The Law of Demand

23 Jun, 2022 at 11:45 | Posted in Economics | 2 Comments

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 — like most other analytical statements — neither particularly interesting nor informative.

As is well known, the law of demand 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 …

Wissenschaftstheorie: Hans Albert feiert 100. Geburtstag - Forschung & LehreIf 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 …

Various 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

In mainstream economics there’s — still — a lot of talk about ‘economic laws.’ The crux of these laws — and regularities — that allegedly do exist in economics, is that they only hold ceteris paribus. That fundamentally means that these laws/regularities only hold when the right conditions are at hand for giving rise to them. Unfortunately, from an empirical point of view, those conditions are only at hand in artificially closed nomological models purposely designed to give rise to the kind of regular associations that economists want to explain. But, really, since these laws/regularities do not exist outside these ‘socio-economic machines,’ what’s the point in constructing thought experimental models showing these non-existent laws/regularities? When the almost endless list of narrow and specific assumptions necessary to allow the ‘rigorous’ deductions are known to be at odds with reality, what good do these models do?

Deducing laws in theoretical models is of no avail if you cannot show that the models — and the assumptions they build on — are realistic representations of what goes on in real-life.

Conclusion? Instead of restricting our methodological endeavours to building ever more rigorous and precise deducible models, we ought to spend much more time improving our methods for choosing models!

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  1. 《In my model of inflation, noise is the arbitrary element in expectations that leads to an arbitrary rate of inflation consistent with expectations. In my model of business cycles and unemployment, noise is information that hasn’t arrived yet. It is simply uncertainty about future demand and supply conditions within and across sectors. When the information does arrive, the number of sectors where there is a good match between tastes and technology is an index of economic activity. In my model of the international economy, changing relative prices become noise that makes it difficult to see that demand and supply conditions are largely independent of price levels and exchange rates. 》
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    《[…] the slopes of demand and supply curves are so hard to estimate that they are essentially unobservable. Introspection seems as good a method as any in trying to estimate them. One major problem is that no matter how many variables we include in an econometric analysis, there always seem to be potentially important variables that we have omitted, possibly because they too are unobservable.》
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    – Fischer Black, “Noise”, 1986

  2. The narrowness and sterility of philosophers Hans Albert and Prof. Syll contrasts starkly with the much broader and more fruitful understanding of economists such as Alfred Marshall:

    “… (Economics must be) concerned throughout with the forces that cause movement: and its key-note is that of dynamics, rather than statics.
    The forces to be dealt with are however so numerous, that it is best to take a few at a time; and to work out a number of partial solutions as auxiliaries to our main study.
    Thus we begin by isolating the primary relations of supply, demand and price in regard to a particular commodity. We reduce to inaction all other forces by the phrase ” other things being equal “: we do not suppose that they are inert, but for the time we ignore their activity. This scientific device is a great deal older than science : it is the method by which, consciously or unconsciously, sensible men have dealt from time immemorial with every difficult problem of ordinary life.
    .
    In the second stage more forces are released from the hypothetical slumber that had been imposed on them : changes in the conditions of demand for and supply of particular groups of commodities come into play; and their complex mutual interactions begin to be observed. Gradually the area of the dynamical problem becomes larger; the area covered by provisional statical assumptions becomes smaller ; and at last is reached the great central problem of the Distribution of the National Dividend among a vast number of difierent agents of production.
    Meanwhile the dynamical principle of “Substitution ” is seen ever at work, causing the demand for, and the supply of, any one set of agents of production to be influenced through indirect channels by the movements of demand and supply in relation to other agents, even though situated in far remote fields of industry.
    The main concern of economics is thus with human beings who are impelled, for good and evil, to change and progress. Fragmentary statical hypotheses are used as temporary auxiliaries to dynamical or rather biological-conceptions : but the central idea of economics, even when its Foundations alone are: under discussion, must be that of living force and movement.”
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    – Alfred Marshall: Principles of Economics: Preface to the Eighth Edition 1920


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