Platt Perspective on Business and Technology

Open markets, captive markets and the assumptions of supply and demand dynamics 1

Posted in macroeconomics by Timothy Platt on June 19, 2015

I should start this posting by noting that I am not an economist and that I do not pretend to be one. I generally restrict myself to writing about economics issues when I specifically address them as points of discussion that very specifically connect with my own areas of work experience. I will at least seek to keep to that type of focus here as well, while acknowledging that I at least briefly and selectively take note of a larger and more complex set of economic considerations in this posting than I would usually address in this blog. And with that caveat offered, I begin this posting itself.

I have been writing about issues that relate more specifically to economic and macroeconomic modeling and reasoning in this blog for about as long as I have written about anything here, with my first posting to my first Macroeconomics and Business directory page going live in September 2009, just under two weeks after this blog itself formally went live. And one of the core topic areas that I have been discussing in all of that, is the set of assumptions we make, and particularly where we do so automatically and without careful analytical consideration as to what those assumptions are, what they imply or where they would logically lead. And that is what I set out to do here as well. And as an only partly unrelated point of digression, I note that I write and offer this while thinking of a very particular series that I added to my Reexamining the Fundamentals: Zeno’s Paradox, Moravec’s Paradox and Rethinking How We Project Forward In Our Planning (see Section 5: Rethinking Underlying Assumptions and Their Logic, of that directory page.)

And I begin this posting with a point of debate that many if not most economists appear to have come to see as fundamentally settled, even if any number of politicians still refuse to acknowledge that: the debate between supply-side economic models and more demand-side economic (or New Keynesian) economic models and their relative merits in representing business and marketplace reality.

A “conservative” political, “pro-business” policy as most actively pursued for example, in the United States by more extremist elements of the Republican Party, pushed for enactment of law and reduction in regulatory oversight in order to free manufacturers’ hands so they could produce more, and both more easily and more competitively. And this, it was argued, would help consumers by increasing availability of goods to them, and at reduced costs. There is, of course, a lot more to this supply-side approach than that, but I cite these few details to give a sense of what that understanding of economic reality claims, and perhaps some insight into what it assumes too. And yes, this production-centric approach is based very firmly in supply-side economics thinking and its assumptions can be found at the heart of that economics system.

A more strictly demand-side approach would posit that the consumer and the collective voice and action of the marketplace drive economies and not manufacturers and producers. The supply side of this is important as there have to be producers for consumers to choose products from, in order for there to be economic activity. But consumer activity and consumer willingness to buy drive this. And to acknowledge something of the complexities of applying any of this to the real world, modern New Keynesian economics with its foundation in demand-side oriented thinking is explicitly predicated upon assumptions of market inefficiencies, and of “stickiness”: friction to use my preferred term, in prices and wages among other process outcomes, that arise due to delays and errors in matching production and availability on the supply side with consumer demand and purchasing follow-through on the demand side. In the real world, communication gaps and delays in follow-through happen, as do differences in understanding as to the nature of the true marketplace situation and differences and even conflicts in goals and priorities perceived in all of this.

And the second half of that paragraph was all about limitations as to what is known and by whom and it is all about assumptions made and by whom – and that ultimately is the topic of this posting. And I would divide that area of discussion into two domains: what these theories assume as to the nature of more individual human motivation and behavior, and what they assume as to the nature of the marketplace, as a cumulative consumer endeavor.

Let’s start with human motivation and behavior, and with consideration of the supply-side approach. This model assumes that if regulatory control and oversight are lightened or removed, and tax burdens on corporate profits lightened and cut back as to type, that would make those businesses more competitively effective, and that would lead to their capturing larger market shares and to their generating greater profits. This new found wealth would then be rolled back into those companies, and both to enable their innovative growth and the development of their newer and better next generation products, and to reduce prices demanded of what is currently manufactured and produced. This would lead to reduced costs to the consumer and would have the effect of bringing increased wealth to the consumer by reducing their overall expenses and making their money go farther.

But what actually happened, and I add still happens in a supply-side opportunity driven world, and particularly for a significant number of the United States’ largest corporations? The leadership of those companies see this increase in their business’ overall financial strength, claim full personal credit for that, and demand and receive personal salaries that go way into the hundreds of millions of dollars a year and in base pay alone in some cases, and with even more made available to them as benefits. Interlocking boards of directors and executive suites boost each-others executive pay packages, with the executives on Company A serving on the board of Company B and vice versa, and through more complex variations on that conflict of interest scenario. And the price points set by manufacturers for the products they offer are not reduced, at least not systematically and long-term, and savings are not passed onto consumers or to the marketplaces they collectively comprise. And most of this tilt towards greater corporate wealth is directed away from in any way making those businesses more effective, more innovative or more competitive. It is simply redirected out of the entire producer, to consumer and marketplace, to producer system that supply-side is predicated upon.

And supply-side’s darling: trickle-down economics collapses from its insistence on predicting what turns out to be close to the opposite of what actually transpires. And in retrospect all of this comes to sound uncomfortably like Marxism’s “from each according to his ability, to each according to his need.” And there is real irony in that, when the most vocal and forceful champions of supply-side and trickle-down economics have also all claimed to be extreme champions of free market capitalism. And to paraphrase them even if cartoonishly: “burn regulations, cut stultifying corporate (and highest income level personal) taxes, and let capitalists be capitalists … et cetera.” And the “from each according to his ability” side of this comes disproportionately from the lower and middle classes. And the “to each according to his need” side of this goes equally disproportionately to the top one percent bracket, for overall income and accumulated wealth and to the top one percent of that group, just as Marxism’s real world manifestations have mostly benefited their political Party elite. Yes, I am explicitly challenging the assumption that anything like pure supply-side economics is or can be capitalist in nature.

If there is friction if you will, in the supply-side of this, with loss of value from what supply-side economics would see as its core virtuous circle processes, there is also consumer and demand-sided friction that would have to be accounted for too. New Keynesian economics is in large part, at least to my understanding, an attempt to understand and account for friction in economic systems, and particularly where human behavior creates friction that simple expectations there would not account for. And that, of course, is where behavioral economics enters this narrative too.

And this brings me to the questions and issues of marketplace assumptions. I initially planned on at least briefly addressing all of the points that I have begun raising here in this one short posting. But I will continue its starting discussion in a second, continuation posting where I will delve at least selectively into assumptions made about the marketplace and about the consumers who collectively comprise it – there focusing on behavior that is emergent to group action. And yes, for purposes of openness and transparency I will add a few thoughts about my own assumptions in all of this there too. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.

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