The Market Equilibrium Fallacy Part 1January 6, 2022
The biggest fallacy of Economics is Market Equilibrium which is taught in basic economics or ‘Econ101’ everywhere as the supply and demand curve forming an ‘X’ and meeting in a state called ’exact equilibrium’. Smith exposed this as mercantile sophistry in the 18th century, then called the ‘balance of trade’. To prove that this idea of ‘balance’ is the same in essence with the ’equilibrium’ of economics, let’s compare the philosophy behind both ideas.
The Law of Demand
Modern Economics began with Paul Samuelson’s neo-classical synthesis which described a downward sloping picturization of the ‘Demand Schedule’*. It means that the price of a thing goes down the more abundant it 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.Paul Samuelson, Economics, Chapter 4 Supply and Demand: The Bare Elements, page 61
*Instead of a demand schedule, pantrynomics uses the modern economic table of the Physiocrats to determine the real price of everything in real-time. If everyone knows the real price of everything, then information asymmetry and profit maximization stop existing. Consequently, economic crises no longer have a chance to form.
He then goes through a few more paragraphs to prove this.
Smith uses only four sentences to explain this from the viewpoint of an impartial spectator (not as a buyer nor seller):
The things which have the greatest value in use have frequently little or no value in exchange. On the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.Adam Smith, Wealth of Nations, Book 1, Chapter 4
Like Smith, Samuelson also gives the example of water. However, Samuelson’s version observes this phenomenon from the viewpoint of business or the supplier first instead of the buyer or demander. This is important because in reality, the buyers are made up of people in society. This subtle fact might not catch the attention of a casual reader, but it can be seen by a dialectician (a non-shallow philosopher).
The Mercantile Version
Smith points to Thomas Mun’s England’s Treasure on Foreign Trade as the origin of equilibrium, so we look for Mun’s version of the demand curve.
Plotting this, we get the same downward sloping demand curve. We thus prove that Samuelson, Smith, and Mun agree on a downward sloping demand curve:
Digression on the 'Law' of Demand: Creating the non-problem 'paradox of value' to justify the fallacy called Profit MaximizationFeb 2017 Many economists, including Samuelson, cite Smith’s example as a 'paradox of value', where in fact, there was never a paradox to Smith. Anything that is difficult to obtain yet desired by the mind, such as diamonds, simply will naturally have a higher price than that which is easy to obtain, like water. Economists create a paradox in order to justify the creation of the concept of marginal utility to ‘solve’ the paradox. This marginal utility requires the quantification of pleasure or utility, which is then ‘maximized’ as ‘profit maximization’ -- the second key fallacy being perpetrated by Economics. By destroying the paradox of value, then value is properly kept as subjective instead of being objectified into numerical increments. This will then make profit maximization lose its top importance in the minds of businessmen and people in general. This then will make businessmen, investors, and entrepreneurs shift their focus on the actual non-numerical, non-quantifiable benefits that their businesses create.
The Supply Curve
We see that the demand curves of Smith the moralist, Samuelson the businessman, and Mun the merchant are the same.
Next, we look at the Samuelson’s Supply curve to see that it is also business-first:
Samuelson says that suppliers react to society’s high demand for a product (which manifests as higher prices), which then motivates them to produce more of that product. Because of natural limitations, the costs of producing each additional product eventually increase and this leads to higher prices at higher quantities.
In this version, the main cause for the rise in prices with rising quantity is the rising cost of production. Thus, we will call this the manufacturer’s version of the supply curve.
The Mercantile Version
In England’s Treasure by Foreign Trade , Mun describes the mercantile supply curve:
Unlike the manufacturer’s supply curve which rises because of rising supply-side production costs, the mercantile supply curve rises because the increased denand-side sales also increases the competition between the merchants for the supply-side wholesale goods.
While Samuelson’s supply curve will lead the producer to want to own all the land, the curve of Mun will lead the merchant to want the collapse of all other merchants. The perfection of the former is done through a war for territory as seen in World War I and II, while that of the latter is done through a trade war, best seen in the War of Jenkin’s Ear (Update Sept 2021: and also by Trump’s trade war with China).
This mercantile supply curve is also seen in modern economics textbooks as the “ultra-short run supply curve” which is based on profits instead of costs. Samuelson seems to downplay the profit motive in order to emphasize the law of diminishing returns, whereas modern textbooks seem to go straight for profits.
Smith’s supply curve can be seen in Book 1 of The Wealth of Nations, and like Samuelson, is based on cost and not profits.
Unlike the producer’s or mercantile supply curves which slope upwards, Smith’s pantrynomic supply curve slopes downward to represent less effort and energy expense while production increases, in a phenomenon called economies of scale or division of labour.
Why does Samuelson’s costs go up with more production, while Smith’s costs go down, properly leading to lower prices? This is simply because Smith and Samuelson’s costs are seen from different positions:
Smith’s supply curve is in the left side sloping downwards, representing efficient production, while Samuelson’s is the one on the right, representing diseconomies of scale or when the production is being forced beyond its natural rate or limits.
All Economics books that discuss the upward sloping supply curve have no choice but to admit that it is caused by inefficiency:
The Supply Curve of Economics is Wrong (Unnatural)
This admission means that the upward sloping supply curve is unnatural. If a company is unable to supply the needs of its customers, then other companies can enter and address those needs, relieving the original company of the need to produce unnaturally and inefficiently.
Therefore, the upward sloping curve can only be true if the company had a monopoly and could charge high prices at higher quantities. This means that both the mercantilist and manufacturer’s supply curves exist only in a non-free world, or one that follows a survival-of-the-fittest doctrine, which Smith explains simply:
Thus, we see that the supply curve of modern economics, first established in the 1870’s in Europe and then globally through Samuelson, unnoticeably establishes the idea of monopoly, war, and trade war as a natural state.
Update July 2021: This is consistent with history:
- World War I on July 1914 and II on Septmber 1, 1939
- The Cuban Missle Crisis and the Vietnam War in the 1960s
- The Latin American debt crisis in the 1970s
- The height of the Cold War in the 1980s
- The mergers and acquisitions in the 1990s
- The Financial Crisis in 2007
- The War against the Amazon rainforest in 2019 resulting in Covid