The law of demand — a useless tautology immunized against empirical facts

7 December, 2015 at 15:57 | Posted in Economics | 1 Comment

Mainstream economics is usually considered to be very ‘rigorous’ and ‘precise.’ And yes, indeed, it’s certainly full of ‘rigorous’ and ‘precise’ statements like “the state of the economy will remain the same as long as it doesn’t change.” Although ‘true,’ this is however — as most other analytical statements — neither particularly interesting nor informative.

For the sphere of consumption goods, the law of demand is an essential component of the theory of consumer market behavior. With this law, a specific procedural pattern of price-dependent demand is not postulated, that is, a certain demand function, but only the general form that such a function ought to have. The quantity of the good demanded by the consumers is namely characterized as a monotone-decreasing function of its price …

As is well known, the law is usually tagged with a clause that entails numerous interpretation problems: the ceteris paribus clause. In the strict sense this must thus at least be formulated as follows to be acceptable to the majority of theoreticians: ceteris paribus – that is, all things being equal – the demanded quantity of a consumer good is a monotone-decreasing function of its price …

peanutsplatonism

If the factors that are to be left constant remain undetermined, as not so rarely happens, then the law of demand under question is fully immunized to facts, because every case which initially appears contrary must, in the final analysis, be shown to be compatible with this law. The clause here produces something of an absolute alibi, since, for every apparently deviating behavior, some altered factors can be made responsible. This makes the statement untestable, and its informational content decreases to zero.

One might think that it is in any case possible to avert this situation by specifying the factors that are relevant for the clause. However, this is not the case. In an appropriate interpretation of the clause, the law of demand that comes about will become, for example, an analytic proposition, which is in fact true for logical reasons, but which is thus precisely for this reason not informative. This of course applies to any interpretation that makes the then-clause of the law of demand under question a logical consequence of its if-clause so that, in this case, an actual logical implication results … Through an explicit interpretation of the ceteris paribus clause, the law of demand is made into a tautology.

24958274Various widespread formulations of the law of demand contain an interpretation of the clause that does not result in a tautology, but that has another weakness. The list of the factors to be held constant includes, among other things, the structure of the needs of the purchasing group in question. This leads to a difficulty connected with the identification of needs. As long as there is no independent test for the constancy of the structures of needs, any law that is formulated in this way has an absolute ‘alibi’. Any apparent counter case can be traced back to a change in the needs, and thus be discounted. Thus, in this form, the law is also immunized against empirical facts. To counter this situation, it is in fact necessary to dig deeper into the problem of needs and preferences; in many cases, however, this is held to be unacceptable, because it would entail crossing the boundaries into social psychology.

Hans Albert

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  1. I went and looked at how Samuelson treated “the law of downward-sloping demand” in his textbook (9th edition, p. 61). He, indeed, asserts “This law is true of practically all commodities: wheat, electric razors, cotton, Kellog’s cornflakes, and theater tickets. . . . This law is in accordance with common sense and has been known in at least a vague way since the beginning of recorded history.” So no hyperbole or immodesty.
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    Samuelson’s definition of the law is: When the price of a good is raised (at the same time that all other things are held constant), less of it is demanded. . . . if a greater quantity of a good is put on the market, then–other things being equal–it can be sold only at a lower price.
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    He then goes on to argue for the “validity of the law” by arguing from experience for its plausibility as a proposition, arguing, as an example, that if water were very expensive and precious, a person would buy only enough to drink, but as it becomes cheaper, other uses, such as to wash clean and then to water flowers would be found. Though not named as such in this passage, this argument is a variation on the Law of Diminishing Returns, which is invoked frequently elsewhere in the text.
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    I think it would be fair to say that Samuelson’s pedagogy is epistemologically confused. He claims that the “the law of downward-sloping demand” is “true” and argues from plausibility that the “the law of downward-sloping demand” is “valid”. There’s no clear distinction between stating this “law” as an analytical proposition (where validity is the claim) and making an assertion about how things are in the world (where truth is the claim).
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    Hans Albert is certainly correct that under an appropriate interpretation of the ceteris paribus clause, the law of downward-sloping demand is an analytic proposition. And, I think, though Samuelson obscures it in his teaching, and probably didn’t usually recognize the implications of the distinction in his own thinking, that’s the correct interpretation of the neoclassical theory of market price: it is an analytic theory, which by itself, is not informative.
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    If an economist wants to determine as a matter of fact whether a change in price results in a change in quantity demanded and in what direction, it is necessary to confront a particular case. Pure theory offers no prediction in advance of investigating the values of actual parameters and variables. In an investigation of an actual case, no ceteris paribus clause can apply and if the law of diminishing returns is invoked, it takes on the role of an auxiliary hypothesis in constructing the operational model.
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    Whether the investigation(s) of (a) particular case(s) constitutes a test of the analytic theory, and whether the outcome of such (a) test(s) should compel revision or replacement of the analytic theory are acute questions for the theory of science and scientific knowledge. (Definitively unanswered questions, insofar as I know.)
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    Hans Albert has made a serious error in the passage quoted, by letting himself get sidetracked into unreasoning hostility toward the method of analysis. Dismissing pure analysis for supposedly producing only tautologies is a silly form of philistinism, and doesn’t answer Samuelson’s epistemic confusion. No one is going to carry a ceteris paribus clause into an investigation of actual prices and quantities demanded. And, no fact is going to reach thru the “if-then” barrier surrounding analysis to disprove a purely analytic proposition. This is not a fight worth fighting, nor one any philosopher should expect to win.
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    If economics is to lose its immunity to facts, it will not be by a per se discrediting of all analysis as a method, but because the limits of analysis are better circumscribed and the investigation of factual cases shows the necessity of a more sophisticated analysis. Just the observation that prices are commonly held to an administered schedule by firms that then use various methods of marketing to manage demand and effect price discrimination calls into question Samuelson’s smug hand-waving at “commodities” like Kellogg’s cornflakes, though the analytic proposition that expects price to vary inversely with quantity demanded isn’t actually brought into question, even when marketing succeeds in creating Veblen goods. What is brought into question, though, is broader and deeper: whether a market analysis of a money exchange economy is sufficient when the actual economy consists largely of hierarchies managing exchange.
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    What can be accomplished is not a factual refutation of the primitive analytic propositions of economic theory, but a practical refutation of the presumption that a knowledge of economic theory is superior to, or an adequate substitute for, a factual knowledge of the working of the actual economy. It helps to know what the war is about and which battles can be won.


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