The Case for a Metaeconomics Pt. 5: Tracing the Origins of Demand and Economic Preferences

In the previous post in the “Case for a Meta-economics” series, I explored the possibility that the interface between economics and ethics has a significant impact on economic arguments and the division of economics into schools.  Ethics is supposed to contain, develop, and communicate our higher and better selves.  Crucially, though, economics is also supposed to account for the effects of our more basic or amoral drives, for which there are not necessarily traditional ethical justifications.  Economists are tasked to explain how human wishes, no matter how trivial or “primitive”, become economically important and shape economic institutions like money and “demand”.

Neoclassical Economics and Demand

Neoclassical economics, the dominant school of economics in most of the world, assumes that one of the prime drivers of economic activity is “demand” along with its complement “supply”.  Within this paradigm, demand is thought of as the result of the search of individuals and organizations to maximize their “utility” through a rational process of calculation of the relative benefits of one consumption or investment option over another.    Utility is a “black box” of wants and needs which is supposed to remain inscrutable to economists though is best observed by its behavioral effects after the fact:  what maximizes utility is that which compels monetary transactions to occur.  While everybody can imagine and infer what they think constitutes the basics of utility (the satisfaction of recognizable wants), economists are wary of defining what actually drives people to want one product or service over another.  Instead, the argument remains the rather circular and somewhat limited notion that what people want is what they want (to buy).  Like many aspects of neoclassical economics, the notion of “demand” suggests that it is a dynamic force but in its actual measurement it is an outcome rather than the force itself.

While in underdeveloped or pre-consumer societies, demand for essential goods is more likely to “chase after” supply, in affluent societies, supply tends to chase after demand making demand the more powerful of the two main economic entities in neoclassical economics.  Economic success depends, in consumer societies, on being able to figure out what people want or might want then being able to supply those wants at an affordable price.  Occasionally in consumer societies, either a monopolist or a highly successful market leading company (like Apple) can shape to some degree what people should want by creating new appetites and leading in product design; sometimes supply can create its own demand.

Marketing and Demand

While within the “high church” of conventional economics, demand can be represented as a “demand function” or “demand curve“, theories of how demand itself actually arises are pushed outside the main body of theory into fields like marketing or consumer psychology, within which numerous ideas about people’s wishes and how to address them compete.  Neoclassical economic theories of demand therefore have not much to offer businesspeople in the way of guidance about how to figure out what the market wants and need to turn to the diverse and sometimes confusing toolkits of marketing and related social sciences.

Marketing then might be considered the craft and/or science of demand, either assessing its pre-existing form or creating demand by sending messages to potential buyers of a product or service.  Furthermore, more on the supply side, marketing can help in product design and refinement by embarking on an iterative process of improvement by continual communication with existing and potential buyers.  Even though marketing can be credited with many of notable business successes in the last century, marketing, like other business economics disciplines, is not in regular communication with the abstract formulations found in academic economics.

Despite its location outside the “High Church” of neoclassical economics, many human activities critical to the functioning of the economy fall under the rubric of marketing.  So a meta-economics or a more complete economic theory would need to be able to incorporate both the domains of human experience associated with marketing as well as shed some light on the techniques themselves that are used in marketing.  Splitting off marketing as either slightly “sub-rosa” and entirely unproductive or as an art beyond economic theory does this critical domain a disservice.

Keynesianism and Demand

Though John Maynard Keynes did not break decisively with neoclassical economics on all issues, he did formulate theories which suggest that there are qualitative as well as quantitative dimensions to demand.  Keynes suggested in his General Theory, that “animal spirits”, presumably their tone and energy, were key in determining how willing people are to engage in economic activity.  These emotional states kept people in the Great Depression and other economic crises from spending money, when in fact, if people as a group did spend, the economy would recover sooner.  The theory of “animal spirits” is thus linked to another concept revived by Keynes, the paradox of thrift.  Furthermore Keynes pointed to the insufficiencies in overall measurable (aggregate) demand after an economic crisis, pointing to the need by governments to step in to stimulate or substitute for the weakening of private demand after a financial crisis.

While economists since Keynes have been more accepting of his observations about aggregate demand (though these are still disputed by conservative economists who wish to reduce the role of government in management of the economy), his ideas about animal spirits are other qualitative dimensions of demand are sometimes treated as “sui generis” musings of a great mind but not part of what came to be called Keynesian (as well as neo and new Keynesian) theory.  In general Keynesian economics has been characterized overall as “demand-side” rather than “supply-side” economics.  “Supply-side economics“, a now somewhat out-dated term, focuses on whether investors have enough money after taxes to invest in productive assets (therefore “supply”) and is used as a justification for cutting taxes on the wealthy and on businesses.

Wants, Needs and Economics

Attempts to translate the experience of “demand” in terms of utility and utility maximization has presented a problem for the dominant neoclassical economics in that the political actors who help shape economic policy have been unable to take such a distanced view of their own subjective experience of wants and/or needs.   Folk or popular economics of almost every kind must draw in the vernacular to relate economics to lived experience and as I have posited in an earlier post, all schools of economics have to in some way grapple with the interaction of their abstractions with how people feel and think about the economy.  Economics students might think of themselves as “maximizing their utilities” by satisfying their wants but very few others will relate to this language.

The part of English vernacular that addresses the experience of “demand” (and there are close analogues in other languages I know) deals with “wants”, “needs”, and “desires”, most of which are used to describe what presumably is an internal or a social experience of needing and wanting things and experiences.  In addition to these subjective experiences, technically “demand” involves an additional component, the ability and readiness to pay for a good or services that addresses the perceived need or want.

While the collection of human material strivings in “demand” papers over the distinction between wants and needs, the latter distinction has extremely important political economic effects that motivate conflicts between economic schools despite their nominal commitment to the neutral language of “demand”.  Wants or desires are subjectively experienced states but needs are a subset of wants that are socially sanctioned and recognized by others.  Paradoxically “needs” though they contain this additional component are usually more primitive wants without which we would not survive.   So “wishes” are analytically simpler (a wish is a component of a need) but “needs” are a complex combination of phylogenetically and biologically more basic strivings within a social web of relationships.  Needs, which evoke the dependence of children in childhood, imply a web of social interdependence while wants can be ascribed to the individual, self-responsible social “atoms” of neoclassical theory.

Laissez-faire or neoliberal economics tends to emphasize that all of “demand” is individual wants or freely chosen selections from a variety of wishes, which an unregulated market is supposed to supply.  These economists make an exception for national defense and criminal law which they think of as vital social needs, especially in defense of property rights.  Meanwhile Keynesian and leftward economic commentators operate with a both a conception of optional wants and an implicit or explicit concept of individual human and social needs, which most often are being insufficiently served by the market for at least the more vulnerable parts of the population.  In left-of-center economics, there is the implication or statement of social responsibility for partially or completely fulfilling certain basic wants, i.e. needs.  By contrast, neo-liberal economists subscribe in theory to a doctrine of individual responsibility for one’s personal wishes.

An instance of this conflict between economists who conceive of individual needs being primary versus economists who believe that wants are primary is found in the recent conflict between “deficit hawks” and that group of economists that oppose them, mostly from left of center.   The more leftward group of economists and their supporters who oppose the efforts of deficit hawks seem to be operating with an implied socially-validated concept of needs, which their opponents in the US like to call, “entitlements”.  They believe that the moral imperative to care for the needy as well as provide some level of universal social benefits is threatened by the drive to cut deficits at all costs.  For example, James Galbraith has recently stated that the fulfillment of human needs as the ultimate purpose for economics and government fiscal policy in both the US and in Europe.  Other opponents of deficit hawkery might disown the idea that they are operating with a concept of human needs, perhaps to continue to be included in a mainstream economic discourse that is inimical to the idea of needs. In fact, most opponents of immediate action to cut deficits are operating with a political-economic hypothesis that the primary reason that deficit hawks have started their assault on deficits is to undermine government support for needs.  In fact, some deficit hawks have shown inconsistent support for the idea of cutting deficits (by insisting on maintaining tax cuts), apparently tipping their hand that cutting social services is the prime objective of their campaign.

By contrast, deficit hawks suggest that a show of responsibility for one’s wants is required to reassure bond markets or other lenders to the US government by either denying those wants, or it seems, less frequently, raising taxes to pay for the fulfillment of those wants.  Their idea is that the need/want for social services needs to yield (soon) to some form of scarcity, be that a scarcity of tax revenues or a scarcity of the ability of government to run budget deficits.  The troubling aspect of this insistence on an apparent universal rule of individual responsibility and management of scarce resources is that, as mentioned above, the vulnerable are those who are supposed to yield to the principle of scarce resources, while the wealthy (and most of the deficit hawks are personally wealthy) will seemingly keep both their personal wealth (via continued low tax rates) plus the public services that they value and use, including a government that will bailout the well-connected and powerful.

Demand, Sustainability and Growth

Another area of challenge for understanding the current economy as well as some future economy is how such an economy would deal with a net zero material growth state, an economic steady-state.  Most rational observers of the growth of humanity both in terms of number but also in terms of consumption put some hard limit on the size of the human footprint on the world.  Those who assume our continuing propensity to grow exponentially as an immutable fact sometimes turn to idea of the colonizing of other worlds as a means to continue humanity’s current rate of growth and consumption, though how this would happen in physical and biological terms currently resides almost entirely in the realm of science fiction.

Moving simply by successive approximation to a no-growth state from where we now stand however is also unworkable.  The set of tools upon which our current economy would be unsustainable under any conditions because of their dependence on the irreversible conversion of depleting fossil fuels into their constituents some of which additionally undermine the sustainability of the biosphere.  Thus certainly in the next several decades there will and should be robust economic growth in the sector of developing sustainable alternatives in the area of energy as well as industrial production.  Further along in this process, facing the hard choices associated with achieving a steady state economy would seem to be inevitable.

Demand, our wants and needs, is one of the key drivers of our economic system.  If our wants and needs, are, as some claim or imply, rigid and hard-wired in their objectives and intensity, we will be unable to move to a society where most economic activity is focused on either maintenance of material well-being or the development of cultural and non-material products and goals.  If our wants and needs are responsive to (elastic) the encroaching externalities of our ways of consumption and production, then it should be possible for human beings to evolve towards the next stage of our species’ “wild ride” on this planet.  A comparative anthropological perspective indicates that an economy that grows meteorically and then plunges is not necessarily part of our genetic code.  A meta-economic perspective will enable the relevant portions of philosophy, comparative economics and economic anthropology to at least inform such Big Picture theorizing about “what’s next” for humanity.

Needed: A Multi-disciplinary View of “Demand”

I hope the foregoing has suggested to readers that a view of demand as simply a quantitative record of past expenditures and investments or a projection of those numbers into the future compresses what is a more complex and dynamic reality.  I am proposing that a meta-economic framework can bring to bear insights from biology, biophysics, psychology, and philosophy to capture some of the causal factors that drive purchasing and investment behavior in both the private and public sectors.  Additionally such a framework can help explain or at least clarify the existing divides in economic theory and popular economic debates.

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About Michael Hoexter
I'm a clean energy marketing and policy strategist and consultant based in the San Francisco Bay Area.

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