by Timothy Lane 12/16/13
When I attended Purdue University, School of Science students needed to complete 12-18 hours (generally 4-6 courses) of humanities and social sciences to qualify for a baccalaureate (in addition to the basic requirements in English and a foreign language). I ended up taking 12 courses – 6 in history, 4 in economics, and 1 each in sociology and English (a first-time course on science fiction my last semester there). The first economics course I took (ECON 215) handled microeconomics. I think this is something more people need, much earlier than college and not as an elective.
I have previously discussed the microeconomic concept of opportunity cost. In this article, I intend to discuss the importance of the concept of supply and demand. There are many political disputes today in which the liberal side ignores (if they’re even aware of them to begin with) this basic element.
Basically, if you increase supply faster than demand, the price will decline; conversely, if you raise demand faster than supply, the price will increase. (If these price changes are prevented by government action, they will disrupt the market.) Similarly, when prices rise, supply is likely to increase and demand will fall (though it’s theoretically that a cheap staple will be used more its price rises because people consume it instead of more expensive alternatives); and when prices fall, supply will decrease and demand will generally increase.
When it comes to agriculture policy, this is well known and accepted. The New Deal recognized this when it destroyed food supplies to increase far, incomes at a time of want, and later when they adopted farm parity as the basis for their policy under the Agricultural Adjustment acts (the first was rejected by the Supreme Court, but the virtually identical second version was successfully defended on the basis of regulating interstate commerce even though the farmer in the deciding case used the extra grain he produced solely as fodder for his own animals).
But when it comes to labor, no one seems to recognize the effects. Minimum wage laws artificially raise the price of labor and thus reduce the demand, but few liberals will admit this link. Increased Immigration greatly increases labor supply, which in a time of virtually stagnant demand for labor (as is the case today) means reduced compensation for labor. Again, this is hardly a new fallacy; the basic error goes back to Herbert Hoover, who tried to keep wages up when the Great Depression began (a policy that his successor continued). Naturally, unemployment exploded to then unimaginable levels.
We see similar errors with complaints about price-gouging, particularly during emergencies. Such price increases are certainly very unpleasant for the victims of natural disasters, but they also help lead to increased supply and lower demand, which will ultimately benefit those victims. There is a story that Daniel Patrick Moynihan, during his time as a domestic advisor to Nixon, once was expressing pleasure about a major interception of illegal drugs. He then noticed George Schultz (an economist who knew his stuff), and commented that no doubt this would lead to increased prices and ultimately more drugs brought in to replace them. Schultz acknowledged that Moynihan was learning. Sadly, all too often politicians don’t learn these lessons. (Moynihan himself later ignored them in his Senate career, preferring doctrinaire liberalism.)
Part of the problem is that most economic advisors are more familiar with macroeconomics (which deals with the economy as a whole and how to deal with it) rather than microeconomics. Indeed, economics used to be called “political economy,” and even if the terminology is different today, the problem remains. • (1295 views)