Platt Perspective on Business and Technology

Open markets, captive markets and the assumptions of supply and demand dynamics 3

Posted in macroeconomics by Timothy Platt on August 22, 2015

This is the third 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 and Part 2.)

I began this series in its first two installments by briefly and selectively discussing supply-side and demand side economics and economic models. And I ended Part 2 by stating that I would continue that discussion here, by more directly considering when supply-side and demand-side approaches might validly empirically apply. And I expanded upon that by stating that:

• Economists who have formulated these approaches, have all held test case contexts in mind where their respective theories would 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 these economic approaches would break down when their underlying context assumptions are violated.

I begin addressing that complex of issues on the supply-side of economic theory, as I did when starting this overall discussion, and by invoking a straw man line of argument, in at least nominal support for supply-side thinking:

• Supply-side economics would work essentially perfectly in a world in which all business managers and owners are pure altruists who only seek to create value and opportunity for others, over consideration of themselves.

It could in fact be argued that virtually any economic theory could be made to work if everyone who had to participate in it and sustain it were to always strive to achieve that goal, and even if their efforts to do so had to be made at their own expense and to their own personal, self-sacrificing detriment. It is just that the less effective such a system was, the more quickly its pool of available participants would shrink, until it disappeared from its own success.

• Any long-term effective economic theory and its application have to be self-sustaining, through development and support of value creating and value distributing virtuous cycles that benefit all essential categories of participants, even if not all individual members of those categories.
• And such cycles have to work under circumstances where any and all such participants would seek to advance their own causes and through accumulation of value to themselves as individual participants.
• Any such approach has to meaningfully account for and allow for self-interest and on the part of all involved parties, and for long-term effectiveness it has to promote more mutually supportive enlightened self-interest and certainly among participants in single business ventures, than it does mutually antagonistic and conflicting views of self-interest within those groups.
• Note the word “more” there. This is not about making conflict of interest disappear and even just within single organizations, but rather about making incentive to cooperate to mutual benefit stronger and more predominant so as to create long-term overall stability.

From a supply-side perspective, that would mean that economic model working under circumstances where it would not matter if business owners and leaders have personal goals and priorities that differ from those of the businesses they manage. And for this approach to work, that would mean policies developed and enacted according to that economic model, offering more positive value than challenge in addressing the needs of any other significant stakeholders required for these businesses to succeed, as well.

And this brings me to the challenge of conflicts of interest. From a strictly “best for the business” perspective as much of the incoming revenue and value as possible, coming into a business through its activities would be rolled back into that business itself to help sustain and grow it, and with only the minimum proportion of that accruing value that is needed to retain its staff and at all levels on its table of organization, and its investors and their involvement, going to them from this value flow. I posit here, the business itself as a separate and distinct stakeholder, and its owners and its leadership as a separate aggregate stakeholder class, and its non-executive employees, and its outside investors, and its customers and the marketplaces they collectively comprise as separate and distinctly significant stakeholders and stakeholder classes here too.

The challenge that supply-side economic theory faces, and that empirically develops as attempts are made to put it into practice, comes from a failure to either anticipate or allow for the distinct and even fundamental differences in goals and priorities that can arise between stakeholders, and certainly between owners and executive leadership on the one hand and the businesses they own and lead on the other. And I add that supply-side economics also very overtly leaves out consideration of the distinctive goals and priorities of other stakeholder groups as well, and of possible conflicts of interest that can arise when they are not fully considered too (e.g. differences between owners and executive leadership, and employees, and also between owners and executive leadership, and consumers when for example, trickle down economic approaches are operationalized and put into practice as a part of overall supply-side theory.)

• This posting is all about the issues of congruence among, and differences between stakeholders
• As they variously shape and seek to advance their own partisan understandings as to what would constitute best, most favorable goals and priorities for themselves
• In the allocation and distribution of value accruing to a business, to its leaders and owners, and to other stakeholder classes.

And this posting is also very much about enlightened self-interest. And it is about how long-term effective economic theory and its implementation into law and into ongoing business practice, means creating contexts in which differing perspectives of self-interest can align across stakeholder groups, and on the basis of a realistic understanding of human nature.

And this brings me to the issues of time frames, and of how any relevance and value that might be obtained through operationally implementing an economic theory depends on which time frames are being considered and by whom. I will delve into that complex of issues and offer some thoughts as to demand-side economic policy and practice in my next series installment. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.

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