J Brauer | © Stone Garden Economics
Like most scientists, economists are trained to hold a sharp lookout for parsimonious theories. If 1,000 observable things need explaining and one theory uses ten concepts to do the explaining whereas another uses two, then the second theory is preferable to the first. To a scientist, the simple is not simplistic. Quite to the contrary.
The two laws of thermodynamics are one example. The first law states that one cannot add to or subtract from the universe’s finite energy; one can only transform one form of energy into another. The second law—the famous law of entropy—states that whatever form of transformation one chooses, all energy will gradually dissipate into useless heat energy and eventual universal disorder (i.e., sadly, the death of all living things). The simplicity of these two laws is starkly beautiful, and their far-ranging explanatory and predictive power is mind-boggling. The laws of thermodynamics truly are marvelous.
Another example of starkly beautiful, far-reaching, and mind-boggling laws are the “divine laws of supply and demand,” as a former Saudi oil minister once referred to them in thunderstruck veneration. These laws universally explain the operation of markets (and much more), throughout all known history and throughout all known time. These laws even apply to nonhuman species. For example, economists and psychologists have conducted experiments that show that even animals respond in the way the laws of supply and demand predict. For instance, rats are given an income—a certain total number of lever presses—and a set of prices: Two presses on lever A releases a certain quantity of water, four presses on lever B releases a certain quantity of root beer. The rats can now choose which combination of root beer and water to consume until their income is used up. Remarkably, the higher the price of one item, relative to the other, the less of the more costly items the rats consume and vice versa. They follow the law of demand.
But back to the Saudi oil minister. Here is the full quote of what Zaki Yamani said: “Political decisions cannot permanently negate the divine laws of supply and demand.” What’s this about “political decisions”? Indeed, far too many people, and especially politicians and bureaucrats—who all should have to pass a mandatory economics exam before being permitted to run for office or assume positions where they handle your money—falsely believe that the laws of supply and demand must succumb to our whims, must bend to our will, must be suspended when it suits us. No such luck! Just as the laws of thermodynamics are eternal laws of nature, so are the laws of supply and demand. Just because supply and demand deals (mostly) with humans does not mean that the laws do not apply. They are laws of nature, after all. You cannot permanently defy the law of entropy; neither can you—politician, bureaucrat, or otherwise—permanently defy the laws of supply and demand.
Thus, the laws of supply and demand are especially stunning to behold in situations in which people do try to sidestep them. So we study what happens when California politicians “deregulate” only part of the energy market. We observe how taxpayer financed drug-interdiction policies end up subsidizing drug dealers. We observe interventions in the markets for organs and other human body parts that guarantee their undersupply. We shake our heads at minimum wage laws that, while well-intentioned, create unemployment. We throw up our hands in despair at rent-control laws that contribute to deteriorating housing stocks. We frown upon import quotas that make domestic goods more expensive and harm our consumers without assisting producers and their employees. We grit our teeth at agricultural “support” prices that make food more costly. The list of follies is endless.
So, don’t sweat the small stuff, the simple laws? You’d better! You defy the divine laws of supply and demand only at your and your neighbor’s eventual peril.
J Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, Georgia, USA.
This column is to appear in the Augusta Business Chronicle (April 2001).