Supply and Demand Deconstructed
Prices are caused by supply and demand, right? So say neoclassical economists. If you’ve bought their fairy tale, I recommend you watch the video below. In it, Jonathan Nitzan demolishes the neoclassical theory of prices. It’s a master lesson in how to deconstruct a theory.
Here’s the 100-word summary. Nitzan shows that the neoclassical theory of prices fails in six ways:
- Neoclassical theory hinges on utility that cannot be measured
- It relies on demand and supply curves that cannot be observed
- It depends on equilibrium whose existence it cannot confirm
- It requires but cannot show that demand and supply are mutually independent
- It requires but cannot demonstrate that the market demand curve slopes downward
- And it must but cannot measure capital and therefore cannot draw the supply curve, even on paper
So what explains prices?
If neoclassical theory is bunk, then what explains prices? Jonathan Nitzan, together with Shimshon Bichler, argues that prices are inseparable from power.
Here’s a window into Nitzan and Bichler’s thinking. Start with what economists call ‘demand’. If you’re going to buy something you must need or want it. But your want isn’t some fixed property of human nature. It’s a product of your social environment. Want can be massaged, even manufactured. That’s why we have advertising. Everyday, corporations shape our wants so that we buy what they’re selling. This means that demand isn’t some function of autonomous ‘preferences’ (as neoclassical economists would have us believe). Demand is actively shaped by corporate power.
Now let’s look at ‘supply’. It makes sense that if people want something that is scarce, they’ll bid up the price. The problem, though, is that scarcity isn’t just a fact of nature. It’s also an outcome of property rights.
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