Economics and free market

[HydrogenBond]

The capitalist system is based on the laws of supply and demand. Although this is true, the existing system is based on supply side economics. In other words, demand for most goods and services can almost always be traced back to the supply side. For example, nobody originally demanded fast foods. Entrepreneurs, at the supply side, came up with this idea and used marketing to create demand. Once this demand appeared, there wasn't any universal demand to make more and more fast food varieties. The supply side provided these alternatives. Once the induced demand sticks, then the laws of supply and demand take over. What is taught in school has to do with supply side economics driving the supply and demand in a free market system.

Demand side economics, as the driving force of economics is different. Demand side are the consumers defining the need and price. The supply side would see an opportunity and would provide the supply. The law of supply and demand would apply, but driven by the demand. For example, if demand side wanted low cost medical insurance, the supply side would have to respond. Currently, due to economics being driven by supply side, there is no need to respond, since supply side is the driving force between supply and demand. While demand side has little leverage.

Let me give an example of demand side setting the price. All people and families, who buy a product X in the free market, rather than act as an individual, become part of a national buying group. Due to the volume that the buying group promises to buy, to reflect the needs of all the members, the group will be given a special price, at or below wholesale. The groups then issues all their members a membership card, that they use at the point of sale, that gives them this big discount.

If is sort of like a builder who buys from a hardware store. Due to the volume they anticipate buying, they get a deep discount. The average consumer does not have the buying power to get this discount. With supply side driving supply and demand, the demand side leveage often goes to those who have more. In other words, they can use their business to get discounts on personal items. While those who have the least money usually have to pay full retail price. To balance this out, one could extend the buying group to those with less that say $100K annual income. These can use their wholesale card when they shop. Those who are not part of the buying group, pay at the prices dictated by supply side.

This is nothing personnal. It is just part of the free market. The real demand side economics is not taught in schools; it is taboo. The laws of the economic jungle that are taught say there are shearers and sheep, with the sheep suppose give the wool. But the sheep need to realize, without their wool there is no economics. Because their wool is important to the economy, is should be considered valuable. The way you sell it in the free market, is to demand the price you wish to pay.

If we extrapolated this scenario, where demand side economics could set the demand and the price, it could cause many businesses to reach a point where they would go belly up. The govenment would have to step in and create a business welfare system. Essentially, without recieving any goods or services, the govenment would slip the business money under the table. It would be enough money to make the business worthwhile, to compensate for the extremely low prices. It would become a type of free market socialism, where the govenment dictates where the money goes, based on the demand of the people. If the people need food at low price, then the govenment would keep this business sector healthy.

This last scenario is neither good or optimum. But it would be beneficial to create a better balance between supply and demand side economics. Things that people need should be leverage with organized demand. Things that people want should remain under the current supply side system. This creates an interesting paradox for business; if they create artificial need, there will be a short term gain, but the demand side will step in and make the price drop. So business would have to learn to be careful about artificial need, if they wish to keep a market from getting gobbled by the demand side. Supply side has hyped medical demand. This could be a good experiment in real demand side economics.

[Buffy]

Just a general warning to anyone reading this thread: These are "interesting" and "personal" definitions of the terms "supply-side economics" and "demand-side economics":

"Supply-side economics" was coined in the late 70s and implemented in the early 80s in the Reagan Administration. It solely refers to advocating government policies that promote production, and is actually quite similar to Keynesianism, except that its "policies" are focused on lowering government taxation of business rather than increasing government spending (although in fact, Reagan did the latter through the *very* Keynesian mechanism of spending on Defense programs, which is somehow different than social welfare and infrastructure investment programs).

There is no historical or economic term known as "demand-side economics."

"Supply" and "demand" are both critical to the success of any product or market, but to say that one is exclusively dominant has no basis in economic theory. Certainly there are "created markets" (my favorite is the "Pet Rock"), but they are *always* matched by some latent or base demand.

This is a certainly interesting post, but it bears no relationship to any current or past economic argument regarding some "conflict" between the two.

Words ought to be a little wild for they are the assaults of thought on the unthinking,
Buffy

[HydrogenBond]

I used to be more knowledgeable about the terms of economics, but my memory is a little rusty. Thanks for clarifying that, Buffy. What I was trying to show was a contrast between an economy that begins with demand, where the supply side reacts, to one an economy where supply creates demand, so demand reacts to the supply. The final supply and demand effects are quite different. For one thing, demand is not that creative. It would not come up with hundreds of new angles for demand. It would choice from what already exists. Almost all the new angles, are marketed from the supply side.

What I referred to as demand side economics, are all the people who shop in the market place, deciding how to spend their money. They pool their wealth, as a single buying group, and decide how to spend all that money in bulk. This gives the group economies of scale. Because there are a hundred million shoppers, one could not take into consideration everything, everyone wants. For sake of practical feasibility, it would have to be restricted to only things that the shoppers really need.

Another way to make this economic contrast is the analogy of shearers and sheep. I don't mean this in a negative way, but this analogy helps. If every person decided to start a business, supply side economics would not work like it currently does. For one thing, since everyone would see themselves with the vision of a higher earning potential, there would be no cheap labor. How much would you have to pay a business owner to flip burgers at your fast food resturant; $175K.? For the supply side approach to work, it needs a plentiful supply of sheep. The Mexican invasion into the US, is being allowed because it increases the supply of sheep. If you have more sheep, there is more room for additional shearers. The sheep for any number of reasons ,accept their role of having less. If they didn't feel that way and all became shearers, nobody can shear.

Although the sheep are low paid, they are pivotable to supply side. All these low cost jobs are sort of the foundation of the machine. If we had no sheep, than we would have very few shearers, since the cost of labor would get so high, due to everyone feeling more worth. What the demand side approach does, is keep the supply of sheep, but it is also allowing the sheep to shear the shearers, for their basic needs. The sheep can't seem to do this on their own, so they need help using a team approach.

Government shears the shearers with high taxes. But govenment is wasteful. The Demand side approach is a valid free market strategy that will lead to more efficiency in the free market. It would result in business getting hit with lower sales prices. Govenment would need to offer relief, by lowering their tax rate. Taxes go back into the free market.

With the sheep able to take care of their basic needs, cheaper, the extra money is available to shop within the endless variety generated by the supply side of the free market. This is money for their desires. This is not socialism, because it is based on the free market. But it leads to a similar result, but with much higher free market efficiency. This incremental difference, in efficiency, means the economy will grow.

The biggest problem with using a demand side push, such as buying groups, is it can get too greedy and cause the economy to stall. The only way it could work, would be to make it pure demand side. It can't be a business for profit. One can not use professional shearers to shear shearers, because it would turn into a supply side mutation. It would have to be done using voluteers, so there is only marginal incentive.

[OldBill]

Oh, that Ogg! -what a marketer he must have been, to convince people they needed his wheel - when they had been getting along all that time without it.

Businesses do not create artificial needs - they respond to a perceived direction in the market for their particular good or service, and succeed or fail on how well they predict and how fast they meet that need. Even Buffy's Pet Rock filled a timely void in our need for a light-hearted distraction from the dire political turmoil of the Nixon-Ford transition.

Economics is a "social" science for good reason, it reflects our values, trends and determinations at every given moment in time, and can naught but be mis-managed by attempts to superimpose quotas and other dictates. There's no better example of that than the chaotic Soviet economy starting in the late 1950's, when all the wrong things were stockpiled while the most basic goods went wanting.

If government regulatory intervention was around during Ogg's time, half of us would still be waiting for our turn to get wheels.

[Inter.spem.et.metum]

What about the ability of the study of economics to be a self-fulfilling prophecy?

[Buffy]

Originally Posted by HydrogenBond

What I was trying to show was a contrast between an economy that begins with demand, where the supply side reacts, to one an economy where supply creates demand, so demand reacts to the supply.

First of all, supply and demand are highly organic: they interact dynamically as a continuous feedback loop. While you can certainly find many examples of "creative supply" that "drove demand" I can show you a thousand more examples where no demand was created, precisely because there must be some latent need in order for the supply to succeed. Where that need is weak--and that's most of the time--there is a discontinuous change in supply and demand based on this feedback loop.

Secondly, there's no such thing as an "economy" which is exclusively "demand driven" or "supply driven." Markets spring from "initiative" on both sides, often with "new supply" coming in the form of "substitution" of demand for "old supply": Cars were a "new invention" 100 years ago, but the "demand" was for "transportation" not "cars" and thus demand for cars did not really "follow supply" it simply was drawn from demand for buggies.

Originally Posted by HydrogenBond

The final supply and demand effects are quite different. For one thing, demand is not that creative. It would not come up with hundreds of new angles for demand. It would choice from what already exists. Almost all the new angles, are marketed from the supply side.

Hardly. If you've spent any time building a company, customers will constantly ask for new features, capabilities, sometimes completely separate products that all of a sudden make sense given what you have and an annoying problem. The customers are doing the demanding in an incredibly creative manner.

Often times the "demand" is simply in the clear enunciation of the problem that they have, in others its a fully formed product concept. In any case, it gets built because we entreprenuers hear the demand and react to it, but the supply is a spontaneous--and necessary--reaction to that "demand."

While supply and demand are simple concepts, the way that they interact is unbelievably complex. Where you're running into trouble here is in trying to oversimplify this interaction by making them separate and atomic, when they are really fundamentally inseparable.

Originally Posted by HydrogenBond

Another way to make this economic contrast is the analogy of shearers and sheep. I don't mean this in a negative way, but this analogy helps. If every person decided to start a business, supply side economics would not work like it currently does. For one thing, since everyone would see themselves with the vision of a higher earning potential, there would be no cheap labor.

Well, the market would quickly change those expectations! If there's too much supply, the market will only absorb what it needs *at that point in time*. This will cause many suppliers to exit the market and lower the expectations of those that remain.

Originally Posted by HydrogenBond

How much would you have to pay a business owner to flip burgers at your fast food resturant; $175K.?

Not unless there were some sort of incredible shortage of burger flippers! No one can "demand" a certain "price" unless there is a shortage of supply. If there is an unlimited supply, the price goes to zero! As the price goes to zero, suppliers exit the market, raising prices because there is less supply and back and forth until the market reaches "equilibrium."

That's how real supply and demand works, not some:

Originally Posted by HydrogenBond

The sheep for any number of reasons ,accept their role of having less. If they didn't feel that way and all became shearers, nobody can shear.

These two *interact*. No one can simply "decide" what their price should be, and they don't have mysterious "reasons" for "accepting" their role: they are pushed into a limited set of roles because the *dynamic interaction* of supply and demand *dictates* what their price is, and they either accept that price or have to move into something else if they want to make $175k/year.

I really suggest you take a look at some basic Economics before you go to far into these speculations...

Originally Posted by Inter.spem.et.metum

What about the ability of the study of economics to be a self-fulfilling prophecy?

No more than any other religion, eh?

They don't call it the dismal science for nothing,
Buffy

[Qfwfq]

Originally Posted by OldBill

Oh, that Ogg! -what a marketer he must have been, to convince people they needed his wheel - when they had been getting along all that time without it.

I doubt Ogg was able to sell the idea, at the most he may have been the craftsman making the things and trading them for something. The wheel was a self-selling idea. Aside from the existence of patents, it was an idea that the other blokes would have immediately seen the value of without any marketing at all. This doesn't go for all things. As Buffy says, some marketing is a matter of making necessities emerge. In some cases it is however a matter of creating the "necessity" which otherwise wouldn't be one at all.

That of keeping up with the Jones' is a necessity, leveraging it to sell some useless novelty is what I call leveraging something to create a pseudo-necessity, any number of them can be created by leveraging the same thing. The same goes with the typical housewife's desire for domestic lustre, floor wax is definitely not the wheel and neither is the latest fad in clothing or in car gimmickery.

Originally Posted by Buffy

Not unless there were some sort of incredible shortage of burger flippers! No one can "demand" a certain "price" unless there is a shortage of supply.

The modal would in the English language often expresses a conditioned hypothetical clause. His point was poorly expressed but I'm not sure you read it properly:

Originally Posted by HydrogenBond

Another way to make this economic contrast is the analogy of shearers and sheep. I don't mean this in a negative way, but this analogy helps. If every person decided to start a business, supply side economics would not work like it currently does. For one thing, since everyone would see themselves with the vision of a higher earning potential, there would be no cheap labor. How much would you have to pay a business owner to flip burgers at your fast food resturant; $175K.? For the supply side approach to work, it needs a plentiful supply of sheep. The Mexican invasion into the US, is being allowed because it increases the supply of sheep. If you have more sheep, there is more room for additional shearers. The sheep for any number of reasons ,accept their role of having less. If they didn't feel that way and all became shearers, nobody can shear.

Although the sheep are low paid, they are pivotable to supply side. All these low cost jobs are sort of the foundation of the machine. If we had no sheep, than we would have very few shearers, since the cost of labor would get so high, due to everyone feeling more worth. What the demand side approach does, is keep the supply of sheep, but it is also allowing the sheep to shear the shearers, for their basic needs. The sheep can't seem to do this on their own, so they need help using a team approach.

Poorly expressed but not actually wrong, one can indeed "demand" a certain price no matter what the market is, only they might not get it. Aside from this his meaning was that if everybody is a boss, none of them are anybody else's boss and you can't very well deny that!

There is however such a thing as enterprise being prevalently small and diffuse and even consisting mostly of individual freelance and family enterprise. The industrial revolution changed that quite a bit. The dignified livelihoods of many people, including farming families that had been spinning and even looming the wool of the sheep they raised, were out-competed, forcing them to become 12-14 h/day factory workers or miners.

Harnessing steam of other mechanical power wasn't per se an evil accomplishment, the trouble was in it being done by and in control of a few. It required large investment and there were the big fish that could do it before the many people had the wits to form large shareholders companies or co-operatives, which would have been difficult anyway. That's essentially what Marx was ranting on about and it was a while before people in most countries could even form labor unions and be on the par at the negotiation table. If you, single impudent arbeiter, aren't willing to work your guts out for a pittance, you can jolly well find another way of getting your daily bread. Take it or leave it.

[Michaelangelica]

mmm
Very interesting HB
Traditional economics always talks of supply and demand.
I loved economics at school because all you seemed to need was a few simple models of the world and then you could write pages of BS based on them for any exam question.

One of the reasons I did psychology was my dissatisfaction with simplistic economic models.
Psychology did not help ( a lot but it did show that putting the price of your perfume/Gucci bag etc up did not reduce demand- it increased it!).

I should have done philosophy.

I was quite amazed when talking to an advertising/marketing friend of mine. I asked how he promoted the products presented to him
"O no that's not how it works" he said
"We find out what may be needed/wanted/desired/fantasised by the consumer, design it, produce it and then market it"!

I had always been under the misapprehension that someone designed a better mouse trap then hired a marketing firm to promote it.
NO exactly the reverse seems true.

Buffy it is very late.
I have drunken too much port but I think you have lost me.
I will read your posts again in the AM (It is AM!- well PM)

[Qfwfq]

Originally Posted by Michaelangelica

it did show that putting the price of your perfume/Gucci bag etc up did not reduce demand- it increased it!

Exactly! We could call that "selling the price tag"!

[Michaelangelica]

I listened to a talk by your wonderfull entertaining Minister for labour under Clinton (Can't remember his name)
He started his talk with:
"I am an economist.
That means I didn't have the personality to be an accountant."
Very funny I thought.

Supply and demand side economics both seem both to be talked about by economists.

Demand-Side Economics
Mark P. Mills 08.17.07,

Demand-Side Economics - Forbes.com

A Tale of Two Theories: Supply Side and Demand Side Economics
by Robert Freeman
Demand Side economics, as we saw in the 1990s, while far from perfect, produces robust growth, budgetary surpluses, and broad based prosperity.

Supply Side economics produces middling growth, soaring deficits, and broad based debt. Mountains of debt. And the mountains are growing.

Both articles are worth reading a couple of times.
A Tale of Two Theories: Supply Side and Demand Side Economics
Wiki says

Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates.
This can be contrasted with the classic Keynesian economics or demand side economics, which argues that growth can be most effectively managed by controlling total demand for goods and services, typically by adjusting the level of Government spending

and

Keynes asserted the importance of aggregate demand for goods as the driving factor of the economy, especially in periods of downturn.
From this he argued that government policies could be used to promote demand at a macro level, to fight high unemployment and deflation of the sort seen during the 1930s. This is in contrast to supply-side economics

Although the entries seem to be in dispute ( Life is too short to find out why)

One thing that seems to have happened of late is that the very rich have taken them selves out of the taxation loop.
Aprox. 6 trillion $ is parked in Offshore accounts.
About 2 trillion each UK and Switzerland and 2 trillion various "others"
I think this is the reason the Pound defies gravity and of course the Swiss franc has always been strong.


While I have a few economic thinkers here Could I ask something please?

Australia is in the middle of a minerals bonaza. The government, since introducing 10% GST, is rolling in money. Tax cuts are proposed by both major parties. The Reserve Bank has independent control of interest rates and lately it has been putting them up and up and up. This hurts young people with large mortgages.And those with high credit card debt (most of us).
It is an "Australian Thing" to do own your own home and much of the economy is predicated around it. A 1/4% rise in interest rates translates into $50-$100 a month increased home payments.
I think the tax cuts promised this election will be inflationary and therefore counter productive for many.
I am sure with bracket creep and the GST the government will quickly re-coup what it "gives"
My question is Can there be non inflationary tax cuts other than giving money to the very rich?

We do seem to have some States languishing economically and some like Qld., and WA going gang-busters. Personally I would like to see the Feds not give as much tax revenue to those sates and spend it on the eastern States. Politically that won't happen.
I made a long post in the Australia thread that went a bit like this

I don't "GET" the 38c a litre on petrol in Oz.
Plus 10% GST on the final price
A tax on a tax- crazy.

Can business recover any of this?

Doesn't it make EVERYTHING dearer farmer's out puts, cartage, post,exports, ploughing, transport, airfares, postage,delivery of goods etc.

In a county as big as Australia do we really need such an inflationary tax?

Is my economic thinking correct, if environmentally irresponsible?

Is there any other way Government can return money to the economy without forcing up inflation?

So much of our lives are ruled by economic thinking and dogma.
I have always found their models lacking and simplistic and based on uncertain assumptions.

Its raining again!