Fallacy of Equilibrium Part 3: Businessmen vs The People

August 23, 2015

In a previous post, we explained that though the demand curves of Samuelson the manufacturer, Mun the merchant, and Smith the moralist are the same, the supply curve of Smith is very different because it slopes downward exactly like a cost curve, generally implying lower prices, unlike the others which slope upwards, implying higher prices through time or as quantity increases.

We then combine both curves to see their effects on society.

Samuelson's Version

Samuelson combines supply and demand into an auctioneer scenario. This is the same as that mentioned by Jevons and Marshall, in their attempt to justify equilibrium.

Which level will the price actually go? And how much will then be produced and consumed?.. Let us proceed what an auctioneer would do, i.e. proceed by trial and error. 

From trial and error,he ends up with an equilibrium point where both curves intersect.

The equilibrium price, i.e. the only price that can last, is that at which amount willingly supplied and willingly demanded are equal. Competitive equilibrium must be at the intersection point of supply and demand curves.

However, it is interesting to note what he says about what happens at low prices:

Can that price ($1 per bushel) persist? Again, obviously not-for a comparison of Columns (2) and (3) shows that consumption will exceed production at that price. Storehouses will begin to empty, disappointed demanders who can't get wheat will tend to bid up the too-low price. This upward pressure on P is shown by Column (4)'s rising arrow.

This statement is sheer fallacy because a product can only be sold cheaply if it is produced cheaply. It can be produced cheaply if it has economies of scale. If it has economies of scale then there can be no shortage. In fact, there are many cases of crops being overproduced and merely dumped. If wheat falls to $1, then it means its production was plentiful and is likely more than the usual consumption. This then forces the excess to be exported, stored elsewhere, or simply dumped.


Crops get a low price when overproduced and are even dumped, opposite of Samuelson's assertion that they will be overconsumed

The Mercantile Version

Like economist's supply curve, the mercantilist's supply curve also slopes upward.

If we send £100,000 in money to Amsterdam to buy Pepper then send it to Italy, it must yield £200,000, doubling the money. If we send the £100,000 to India to buy Pepper and sell it to Italy, we can earn £700,000 gross. But where the voyages are short & the supply plentiful, the profit will be far less.If our consumption of foreign goods stays the same and our exports increased, the overbalance must return as money or foreign goods from our re-exportation, and increase our revenue more.

Similarly, the mercantilist advocates reducing supply to increase the selling price, and cutting costs to increase profits. By replacing 'exports' with 'sales', and 'imports' with 'purchases' or 'costs', we can see that the merchant does the same things that the manufacturer does. What the manufacturer calls 'equilibrium' is called 'balance' by the merchant, while 'profit maximization' is 'overbalance'.

Smith's Version

Unlike Samuelson who takes the position of the seller, doing opportunistic trial and error to get the highest selling prices, Smith takes the position of the buyers who compete with each other. Because it views demand as superior, profit maximization never enters the curves, and is merely mentioned as the effect of keeping secrets in manufacturers and trades.

The natural price is the lowest price that a dealer can sell his goods.. The market price is the actual price at which any commodity is commonly sold. Market prices are regulated by the proportion between the quantity to be sold and the demand of buyers willing to pay the natural price.

When the commodities fall short of the effectual demand, the shortage will cause some of the buyers give more for those few commodities. This will create a competition among buyers which will raise the market price. When the amount sold exceeds the effectual demand, the excess will remain unsold. To dispose of it, it must be sold to those who are willing to pay less.

Unlike the manufacturer and the merchant's curves, Smith's curves slope downwards to create low prices because it views economic activity as ultimately for the demanders or consumers, and not for the suppliers or sellers.

Economics: Auctioneering = Monopoly

The main flaw in the economist's equilibrium is that it is based on a scenario where there is only one seller as an auctioneer. Thus, the buyers, who represent people in society, end up competing or bidding against each other to get resources, causing prices to go up until they reach an equilibrium that satisfies the seller.

In reality, there are many sellers for anything, unless there is a monopoly, either by huge corporations in Capitalist systems, or state-run enterprises in Communist systems. Economists try to save face by saying that equilibrium fails because it requires perfect competition, but do not realize that their supply curve makes perfect competition impossible to begin with. Because of this, supply and demand never match up despite the best efforts of economists and governments. This manifests as recessions, unemployment, and economic crises, all caused by the fact that the entire system was designed not for the benefit of society, but for the sellers.

When a potter becomes rich he will not think of you as much as before, grow more and more indolent and careless, and become a worse potter. But, on the other hand, if he has no money, he cannot provide himself with tools or instruments, he will not work well, and he will not teach his sons or apprentices to work well. Then, under the influence either of poverty or of wealth, workers can degenerate. Here, then, is a discovery of new evils of wealth and poverty, against which the guardians will have to watch, or they will creep into the city unobserved. Wealth is the parent of luxury and indolence. Poverty is the parent of meanness and viciousness. Both are parents of discontent. Simple Republic Book 4

Our Solution: Natural Price Theory and Economic Democracy

Adam Smith pointed out the cause of equilibrium to selfish-interests by the class of people known as businessmen or those-who-live-by-profits:

The interest of any dealer is always different from, and even opposite to, the interest of the public. To widen the market and to narrow the competition is always the interest of dealers. To widen the market may frequently be agreeable to the interest of the public. But to narrow the competition must always be against the public interest. It only enables the dealers to levy an absurd tax on the rest of their fellow-citizens, raising their profits unnaturally. The proposal of any new commercial law which comes from this order, should always be listened to with great precaution. It should never be adopted until after long and careful examination with the most scrupulous and the most suspicious attention.

By exposing the sophistical ideas such as equilibrium and profit maximization, we can say that Economics from the 1870's is a corrupt science, and not merely a dismal one. It descended directly from Mercantilism which caused so much suffering in the colonies in Asia, Africa, and the Americas, and is still creating suffering nowadays through inequality, high prices, college debt, high taxes, etc. Rather than reform a system with a corrupt base, it would be better to take its data and findings, and transplant them onto a new and proper one that is in line with the interests of society and human life.


Update: April 2020:
For this reason, we are introducing alternatives to every major economic concept as the foundation of SORAnomics: