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Economics is a social science, because it deals with human behavior, which unlike physical laws is unpredictable, variable, and sometimes irrational. Thus, the “laws” of economics are generalizations about human behavior that may not hold true in a particular instance. They also can change over time; i.e., they’re not static or immutable. Higher price TENDS to increase supply and lower demand, but anyone with marketing experience knows that if a product isn’t moving well, the best way to increase sales may be raising its price (because people often think that if something is inexpensive, it’s must not be any good. Also, giving something snob appeal by making it expensive can create demand for it, the classic example being diamonds, which are abundant and have little intrinsic value for most people).
Some arcane data cited by this week’s Barrons Magazine (1/26/2015 issue, page 18) — the NFIB small-business optimism index, BLS figures on private sector job openings, and the University of Michigan’s consumer sentiment index — show business and consumer optimism at multiyear highs, suggesting 2015 could be a “breakout year” for the U.S. economy. Just in time for Democrats to benefit from a happier economy going into 2016 elections, I may add. Sux to be Republican.
If the law of gravity were anything like Say’s Law, then, every once in a while, when you dropped something, it would fly up rather than fall down.
Seriously, any time we want to try to model phenomena as complex as economic activity, we have to start with some simplifying assumptions just to be able to break it down. The idea is to come up with a basic model, and then start relaxing some of the assumptions. What happens if we don’t have perfect information? What happens when someone has more market power than others? What happens when firms and households have budget constraints?
The problem is, too many people learn those basic assumptions of Econ 101, and then think that they understand how an economy works. At that point, they become more ignorant than they were before they took the class. It’s truly an amazing phenomenon.
Thank you Adam Smith. Still it would be nice if those using the “Wealth of Nations” to expound on economics would read the whole thing and not concentrate on certain parts. Since it was published in 1776 it’s difficult to know its influence on the United States founders. Perhaps some of our founders were Marxists but ignorant of Marxism.
One assumption is that economics is rational. Or that human beings are relational. Most of the time that seems to be more or less true. Yet we all do irrational economic things and do not always act purely in our self interest.
Generally the law of supply and demand works pretty well. Just how many air sandwich makers are making a killing in Seattle? Not many are raking it in in the city of Oz? Yet Starbucks depends on coffee a crop not grown in most of the United States exists because Americas drink coffee. If it were an illegal product then Starbucks could demand much higher prices. Because of competition and there is supply Starbucks doesn’t charge $25 a cup though they could try and find out if the market could bear it. So the law of supply and demand though imperfect does work. Just ask any corner entrepreneur selling your choice of illicit drug.
It breaks down because we aren’t rational. Diamonds really are just pretty bits of carbon. You can collect ancient ice from a glacier..use it as ice in a drink and charge some outrageous price for drink with this so special form of water…ice. (I’d prefer the tap water in most places of the world…those with water plants or clean wells…and unfortunately bottled water in so much of the world or a bottle of coke or beer in those places.)
Of course if you have an alternative to the economic man, or to the simple fact we exist in a material world and must survive in a material world even if we can escape it by using our minds. Or perhaps we are fooling ourselves. Sometimes we do that with such things as stock markets, and few places can one find such a mix of rational thought with human feelings and potential for irrational behavior. There is significant herd behavior in the stock market, the rational thing is to buy and hold stocks in companies that are going to pay a decent dividend in the not too distant future. Yet it’s really hard to ignore the whole bear and bulls thing of the market. Which may or may not reflect what is going on down at the farm or on main street.