In our previous post, we exposed the biggest fallacy in Economics as the concept of 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. This was exposed by Smith as mercantile sophistry in Book 4 of The Wealth of Nations because, in effect, it establishes a perpetual fight between businesses (suppliers or merchants) and society (demanders or consumers).
We also saw that the mercantilist (Mun), the economist (Samuelson), and the moralist* (Smith), all agree on a downward sloping demand curve. Next, we shall see what they say about the supply curve.
Basically, 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.
In England's Treasure by Foreign Trade, Mun describes the mercantile supply curve:
Unlike the manufacturer's supply curve which rises because of rising production costs (or caused by the supplier), the mercantile supply curve rises because of high demand (or caused by the demander). The merchant raises the price arbitrarily until he finds the highest price that the buyers can pay.
When the Merchant is able to sell his goods overseas, he returns to buy more local goods. This raises the price of our local commodities, and consequently improves the landlords' rents as the leases expire daily. This money, gained by the nation, enables many men to buy lands and make them the dearer.Chapter 5
Like Samuelson, Mun also says that higher sales causes prices to rise. However, the cause in this case is not the rising cost of production, but the rising demand, since the merchant also becomes a demander in the process. The main obstacle then is the competition from other merchants who also buy and sell, since they will be fighting for the same suppliers and markets. In this early stage, the mercantilist properly sees that prices are determined by the buyers.
A merchant who prices his goods too high will have no buyers unless he has a monopoly which will force the buyers to buy from him anyway. This is why monopoly naturally became the goal of mercantilism.
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. It explains why Samuelson's farmer switches from corn to wheat in the first place. 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 'social' supply curve slopes downward to represent less toil and trouble and less energy expense while increasing production, 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:
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 society or world, which Smith explains simply:
Thus we see that the supply curve of modern economics unnoticeably establishes the idea of monopoly as a natural state. This is consistent with the current trend of mergers and acquisitions leading to too-big-to-fail companies which stifle competition for the sake of higher profits for private investors at the expense of the demanders or society.
In part three, we will put these two curves together to see how the merchant and manufacturer's supply curves, espoused by Economics, actually competes with society, in order to force people to pay higher real prices or endure more toil and trouble (manifesting most usually today as stress and in people working more hours), when in fact, technological and human progress dictate that real prices and toil and trouble must be naturally be lower through time.