Our Economic System – Doomed to Face a Crisis from the Start?


Note: all economic terms marked with an asterix* are explained at the end of this blog.

At the heart of economic theory and activity lies the dilemma of human ‘unlimited wants and needs’ and ‘scarcity of resources’. Within this, the economist concludes that decisions require to be made in terms of what resources will be allocated to what unlimited wants and needs.
From this, the supply* and demand* model is derived whereby the price of a good or services ‘decides’ whether one will be able to acquire these goods and services or not. (Whereby demand is defined within the context of having a want or need while having the financial means to back up one’s want/need – i.e. whether you have sufficient the money to purchase the particular good or service you want/need). This way, the economy can limit and control the amount of people who can have access to a particular good or service according to the ‘scarcity’ of what it is they want.
Let me illustrate with a diagram how the ‘forces’ of supply and demand interact with each other, which in turn determines the affordability (which in essence is the same as accessibility) to particular goods and services:
 On the vertical Axis we can read the possible prices at which bread can be sold, at $ per unit.
On the horizontal Axis we can read the amount of bread which can be demanded at any particular price.
The red line/curve represents the ‘Supply’, whereby one can distinguish at which price a particular amount of bread will be supplied: At $1.00, the supplier is willing to supply only 1 bread (The self-interest of the supplier lies within the price of a particular product as the supplier wants to be able to reap as much profit from selling a single unit – thus when something is considered to be ‘cheap’, the supplier is not motivated to produce/sell a great quantity of this product/service, as it is considered to be non-profitable, and he could be doing/selling something else which will reap more profit – this is known as ‘opportunity cost*’ within the world of economics), at $2.00, the supplier is willing to supply 2 Breads -- at $3.00, the supplier is willing to provide 3 Breads – and at $4.00, the supplier is willing to supply 4 Breads.
The blue line/curve represents the ‘Demand’, whereby one can distinguish how many breads the consumer will buy at a particular price: When a bread costs $4.00, only 1 bread is demanded (the self-interest of the demander/consumer also lies within the price, but at the opposite pole of the supplier – the consumer wants to be able to get as many possible products/services per unit of money he owns – thus the ‘cheaper’ something is, the more will be demanded (and also the more people who will be able to afford it), and the more ‘expensive’ things get, lesser quantity will be demanded.), at $3.00, 2 breads are demanded – at $2.00, 3 breads are demanded – and at $1.00, 4 breads are demanded.
Where the demand and supply curve meet (the cross in the centre, indicated with the light blue dot) – is what is referred as the ‘equilibrium*’.  At this particular price (in this case $2.50) all the goods/services in question will be met with an equal amount of quantity demanded (in this case 2.5 breads) which implies that all the goods will be sold – there is no ‘excess supply*’, there is no ‘shortage in supply*’, there is no ‘excess demand*’ and also no ‘shortage in demand*’). This ‘equilibrium’ point will then be the point to which prices will be set.

From my perspective however, this is an unacceptable model to lead one’s economy by. Using the ‘Demand and Supply’ model – there will always be winners, and thus there will always be losers. There will always be people without access to resources, simply because they don’t have the money to do so. If we go back to the diagram, we indicate it as following:

Anyone with the a financial capacity which is unable to reach $2.50 for 2.5 loaves of bread (indicated by the grey area in the diagram) simply gets ‘eliminated’ and ‘removed’ from the Supply and Demand framework as their want/need now no longer falls within the category of ‘demand’. The system will not provide for these people – and this is how the economy manages and distributes its resources as a solution to everyone’s ‘unlimited wants and needs’ in the face of ‘limited resources’.

You see, the problem lies within the premise itself (people have unlimited wants and needs, but there are only so many available resources – what goes where/who gets what?). The economist immediately jumps to making a plan in alignment with this premise, where the only possible outcome is to satisfy ‘some’ beings their wants and needs, while keeping others from getting the same resources to satisfy their wants and needs -- whilst providing a ‘mathematical system’ to justify why resources are distributed in this particular manner (Supply and Demand).
Instead of just ‘going along’ with the statement and ‘trying to make it work’, they should have looked at the implications of the statement itself, and decide whether this statement in itself is an acceptable basis to build an economic system upon.
If we have a closer look at the statement (here it is again:)
“people have unlimited wants and needs, but there are only so many available resources – what goes where/who gets what?”
we are able to translate this statement into an equation, whereby we are trying to satisfy infinity () with something which is finite (x) – this in itself is simply impossible. So why even try and make it work if you know that it is never going to be able to. Instead of conjuring up a ‘Supply and Demand’ system to manage this equation which is inherently out of balance, they should have changed the very equation itself before constructing a system of distribution based on something unmanageable.
What they ought to have done, is look at the variable of ‘unlimited wants and needs’ and firstly separate them into two separate components (instead of giving both equal value).
Once we distinguish between wants and needs, we can recognize that needs (unlike wants) are actually quite limited and defined. Needs include things we can name such as: housing, food, clothing, security, – etc. There is a limit to what can be defined as a ‘need’ whereby everything placed under the heading of ‘need’ is directly related to the achievability of a life of sustenance. In essence, the first system of distribution that should have been designed should have pertained to the satisfaction of everyone’s basic needs. Once the needs are sorted out, can one look at designing a system pertaining people’s wants.
Currently the system of Supply and Demand is the embodiment of ‘irresponsibility’ – because it decides to spent precious resources on people’s wants, knowing that this cannot be sustained, knowing that needs are not considered if it is not a ‘demand’.
It is fundamentally a system of discrimination between those who have money and those who have not (or very little). In my next blog I will be going deeper into this discrimination point and on what principles it was found, and how it currently is still being justified.

Glossary:
Supply: The supply of a product is the amount of the product that producers are willing and able to offer for sale at a certain price.

Law of Supply:
The law of supply states that if nothing else changes, suppliers will supply more goods and services to the market when these goods and services have higher prices, and will supply less if these goods and services have lower prices.

Demand:
A demand for a product or service exists when people want to buy it and also can buy it, in other words if they have the financial means for it (can afford it).

Law of Demand:
The law of demand states that, if nothing else changes, people will buy more of a product when the price of the product decreases, and will buy less of the product when the price of the product increases.

Excess Demand / Shortage of Supply:
This occurs when the quantity demanded of a good is greater than the quantity supplied of a good at that particular price.

Shortage of Demand / Excess Supply:
This occurs when the quantity supplied of a good is greater than the quantity demanded of a good at that particular price.

Opportunity Cost:
This is the cost of something you have to give up to get something else, that is, the value of alternative opportunities that have been given up.

Equilibrium:
The price at which the quantity demanded equals the quantity supplied
.

0 comments:

Post a Comment

top