Platt Perspective on Business and Technology

Open markets, captive markets and the assumptions of supply and demand dynamics 2

Posted in macroeconomics by Timothy Platt on July 21, 2015

This is the second installment to a brief series on underlying assumptions as they arise and play out in economic systems, and in production and marketplace systems (see Part 1.)

I began this now series with a very, very brief discussion of supply-side economic models and of demand-side economic (or New Keynesian) economic models, and on their implicitly presumed assumptions and how they do or do not apply in real world contexts – primarily focusing in Part 1 on the production side of overall economic and business cycles and on how supply-side thinking measures up in representing reality. And in this I noted that pure supply-side economic thinking is still very much alive and well for a great many politicians who seek high governmental office and both in the United States with its more “ultra-conservative” Republicans and in other nations as well for their counterparts to them.

I stated that I would continue on from there in this series installment with a goal of at least selectively delving 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 I added that yes, for purposes of openness and transparency I would add a few thoughts about my own assumptions in all of this too.

I am going to begin all of that by turning back to my Part 1 discussion, to explicitly note that I fell into the same conceptual trap in it, that I sought to present as representing a foundational weakness of supply-side economics and its proponents: which I present here as the flawed myth of the simplistically monolithic.

I wrote of how the leadership of some of the largest corporations that are based in the United States, turned the advantages that were offered to their businesses through supply-side-based government policy to their own personal advantage – and at the expense of those same companies. And that is true as far as it goes. And I add that enough major corporations played that game in their executive suites and board rooms to completely scuttle supply-side economics as a widely realistically trustable approach to economic theory and to government policy formulation. But at the same time, many business owners and their management leadership have always sought to grow and strengthen their businesses as a primary goal. And many of these people did and still do roll value opportunity back into their businesses rather than seeking to personally skim off as much as possible (and hopefully) without bankrupting their businesses as a result.

Note, and with that parenthetical (and hopefully) fully in mind: In the years that constituted the depths of the still recent Great Recession, the more egregiously kleptocratic of corporate leadership continued to take hundreds of millions of dollars each as personal compensation – and even as their companies were losing billions of dollars in red ink annually, under their leadership. But there were others who in fact behaved more in a manner that supply siders would predict as a norm, who did in fact roll profits and profitability back into their businesses and to the benefit of all – their customers included.

My point here is that people are complex and not everyone fits into any single pattern. And insofar as human behavior influences, shapes and even fundamentally determines economic behavior and economic performance – any valid economic theory has to accommodate that. And with that point I “reinvent” an already well known if still underappreciated behavioral economics.

• Supply side economics failed because it failed to account for the diversity of human behavior patterns and of how they all variously shape and even determine business and economic-impacting decisions.
• And supply side economics spectacularly failed because it failed to account for a group behavior pattern that for its collective impact could and did skew both national economies and even the entire global economy into deep recession – and precisely from the way those leaders used the supply side-shaped and inspired tools they were given, ostensibly to strengthen their businesses and the overall economy.
• But ultimately supply-side economics’ failure was one of taking a monolithic approach to understanding and to predicting human behavior – where diversity actually predominates.

And with that cautionary tale from the supply side laid out, I turn more to the demand-side and its assumptions, and particularly to its human behavior assumptions. And in this I turn to consider buyers, product and service end users, and the markets that they collectively comprise.

• Part of the friction (stickiness in New Keynesian economics-speak) that arises in the marketplace comes from the diversity of purchasing decision-making strategies,
• That real world consumers bring to the marketplace when and as they make their purchasing decisions,
• And where businesses that would sell to them do not always smoothly, seamlessly connect with them in meeting their needs,
• According to the dictates of their particular decision making processes or needs as they consider, then decide in making their purchases.

Note: Where most businesses seek to save money and to more effectively utilize their available resources through standardization, the most effective of them and certainly from a Marketing and Sales perspective always see their customers as unique. And they seek to meet their customers’ individual needs even as they do so within what of necessity are structured and consistent business process frameworks. The important point here is that these frameworks need to be flexible where that would make the most sense and rigid only where that would. And one of the most important points of flexibility here can be in Marketing and Sales working with customers to help them gain the information that they would need in carrying through on their purchase decision making due diligence. And I add this seeming digression here because I highlight the heterogeneity of the marketplace and how all customers do not follow any single monolithic approach there.

• Customers are individuals and they act accordingly; those same customers can and do actively respond to and they do help to generate marketplace buzz and they do participate in fads as well.
• And even when individual consumers are acting as individuals, and not for example as members of fad and marketing buzz-driven crowds, they tend for the most part to behave according to patterns that can be predicted and described as representing percentages of possible market share. So they act as individuals but they also act as if members of groups too – here Marketing demographics among other appropriate categorizations.

Any effective overall economic theory has to be able to account for all of this – and for consumer and demand-side complexity as well as for producer and supply-side complexity (which primarily means any such economic theory being well and solidly grounded in behavioral economics.)

And with that noted I will step back from consideration of the individual business leader and/or owner, and from the individual consumer and product end-user to consider when supply-side and demand-side approaches might validly empirically apply. The economists who have formulated these approaches, after all, all have had test case contexts in mind where their respective theories both work, and work very soundly. What are these ideal contexts? If you know the answer to that question, you can more fully predict and understand where and how they would break down when their underlying context assumptions are violated.

I will delve into these issues in my next series installment – and yes I will write more explicitly about my own assumptions in all of this too, adding that anyone who has read any significant fraction of what I have been writing here could probably answer that for me. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.

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