The Morality of Supply and Demand

Abstract

Supply and demand curves do not often inspire consideration of morality. Economics nominally consists of obtuse theorems and calculations, which makes it easy for the deeper meaning of its concepts to escape attention. But certain economic principles are so fundamental to the human condition that they permeate our social interaction and organization. Of necessity, these economic principles intersect with basic moral principles. It is impossible to fully understand economics or morality without grasping this relationship.

Preamble

The following are fundamental aspects of the human condition that cause economic and moral principles to intersect:

• We have desires that are practically unlimited. This means that we yearn for more than we currently possess, that we dream of adventures beyond our current circumstance, that we aspire to accomplishments beyond our current standing, that we ache for more comfort and protection than our current security blankets, and that we compare ourselves to others who currently have more of these things. We may reprimand ourselves and describe these desires as somehow spiritually debasing, but they are universal for all cultures, for all races, and for all eras.

• We have finite resources available to us. There are only so many natural resources accessible on the planet. There are only so many waking hours in a day and only so many days in a lifetime available for productive activity or recreation. There is only so much energy that can be reasonably tapped. There are limits to our current technology. There are laws of nature and physics that constrain our possible actions. All of these constraints are real, and they must be dealt with, because there is no magical wizard or paternalistic deity to negate them.

• The conflict between unlimited desires and finite resources must somehow be resolved. There are six billion sovereign individuals competing for finite resources in a confined space called Earth. There will necessarily be disagreements when billions of people must divvy up resources. It is clear that some method must exist for allocating such scarce resources to fulfill everyone’s desires in an organized, peaceful manner. Which method humanity chooses is a crucial moral test.

• There are only two philosophies for allocating scarce resources on a widespread scale. These are:

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  • Free market capitalism. This is an economic system that empowers free citizens to make individual choices in various markets that allocate labor, capital, and products based on freely floating prices determined by these individual decisions. Such a system includes a minimal set of rules generally based on a constitution supported by laws that defend and protect individual rights and property. Economic power is exercised by free people trading with each other to optimize value, as determined by each trader. The beneficiaries of economic transactions are individual citizens, who create wealth through effort, efficiency, and investment

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  • Government force. This includes any economic system that empowers government to allocate labor, capital, and products based on objectives established by government and imposed by implied or actual force on individual citizens. Examples of economies based on government force include socialism, communism, feudalism, and fascism. Such societies are generally supported by laws that defend and protect the prerogatives of the state or ruling elites and limit the freedom of individual citizens. Economic power is exercised by agents of the state determining resource allocation by means of taxation policies, wealth redistribution, regulatory requirements, and ownership or control of the means of production. Value is determined by agents of the state. The beneficiaries of economic transactions are agents of the state and citizens chosen by the state.Wealth is viewed as something to be divided up, rather than created.

There are many academic resources that address the comparative merits of these two different philosophies.Most of these writings compare them on the basis of economic efficiency and effectiveness. While these are important considerations, they are trumped by the more basic consideration of morality. This exposition will focus on the moral implications of free market capitalism versus government force as philosophies for allocating scarce resources.

We will begin with an examination of the basic free market model. This model includes a set of data representing demand (points on a curve that reflect individual demand intentions) and a set of data representing supply (points on a curve that reflect individual supply intentions), with an equilibrium point at the intersection that represents a resulting market price. A generic depiction is shown below:

 

Although this model is disarmingly simple, its moral implications are profound. But, before we can begin discussing moral implications, we must first discuss the mechanics of the model, in order to understand how it operates. Here are the basic mechanics:

Demand curve (D):

1. This curve represents the quantities of a market good that consumers are willing and able to purchase at various prices.
2. Generally, when price is high, consumers will buy less. When price is low, consumers will buy more. This is an enormously powerful and accurate description of human behavior.
3. The law of diminishing marginal utility will prevent demand from becoming infinite, no matter how low the price goes. No matter how cheap any good is, consumers simply do not need outlandish quantities, because each incremental unit has slightly less marginal utility.

Supply curve (S):

1. This curve represents the quantities of a market good that suppliers are willing and able to bring to market at various prices.
2. Generally, when price is high, suppliers will bring more to the market. When price is low, suppliers will bring less. This is an enormously powerful and accurate description of human behavior.
3. The law of diminishing marginal returns will prevent supply from becoming infinite, no matter how high the price goes. No matter how much someone may be willing to pay for something, it gets increasingly difficult to obtain incremental quantities, because easily available resources get consumed first.

Equilibrium:

1. Equilibrium is the point where the supply curve and the demand curve intersect, meaning that this is where supplier intentions and customer intentions are the same.
2. At this equilibrium point, the actual price and the actual level of consumption is determined by the market. This is the point where hypothetical curves of price/quantity combinations become a single, real expression of price and consumption.

Markets exist for anything that can be traded by people. Markets exist for goods, such as things you might buy in a store, where you trade money for these objects. Markets exist for services, such as those offered by restaurants or barbers, where you trade money for these conveniences. Markets exist for labor, where your time and energy is traded for wages. Markets exist for capital, where your savings and investments are used by others in exchange for a return, such as dividends, profit, or interest. Markets exist for intellectual property, such as writings, artistry, or performances that are traded by entertainers for money. Markets exist for real property, which is traded or leased by owners for money.

These various markets are astonishingly efficient. Consumers and suppliers “voting” with their dollars and their resources in these markets create a staggering amount of information about intentions and relative values that guides decision making. The “vote” that each participant makes in the market influences the equilibrium point, which in turn updates information for all other participants in that market, without any other organizing force in society. This widespread market information is a fertile ground for competition and for movement of resources to the most desired state (equilibrium). This continual flow of information guides enormously complex economic activity among billions of participants around the world. Adam Smith described it as the “invisible hand” of the market. The implication is that societies (collections of individual market participants) can peacefully make decisions about resource allocation without the “visible hand” of institutional force, such as wielded by governments.

Efficiency is important, but it is a mistake to rely on it as the sole justification for free market capitalism. The argument used for government controlled economies is never based on efficiency. It is always based on morality, albeit perverse perspectives of morality. The moral arguments for economies based on government force are fundamentally flawed, as will be discussed below, but they are arguments nonetheless, and people are influenced by them. Unfortunately, the defenders of free markets are often so absorbed in arguing efficiency that they risk losing the debate to advocates of government force, because they are fighting the wrong battle. They lose the moral argument simply because they fail to engage in the moral argument.Defenders of free markets lose sight of the fact that things are not right or wrong because they are efficient or inefficient. They are right or wrong because they pass or fail certain moral tests. In order for defenders of free markets to survive the continual encroachment of government force, it is far more important to win the morality debate than to win the efficiency debate.

So, what is the moral argument for free market capitalism? What does morality have to do with esoteric things like demand curves, supply curves, and equilibrium points? Aren’t these just mathematical gadgets and ephemeral abstractions of amoral materialistic motives?

This exposition argues that the supply and demand model described earlier is inherently a profound moral proposition that trumps any moral argument put forward by advocates of economies based on government force, such as socialism and communism. The supply and demand model is not just a mechanism for achieving market efficiency. It is also the proper moral basis for deciding how freely chosen human desires should be fulfilled in a world of scarcity.

The Morality of Supply and Demand

The free market model, as represented by the traditional supply and demand curves, is also a moral foundation for organizing economic activity between humans. The following points illustrate this truth:

1) Free markets are a pure expression of free choice. Individuals participating in a free market operate with the liberty to make decisions regarding consumption and production. This freedom eliminates force from these decisions. Force is the opposite of morality, because morality is inherently an exercise of free will based on values. In a free market, you cannot force others to buy your products, and others cannot force you to buy theirs. Peaceful agreement must be reached before a transaction can occur, and this agreement must be satisfactory to both parties. Such collaboration is a positive moral expression of human behavior, because it is executed without force.Government controlled economies use force to execute taxation policies, wealth redistribution, asset seizure, regulation, quotas, and various other methods to overrule decisions that would otherwise be made by individuals exercising free will.

2) Free markets are a pure expression of economic democracy. As consumers and producers “vote” with their dollars in the market, decisions are made regarding prices and consumption levels. These decisions do not require governments or armies to determine or to enforce. They are simply the result of all participants expressing their wishes and then living with the market-clearing results of those wishes. In this manner, economic values are established by society without guns being fired or individual rights being suppressed. Government controlled economies are an expression of pure totalitarianism, wherein certain bureaucrats undemocratically determine prices and resource allocation.

3) Free markets are a pure recognition of the equality of all perspectives. All participants in a market have an equal opportunity to choose. There is no centralized bureaucracy that has a “supreme opinion” about what is valuable for society to produce or to consume. All opinions of all citizens provide input to the markets. If you have an obscure desire that you wish to be fulfilled, the market will fulfill it, if there is a price that is agreeable to you and a producer. There is no absolute “right” or “wrong” of demand or supply, because it is not possible to objectively determine whether one person’s opinion of what should be produced or consumed is any better than another person’s. To allow select individuals or groups of individuals to make production and consumption decisions on behalf of everyone else is tantamount to relegating average citizens to the status of children without rights or personalities, or worse still, to relegate them to the status of slaves. The free market eliminates the potential moral dilemma of individual wishes differing from societal wishes, because it is not possible to objectively determine “societal wishes” without allowing all participants to freely act and influence the market. When societies impose production and consumption decisions by force, individual desires get disconnected from societal desires, immediately and inescapably. Such disconnect disables morality completely, because not only does society arbitrarily cease to protect certain citizens, it actually violates their right to life. When the common good of society becomes superior to the individual good of its citizens, the rights of certain individual citizens are inherently diminished. There can be no moral justification for this.The rights of one person, or of one group of people, are not inherently superior to that of another, even if a government decrees it to be so.

4) Free markets are a source of pure information. If “price” is eliminated from markets (as economies based on government force would like to do), then “value” is also eliminated. It is not possible to know what society collectively values without allowing freely established supply and demand curves to emerge from their individual choices, and these curves are not possible without the concept of price. The information contained in a price is a magnificent summation of society’s collective valuation. This information is obtained without force or without institutional bias. It is simply the result of everyone expressing their wishes freely. Such information is priceless (pun intended), and is not possible in a force-based economy in which individual desires are suppressed or ignored. By simple definition, if a society does not allow price to reflect the collective valuations of citizens, then any resulting decision must be flawed, in the sense that the decision ignores the “votes” of some individuals in favor of other individuals whose input (and therefore power) is considered superior.

5) Free markets are a pure expression of cooperation. Trade is a fundamental human activity. When trade is freely executed, both parties are inherently better off than if they didn’t trade. This is necessarily so, because no one will freely make themselves worse off. With free trade, all participants in society can take advantage of everyone’s skills and resources by offering their own skills and resources in exchange. This enables specialization and optimized resource allocation, all accomplished without force and with full cooperation between consenting citizens. Economies managed by government force are an exercise in unwilling obedience rather than willing cooperation.

6) Free markets are a pure expression of individual rights protected by law. The concept of limited government and individual rights, in the framework of a constitutional republic and rule of law, is not possible without free markets. If individuals are not free to make their own decisions about the sale of their labor, the purchase of goods and services, and the control and investment of their wealth and property, then their individual rights are not only unprotected, they are an illusion. Free markets and the sovereignty of the individual are synonymous. If a centralized bureaucracy has the power to determine how your labor will be used and compensated, the power to determine what you can buy at what price, and the power to set limits on your wealth and disposition of your property, then you are nothing more than a powerless ward of the state. In such a condition, you have no rights, and you are effectively protected by no laws.

7) Free markets will create the most output with the least amount of resources. In essence, free markets are the best conservators of the world’s resources. Each citizen is intrinsically motivated to optimize value by selecting the best among alternatives. The gain or loss from each trade accrues to each trader, who has visceral drive to make the right choice. Government force, on the other hand, separates those absorbing the risks and costs of transactions from those benefitting from them. Not only does this necessarily introduce inefficiency because there is no longer a visceral drive to make the right choice and optimize value, a layer of unproductive bureaucracy is added to each transaction. Governments will always be more wasteful than free markets, because government controlled transactions are more costly, driven more by politics than value, guided more by dogma than real information, and motivated more by preservation of the state (an artificial entity) than preservation of each citizen (real entities). The inherent superiority of information flow, unconstrained resource movement, and value-based competition enables free market economies to always husband resources more effectively than economies managed by government force.

The notion of morality at the scale of societies is inextricably bound with free markets. Societies that do not allow their members the freedom to choose their economic associations and the trade resulting from them can lay no claim to morality. Who among us has the unchallengeable authority and the absolute mandate to determine how each of us should allocate our time and our resources? For any individual or collection of people to claim such authority and mandate is an abomination and a disavowal of any moral legitimacy. It is tantamount to saying that one person’s wishes is superior to another person’s, and furthermore that this superiority can be manifested forcefully. There can be no greater antithesis to morality than such a claim. Such claims are the source of slavery and concentration camps, of gulags and re-education programs, of omnipotent leaders and conscripted proletarians. Such claims ignore the most fundamental element of morality – you own yourself and the results of your efforts. To the degree that someone else owns you or the results of your efforts, you are a slave.

For any civilization that has progressed beyond simple tribalism, free markets are the perfect expression of morality in society. Oscar Wilde once said that economists know the price of everything and the value of nothing. This is perhaps worth a chuckle, but nothing more. The truth is that free individuals know the value of everything, and they seek only the freedom to exchange value for value in the marketplace. The aggregate valuation of free individuals in a marketplace determines prices, and prices determine the proper allocation of resources in society. It is government, operating with blind force and unconstrained ambition, which knows the value of nothing. Knowing the value of nothing, governments can only misallocate resources and sub-optimize societal satisfaction. This is why free market economies are more efficient than institutionalized force economies. It is also why they have greater moral standing.

Dr. Maria Montessori observed, “The very foundation of social morality is bound up with money. There is something grand to be grasped here, to realize that this is the most important fact in the organization of society and in social morality.” Ayn Rand adds, “Money demands that you sell, not your weakness to men’s stupidity, but your talent to their reason.” Free markets are the epitome of morality. Government controlled economies are the epitome of evil. The victims of government controlled economies in Cuba, the Soviet Union, Communist China, North Korea, and Eastern Europe will testify to the truth of this. Or, more precisely, the inescapable mechanics and morality of supply and demand curves will testify.

Comments

[GreenManorite]

I was hoping for a good argument from the link and was disappointed.

Confession, I got about 3 premises in and figured the rest isn't worth reading if I immediately disagreed with three unsupported premises.

1) "We have desires that are practically unlimited."
- I realize that "non-satiation" is a typical economic premise and is necessary for market equilibria. This does not make it a good moral premise.
- Many people reach the limits of their practical desires.
- We observe plenty of people who are not extremely wealthy living a lifestyle which values leisure, non-market production, children, hanging out all day on free or very low cost services (ndnation, facebook).
- Practically speaking, there is a hard limit on the amount of wealth you transfer to someone before they start giving money away. If I'm giving money away, then there must be something in the moral realm putting a practical limit on desires.
- If one argues that we can reach a point of consumption satisfaction for most people, scarcity is less of an issue. For example, if the vending machine at school or work provided free drinks paid, would we see huge spikes in coffee/soda/juice drinking at work? If the government was giving cars away, I'd see some people going back for seconds or thirds... really at some point the bother of washing the fourth or fifth car isn't worth owning it.

2) "We have finite resources available to us"
- We also have a bunch of resources which are non-rival or extremely low cost for additional users.
- Plenty of interesting things are non-rival... pretty much all software and intellectual property. All electronic books, music, film...
- Much of the service industry currently works well below capacity not to mention the 8% of the working population currently surplus labor.
-Mostly I find it goofy in modern America to begin the story with unsatisfied desire for goods and horrible scarcity.

3)"There are only two philosophies for allocating scarce resources on a widespread scale. These are: free market capitalism and government force"
- There are no mixed systems, no non-market communities, no non-profits, no social contracts anywhere?
- If you reduce the world to white and lime green, white may always be the appropriate choice. That said, your denial of the existence of any other colors may just mean you're color blind.

4)On free market capitalism: " This is an economic system that empowers free citizens to make individual choices in various markets that allocate labor, capital, and products based on freely floating prices determined by these individual decisions."

- Not all people are free citizens: we have children, we have mentally disabled people, we have elderly people, we have very ill people. Someone has to make decisions for those people. It isn't like youth, age and illness are rare occasions... we're all at the mercy of others.

- Plenty of people aren't making individual choices. Some people are married. Some people have a domestic partner of some type. Some people are members of a corporation which makes decisions. There are clubs engaged in joint market decisions. I'd go as far as saying market activity by individual choice is small in terms of dollar value.

- My point is that there are plenty of teams with joint objectives and strategic decisions. Pricing is sometimes a free floating thing and sometimes it's a game. Econ 101 descriptions of free markets isn't sufficient to formulate a moral theory.

- I will actually agree on the "government force" part. Anytime government taxes then decides what to do with the tax, this undermines the notion of free market. Basically if we want a centrally controlled defense system paid for by any sort of tax or resource ownership, the definition of free market given is undermined. This is mostly because the definition of a free market has no basis in any reality.

5) There is a general confusion of freedom and morality. Just because one is free to do something, this does not make a system more moral. I am not free to purchase a child prostitute. I think this a good restriction on our liberty. I think it is good that a doctor is forced to receive a license from a governing body in order to practice. If something is intrinsically evil, how can a freedom to do that thing a good?

Your arguments in order:
1) Free choice on its own is not a moral good.
2)Your economic democracy is weighted by dollars to spend. A big fish or team of combined interests gain market power. Unions and corporations form because it is advantageous to negotiate as a block in many markets.
3) Markets value the opinion of those in the market, not all perspectives. Anyone beyond the marginal producer and consumer is irrelevant to the equilibrium. That is to say, if only 5% of people participate in capital markets, the "opinions" of the 95% priced out of that market aren't effecting prices or quantities.
4) Markets are a source of information if a competitive market exists. Very few such markets exist, especially if you remove governments enforcing product standards. You may have seen the story about Orbitz advertising higher rates to Mac users... lots of information in that price signal. Plenty of bars have one price for the locals, one price for the tourists... hard to blame government or monopolists for that.
5) Free markets are one form of cooperation. Why is cooperation a moral good? If it is, why are you excluding all of the cooperative economic forms like non-profits and communal living as viable economic alternatives?
6) As you defined it, governments can't do much of anything and the courts have little power to respond to any market failure. How does a court respond to abuses like child labor if government has no role in the allocation of labor?
7) Only if markets are competitive, which they are not. It is really hard work to make a market competitive... take a serious look at any of the major financial markets and you will realize the costs in lawyers, regulators and market makers required to turn something into an easily tradable security. If you look at how people actually trade in financial markets, you'll find precious few people making money gleaning forward looking information. There are lots of dollars trading momentum and arbitrage with institutional money.

Unfortunately you did not argue for any morality beyond freedom which is not a good in itself. The economic foundation is something that only exists in a high school text book. Markets are a useful tool which can be used for good. Governments are a useful tool which can be used for good. Non-profits are a useful tool which can be used for good. It isn't the system which makes something moral, it is how people use or abuse the system. I can sell drugs to kids and fake drugs to old people and find prices which clear the market. That doesn't make my activity moral.