My intention is to bring into question the validity of the supply and demand graph. My argument is that in order to determine the slope of either the demand or supply curve you have to make assumptions about individuals' behaviors, and that this has two implications: (1) upward sloping supply and downward sloping demand cannot be considered economic laws (although, I'm not sure anybody does consider them as such), and (2) the supply and demand graph may offer some evidence towards the usefulness of empiricism in economic science (although, just the same, one could go as far as to argue that the common supply and demand model, as shown above, is actually not that useful a tool in economic science).
I'll illustrate my point by analyzing it behind the concept of a shortage. Anybody, or at least 99% of economists, will agree that artificially (fixing) the price at a point lower than the equilibrium (PE) price will create a shortage of that product. This is because decreasing the price to a point lower than PE will lead buyers to increase quantity demanded. Similarly, an artificial increase in price above PE (price floor) will lead to a surplus of the good in question. This is because it is assumed that a rise in price will cause quantity demanded to decrease.
We see how in making the argument for shortages and surpluses as related to the simple, common supply and demand model we implicitly make an assumption of how the buyer (in general) will behave. If prices fall, quantity demanded will rise; if prices rise, quantity demanded will fall. But, we can't really definitively comment on how exactly the buyer will respond to a change in price, even assuming ceteris paribus (that all else remains the same) — we don't even really know what "all else" is. That the price of product X falls does not mean that it is suddenly more lucrative for me to demand over other products, even if the price of other products remains the same. You simply cannot definitively comment on how individuals economize means amongst ends — this is outside of the scope of economics (we can only say that individuals do economize; this is, more or less (more accurately: human individuals act purposefully), Mises' praxeological axiom).
So, supply and demand graphs contain at least two conditional statements. If the price moves in $_whatever_direction, and if the buyer (on average) responds in $_whatever_direction, then $_something will occur.
At least, this is what seems completely consistent with subjectivism.
Again, I understand that the relevance or importance of these facts may come into question (and, I repeat, this post is only half serious). None of this will lead me to dropping the model as a useful elementary tool. We know (or, I think we know) that supply and demand graphs are usually accurate in the broadest senses. A rise in price above PE will lead to a surplus, and the opposite will lead to a shortage. But, this is based on a broad empirical observation of people's behavior.
What implications does this have in regards to empiricism, economic theory, and subjectivism?
This is discussed fairly at length in Man, Economy and State, it the first half or first third of the book. In fact, I believe you are making two problematic assumptions (and unnecessary ones):
ReplyDelete1. That the demand schedule is a continuous function (a line and not a stair like or similar line). Which is against the idea of utility ranks. Quantities (and even prices, to a lesser degree) are discrete. Not all (in fact, a small minority) or all values of each will result in a change in the other.
2. That a single individual's demand schedule is measurable or predictable. It can't even be determined a posteriori.
A demand schedule can only be estimated for a single point at the time of the transaction (for a single price-quantity pair). We are left completely in the dark for the rest of the curve at that moment (and the curve would only be valid at that very specific moment: I wanted icecream then, no more now).
Therefore empirically graphing demand and supply schedules is absurd. It is a pure analytical tool.
In fact, the only empirical estimation possible is the one entrepreneurs do: they expect a price to rise or fall according to a certain supply of a certain good. And even there, more often than not, they are proven right by practice, but by a set of circumstances that looks more like luck than true foresight.
Finally, when you say "But, this is based on a broad empirical observation of people's behavior." I think it is based on what is rational, not what is observed. Even though it it can probably be observed.
I think you and I are saying the same thing, although I'm not sure why a stepwise function is more accurate than a curved demand/supply schedule (although I have heard the argument before; I don't know it well enough to argue either way).
ReplyDeleteBut, what I'm saying is more elementary than the shape of the curve. I'm not commenting on what the curve should look like. I'm commenting on the ability to a priori decide in what general direction the curve will go (and, furthermore, arguing that you can only really say that the demand curve slopes downwards and the supply curve upwards based on broad empirical observation).
You're right that it is based on what is perceived as "rational", which explains why these models/tendencies are accepted in the broadest possible sense. I'm just being technical and pedantic in this post.
Ah, alright. I think I misunderstood the meaning/objective of you post. In short, you put the fact that "we economize" in conjunction with the "subjectivity" of the best possible end.
ReplyDeleteSilly as it sound, it is the subject I think most about when mowing my lawn :S And I concluded that it is the most precious lesson of the Austrian school.
This, in my understanding, means that an individual is absolutely and completely unpredictable in regards to the choice of his ends, a point which we agree on.
However, I want to underline that 1 individual might be unpredictable, but a group (the larger the better), isn't and will behave more coherently in face of economical decisions. This is not an empirical reading, but a statistical (mathematical) truth: a priori. The fact that people economize mean that on a broad multi-choice, multi-price economic system (such as ours), better prices will prevail, on average (as in not for all, but in general). See the Walmart effect.
So the statement "the demand curve slopes downwards and the supply curve upwards" is not a posteriori, but a priori.
As of the individual demand/supply schedule, I fully agree with you. It is not predictable a priori. I think the confusion stems from the habit of re-framing problems around a single individual for comprehension.
Conclusion: I think this fact is primordial to economic thinking.
About the stepwise function. Rothbards argues for it (if you look for a source). And I doubt anyone could argue against it, except for aesthetic or simplicity reasons. It is a fact of life, things are discrete. I know Shannon would agree!
ReplyDeletehttp://en.wikipedia.org/wiki/Claude_Shannon
Gee,
ReplyDelete"This is not an empirical reading, but a statistical (mathematical) truth: a priori."
Statistics is not mathematics, and statistics is an empirical field. Taking statistics of a population is the same as forming empirical evidence. Saying that a group behaves in a certain fashion based on statistical information is a posteriori knowledge.
True enough, therefore you win the point :)
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