food is clearly not equal to a sated person who wants five dollars’ worth of food, to the producer who is selling the food, they are exactly equal.  It eliminates history, reducing relations between people to mere relations between things.  Decisions people make in this information-suffocated environment cannot reasonably be expected to be made in good conscience.  Capitalism’s white knights never hesitate to declare that any negative effects of capitalism have been completely sanctioned by consumers.  This rationalization amounts to little more than victim-blaming when so little effort is made to inform buyers of a commodity about the ills created through the production of the commodity.  Prices control people’s behavior as much as people’s behavior controls prices.  We all know one way that prices are set to engineer the behavior of people: Hardly anything costs $15, it’s $14.99.  Prices are widely regarded as mystical numbers that reveal incalculable information about the state of the economy, but we see here an example where a part of the price is based only on the fact that people are more likely to buy something if it’s a penny less than an even dollar.  There is also the very common method of pricing something high and frequently having “sales” where it is reduced to the price you intended to sell it at.

This leads us to the law of supply and demand.  The law of supply and demand describes how pricing behaves in terms of the supply of the good and the demand for the good. The price is based on the “supply curve” and the “demand curve”, each of which represent willingness to pay according to these factors.  The law of supply and demand is absolutely, critically indispensable to the idea that markets are efficient: The settlement of prices to an equilibrium is the basis of any mechanism of efficiency in markets, because it connects the abstract and apparently meaningless quantities of prices to the meaningful, material world.  Human action in an economy is reduced to revealed preference and the deterministic mechanisms that act on them and are acted on by them.

However, it’s really this “willingness to pay” that is closer to the critical factor in prices: Were a hungry person and a sated person to compete for the same plate of food, the “law” states that the hungry person should be more willing to pay and thus will bid up the price to satisfy his hunger.  This makes intuitive sense, because of the conflation of price and value: You consider food more valuable when you’re hungry than when you’re not, and are thus more willing to pay for it (and of course, food sellers know this and use it to their advantage).  On the other hand, if this willingness to pay were nonexistent, if there were no greater or lesser willingness to pay due to supply and demand, this law would not exist.  On that hand, there are other factors than supply and demand that influence willingness to pay, which is readily proven due to these curves being different everywhere.

Thus the supply and demand is a mere influence on willingness to pay, which is what prices are really about.  This realization alone does not render the mechanisms of market useless, necessarily, since in the above scenario there is still a resolution to it: The person who is hungrier pays more.  But this common sense solution based on common sense assumptions presents a huge problem for markets intended to be used in real, free societies: Willingness to pay only counts if it is backed by ability to pay, and the willingness of the hungry to pay is not often matched by their ability.  Conversely, the ability to pay, for some, far exceeds their willingness to spend, or put another way, those who have the most wealth are least likely to need it and most likely to keep it, while those with the least of it are most likely to need it and least likely to keep it.  This insight was reached by Keynes with the “marginal propensity to consume/invest”, though it was applied to the argument that wealth must be redistributed by states, rather than the argument that capitalism has problems that can be treated but not cured.  It can be observed through the behaviors of real economies, in which greater inequality is tied to reduced social mobility and a larger financial industry.

Someone with wealth has a greater ability to negotiate a more favorable deal for themself than someone without wealth.  Because of this, the higher willingness to pay by a hungry person without a commensurate ability to do so is often solved by paying for money—by giving up control over their work (or until somewhat recently, over themselves) to someone with money.  In the past, this was also done for debt and credit—many slaves of the olden days ended up in slavery because they sold themselves or their family members in order to pay off debts.  The greatest scarcity in the economy is and long has been the means to pay, and because most of us lack the means to produce commodities to exchange for money, we are instead forced to exchange our agency for money in order to fulfill our needs.

Supply and demand also lacks a relational understanding of economy: Because the economy is made up of more than one supplier and more than one demander, because each have their own characteristics, because the economy works through time and space, there are more complex factors at play here than simply “willingness to pay given S” and “willingness to pay given D.”  The desperate hungry person is actually demanding less than the sated eater, and therefore is less responsible for driving up the price, but in a practical market, pays the same price as the sated eater.  In theory the law is perfectly fair, but only if you don’t examine the theory too closely.

What the law of supply and demand means in practice is that the rich get first pick: If scarcity exists—which today increasingly occurs only alongside novelty—those with the greatest need are least likely to have the greatest ability to pay, while those with the least need are most likely to have it.  Thus, in practice, the law of supply and demand is little more than the principle of proprietarian social darwinism—the idea that we implicitly hold in capitalism: that fitness for survival is, or should be, determined by the ownership and production of property.  You are only worth what you give (although in practice, it’s more like what you take).  The law is not the only, or best, or most intuitive, or most natural way to resolve scarcity, it’s simply the one that reflects the cultural value of wealthy people being more deserving than unwealthy people.  If this still isn’t convincing, let’s think of it in very simple terms:

If more people wanted a slice of cake than there were slices of cake, what are the possible ways to resolve the conflict for it?  The first practice that comes to mind is the dead-simple first-come, first-served (FCFS in any real science that deals with provisioning).  You could also cut the cake into smaller slices, or let the people who want the cake decide amongst themselves what the best resolution is.  Auctioning off the cake is absolutely not the simplest or even the best way to go about resolving the conflict for it.  However, it is the method that best favors those with the most wealth.  The law of supply and demand is the hypothetical cake auction, here. The variance in prices due to supply, demand, and willingness to pay as a function of the variance of each is not an immutable law of economics, but rather a contrived method of conflict resolution based on proprietarian social darwinism.

Because scarcity is assumed by default, because the “law” has never been examined outside of the context of commodity production, and because the “law” is really just a description of one of many possible behaviors, the “law” of supply and demand is a law that fails to actually describe reality.  Its sanctification as a universal law that cannot be ignored without dire consequences in alternative social systems ignores the vast realm of possibility in human sociality that doesn’t involve commodity production.  It ignores this in spite of the many real-life situations in which nothing remotely like the “law” would, could, or should ever apply.

In the world which is governed by the law of supply and demand, production and consumption are considered distinct activities, and individuals are rendered into dividual “producers” and “consumers”.  It is possible to consider this division advantageous based on the belief that it must exist for complex labor to occur.  Strong proprietarians often illustrate their detached thought experiments as beginning from self-provision, but it was precisely private property that most strongly disrupted the self-provisioning of the peasantry and forced them into dividual, commodity-based provisioning over the course of the mid-late first millennium.  A “producer” and “consumer” relationship is only advantageous in supplanting self-provisioning, and that is only advantageous assuming that self-provisioning is inferior to this other pattern—an assumption that at best depends on there being a distinct dichotomy between the two.

The existence of a continuum between dividual provisioning and self-provisioning most sensibly fits the change in economic theory from the 18th & 19th centuries to the 20th and 21st, from the labor theory of value to the subjective theory of value.  Labor theory of value is now attributed to Marxists, but it is actually attributable to Ricardo and was popularized by capitalist political economy—Marx merely agreed with the theory, and marxists today have held onto the theory in opposition to the more contemporary subjective theory.  What these theories actually describe is not what determines “value” in the general sense, but what determines the willingness to pay for a commodity.

In the early stages of capitalism, most people are capable of self-provisioning, so assuming there are no other influences to their decision (which is not necessarily a safe assumption to make), people will go through the effort of laboring for a wage and purchasing a commodity only if the wage labor is less than the labor involved in self-provisioning.  In the early stages, a large but dwindling number of commodities were costlier and inferior to goods produced through self-provisioning.  Many forms of self-provisioning were tenaciously carried out up through the 20th century, particularly gardening, which is such a vastly better method of food production than industrial monoculture farming that political economists argued for a century what the proper size for a peasant’s garden was, and Americans were supposed to have “victory gardens” in the 1940s due to an insufficient industrial agricultural infrastructure.

However, as capitalism proceeds to interjaculate its way into every relationship between us and the world, as the traditional knowledge that gave us the ability to self-provision atrophies and the possibility of doing so begins to rot away as profusely as the property rights of the populace, the labor theory becomes irrelevant.  Today, there is seldom the possibility to decide between self-provision and dividual provision.  We no longer make decisions, we merely make choices: We have choices between commodities and different commodities, which gives rise to the vacant and apologetic subjective theory.  Therefore, it can be said that both the labor theory and the subjective theory are both perfectly correct and the reign of their popularity roughly matches when they would have been most applicable to reality in the Western world.  However, these are not actual theories, and the correctness of one does not imply the falsification of the other.

The division of production and consumption may have the advantage of facilitating complex labor, though it has yet to be seen that such is the case, or that such an outcome is really the most desirable, and it comes with many disadvantages.  Self-provision is maximally efficient in terms of correctly initiating the process of fulfilling needs; each person knows what they want for themselves better than any other person does.  Dividual producers must guess at what dividual consumers want, from which we get such absurdities as the economic calculation problem.  Roping the scarcity principle back into this, the ways that producers go about selling their wares today casts serious doubt on the idea that scarcity is such a “fundamental problem”.  Since the mid-20th century, advertising and marketing have become some of the most crucial parts of any product company, and today we are assaulted with ads on any medium of communication and in any public space.  It seems strange that if we really have a fundamental crisis of too many wants and not enough means to fulfill them, that we would then proceed to entice and encrease these wants at every chance we get.  At the least, it shows that efficiency is not a significant factor in our economy.

Commodity-based provisioning also has a severe ethics problem: Consumers know very little about the qualities of the production process, especially the processes that occurred prior to that of the producer that turned out the final consumption good; sellers in a market also have compelling reasons to look the other way if they suspect that something about their product may be harmful to consumers; For consumers it’s much the same situation regarding harm to producers.  In fact, for any case where labor is a significant cost in the production of a commodity or service, the well-being of the producer (which is usually not the same person or group as the seller) becomes directly opposed to the well-being of the consumer (and remember there are many more intermediate consumers than end consumers unless you buy directly from the producer).  When only marginal cost reductions can be made, when only marginal quality improvements can be made, the only way the consumer can benefit is through the producer’s detriment, and vice-versa.  Most importantly, because of the use of private property and personal accountability, these decisions are all made in terms of how they cost and benefit you alone, not just in an abstract way but in a real, often life-threatening way.  Humans do still have a need to survive, and economics widely ignores the survival mechanism and the risk-averse behaviors that it creates.  An oil company threatened by climate change or a worker threatened by foreclosure will suspend what economists would call “rationality”.

Economics typically assumes that prices are based on value, with the implication that all things that are equal in price are assumed to be at least roughly equal in value.  It is necessary to hold this idea to come to the conclusion that prices are useful in “economic calculation,” and represent the convergence of all relevant factors in provision. This assumption is held so firmly that the “paradox of value”, where the paradox of prices failing to match our intuitive conceptions of value is resolved by considering prices correct and our conceptions of value incorrect.  More specifically, our conceptions of value, which are based on soundly logical priorities, held by the majority of people, and largely robust over time, are supposed to be the thing that is wrong; prices, quantities based on arbitrary calculations and measured in arbitrary units, varying wildly over time and state, and contrived by the minority of people, are supposed to be the thing that is right.  Despite the paradox of value and its implied connection between value and price giving rise to “theories of value”, economists who are questioned on why a given price doesn’t match any known theory of value will not hesitate to admit that actually, value and price are not connected in any meaningful way.

In reality, there are many more factors that have stronger or more immediate influences on the price (such as speculation, which has given us far and above some of the most potent and damaging effects on the economy), but these are less interesting to economists because they are not as useful in producing the meretricious models of efficient, mechanistic market beneficence.  Profit maximization can sometimes lead to efficient material and energy uses, but this depends on the assumption that the cost of materials and energy is accurately described, if not in equivalence or proportion to empirically-observable measurements, then in a similar order as would be the materials if ranked by these measurements.  Production in the market certainly has costs, and these costs are certainly reduced by the manufacturer, but these costs are figured in terms of money, in terms of the power to rearrange society, and not in terms of anything significant to the efficiency of energy or materials.  The idea that maximization even occurs is dubious, as well, since there is no way for most capitalists to know whether and how to maximize their profits.

Further laws of economics are essentially just variations of the law of supply and demand and the myth of market equilibrium which is based on it.  For example, Walras’ law states the absurd idea that no excess supply or demand can exist within a market without a corresponding opposite excess demand or supply.  In other words, an excess of apples would have to correspond to a want of oranges.  Of course, in reality there are simply things that people do not want, there are mistakes made in production by the producers, and markets do not really find their way to some highly-efficient equilibrium.  Honest economists have had to acknowledge this in recent decades, first admitting that the equilibrium conjecture is restricted to specific situations, and more recently, the modern “DSGE” model has been receiving increasingly fervent criticism for its failure to make useful predictions about reality.

Money is power, quite literally, and the movement of prices represents ratios of power between buyers and sellers.  Prices actually have nothing to do with utility or value or labor, except in terms of the convergence of the need and willingness to accept the given price.  They do not “signal” buyers or sellers with any hidden information, since that information would be entangled in many other factors and impossible to reasonably separate; they are as much a signal of changes in supply and demand as test scores are a signal of how many books a student has read.  Prices are no more a reflection of supply or demand than they are of speculation or ignorance; they mask hidden suffering in their creation and hidden wealth in their consideration.  The law of supply and demand is no law of supply and demand, but of the use of social darwinism to resolve conflict, and is closer to the legal term “law” than the scientific one.  All speculation of efficient or equilibria-finding markets based on this law are questionable at best, and outright null at worst.  These are not laws, but ways to frame reality to achieve a political end.

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