“Supply and Demand:” A Quibble

At the Hampton Institute, Shi Sanyazi argues that “Housing is Determined By Class Power and Profit, Not ‘Supply and Demand’”:  “The truth is that… our conditions as tenants are determined by the balance of class power, not the balance of supply and demand. 

I know what they mean, of course. In the economic discourse between left and right, a complaint about the price of anything — the low wages paid by McDonald’s or Amazon are a prime example — is met by a patronizing response from right-wing splainydudes: “It’s all set by supply and demand! The left just doesn’t understand economics, LOL!”

The problem is that, in framing the article in these terms, Shi Sanyazi accepts the premise that there’s some sort of contradiction between rent (or any other price) being set by “the balance of supply and demand,” and it being set by “the balance of class power.”

In reality, there’s no contradiction at all. The fact that prices are set by the balance of supply and demand is so obvious as to be almost a tautology. In any market where price formation is allowed to take place without interference from externally-imposed price caps or price floors, the final price is set by the balance of supply and demand. This is true even of situations where the supply or demand themselves are determined by class power.

The ability to control supply or demand is one aspect of class power. Take the classic example of monopoly pricing: a man in ragged clothes, dying of thirst, crawls across the desert on hands and knees, until he comes to a stand with water for sale at $1000 a glass. The price is set by supply and demand; the problem is that, while the marginal utility of the first glass of water is virtually infinite for the dying man, the supply of water is entirely under the control of the person who owns the stand. 

In The Positive Theory of Capital, Austrian economist Eugen von Bohm-Bawerk illustrated the process of price formation by the meeting of buyers and sellers. When these buyers and sellers meet up, given the spot conditions of supply and demand for a good at any given time, they join up into marginal pairs of one buyer and one seller each. But the process is complicated when the number of buyers and sellers is unequal. If the price for a good is too high, the number of sellers will exceed the number of buyers. If it’s too low, the number of buyers will exceed the number of sellers. If there are unsatisfied buyers leftover who couldn’t find a seller, the seller will probably raise the price in the future so that the quantity demanded falls to equal the quantity supplied. And the opposite will occur if there are dissatisfied sellers left over; the next time around, they’ll probably charge a lower price.

The function of monopoly — the artificial property rights and artificial scarcities enforced by the state — is to protect (say) the buyers of labor, or the owners of rental units, from having to engage in such competitive behavior. The capitalist state keeps the supply of jobs low relative to the number of people competing for them. As for land and housing, nature itself limits their supply relative to the number of people competing to rent or buy them, in the manner described by David Ricardo, Henry George, and all the classical political economists; but the state’s property laws exacerbate that natural scarcity with the artificial scarcity caused by things like absentee title and the privatization of the commons.

What Shi Sanyazi meant — or at least should have meant — is that, while the cost of housing is determined by the balance of supply and demand, the balance of supply and demand is itself determined by landlords with the help of the state’s property laws.

But their reaction to the “supply and demand” talking point is entirely understandable. Right-libertarians do in fact trot out the “It’s just supply and demand” argument because they see it as explaining away low wages, high rents, etc., as just the working of entirely neutral economic laws in which power relations play no part. In fact, reducing the explanation to “supply and demand” explains nothing.

The argument assumes that the supply and demand themselves are spontaneously arising quantities, and that the relative values of supply and demand aren’t determined by power relations. Yes — to repeat — by definition all market prices result from the interaction of supply and demand. Now ask yourself the important question: What institutional factors determine the supply and demand themselves?

There’s an almost endless range of possible institutional arrangements concerning property and wealth distribution, and in each of them supply and demand — if allowed to operate — will result in a different market-clearing price. And, contrary to what the usual suspects say in the op-eds at their right-libertarian websites, none of these institutional arrangements is self-evidently deducible from self-ownership and peaceful appropriation. What’s more, not only does virtually no present title to land result from peaceful appropriation — the modern concept of “private property,” of which right-libertarians are so fond, is almost entirely a creature of violent state imposition. 

So “supply and demand” says nothing of substance.

The price of a prescription drug under patent is determined by supply and demand. The price of a generic prescription drug whose patent has expired is also determined by supply and demand. Those prices are different. See how that works? The same thing applies in regard to the institutional rules governing ownership and distribution of capital, land, etc.

When people complain about low wages, or how much senior executives are paid relative to production workers, they’re complaining about the institutional factors that resulted in the particular balance of supply and demand that are responsible for this situation.

So don’t let conservatives, neoliberals, and right-libertarians pretend that they’re actually saying something when they say “it’s all supply and demand.” 

The question we should be asking, once we get past this distraction, is: what rules should govern the ownership and transfer of land, ideas, business firms, and other forms of property? If we get those rules right, the supply and demand will take care of themselves.

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Markets Not Capitalism
The Anatomy of Escape
Organization Theory