More on the Supply and Demand Curve
Paul D. Fernhout
http://en.wikipedia.org/wiki/Supply_and_demand
I had previously written:
"""
By the way, on limited demand, the classical theoretical Demand Curve here
should touch the X axis to the right side rather than parallel it, because
psychologically healthy humans have a limited demand for material things
(even if that demand may be higher than what we have now globally):
http://en.wikipedia.org/wiki/Demand_curve
That curve touching the X axis (meaning a fixed maximum quantity and a zero
price for additional units) would produce the divide by zero error in
macroeconomics. :-)
Which spreads, since as the article says: "The demand curve for all
consumers together follows from the demand curve of every individual
consumer: the individual demands at each price are added together."
Which leads to widespread joblessness in the face of better technology,
because there is no longer a way to create new jobs making things, whether
goods or services.
That is the "smoking gun" of the failure of classical economics an the
beginnings of a new theory of abundance. :-)
A basic income is one way to address this.
"""
I've been thinking more about this and some other things occur to me.
==== The Y Axis
The Supply and Demand graph should touch the Y Axis as well. That would be a
point where no one will purchase a product because it is too expensive or no
one has that much money who might otherwise want it.
That has a few implications too. That spot on the Y axis is where the human
races starves to death in a mechanized system (food is too expensive for
anyone left out of the system, even though machines could produce it
easily). That is the point of unrealized dreams -- stuff people might want
(like self-replicating space habitats) but which the people who want it
don't have enough money to pay for it. There might be some other
implications as well.
==== Houses of Buffet and Gates
As an example of limited demand, we can look at the houses of two of the
richest people in the world, Warren Buffet and Bill Gates.
First, Warren Buffet's house:
http://en.wikipedia.org/wiki/Warren_Buffett
"In 1957, Buffett had three partnerships operating the entire year. He
purchased a five-bedroom stucco house in Omaha, where he still lives, for
$31,500."
Now, that's probably a nice house, and well maintained, but it is not a
sprawling castle. is net worth of US$37 billion. He could afford a sprawling
castle, but he chooses not to. He has limited his demand.
According to that page, Warren Buffet pays himself a salary of US$100,000.
That is another way he is limiting his demand.
Now, Bill Gates is more extreme, but not that much more in some ways. From:
http://en.wikipedia.org/wiki/Bill_Gates
"The Gateses' home is an earth-sheltered house in the side of a hill
overlooking Lake Washington in Medina, Washington. According to King County
public records, as of 2006 the total assessed value of the property (land
and house) is $125 million, and the annual property tax is $991,000. His
66,000 sq. ft. estate has a 60-foot swimming pool with an underwater music
system, as well as a 2500 sq. ft. gym and a 1000 sq. ft. dining room."
The average home size for new construction in the USA is about 2300 square
feet.
"Behind the Ever-Expanding American Dream House"
http://www.npr.org/templates/story/story.php?storyId=5525283
So, Bill Gate's home is about thirty times the average new US home size. But
what does this prove? Bill Gate's net worth (after donations) is currently
about US$40 billion. But, from:
http://www.bargaineering.com/articles/average-net-worth-of-an-american-family.html
"Across all groups, the 2007 median net worth was $120,300 and the mean was
$556,300 (guys like Bill Gates and Warren Buffett really mess things up)."
So, even working from the average (which includes home equity), we can see
that Bill Gates has a net worth 80,000 times the average. But, his home is
only thirty times the average in size. So, even in this case, Bill Gates is
showing incredible restraint, as well as a recognition of the law of
diminishing returns -- a much bigger home is not likely to make him much
happier.
And, Bill Gates' job as CEO of a big company may require him to entertain,
so there are aspects of that house that are no doubt more like a hotel or
conference center or technology demonstrator than a home. That is not a
common need of most people to that degree.
So, between two of the richest guys in the world, we can see limited demand
in action. Sure, these guys may own other stuff (I don't know) like planes
or yachts or other homes, they might buy stuff for their kids, but I doubt
they buy for personal use anywhere near 100,000 times what the average
person in the USA consumes.
They do own companies, but essentially they chose to use that ownership more
for social control than for providing themselves with lots of stuff, given
how much stuff they could have if they sold their holdings. Essentially,
these two guys are living proof of limited demand for consumer goods in the
face of abundance (at least, for the moderately psychological healthy,
although even there, these two guys may not be the best examples, given they
are otherwise financially obese likely for some dysfunctional psychological
reason).
==== Free iPhones
Here is another way to look at this. Imagine the open manufacturing mailing
list pooled its money and decided to give free iPhones to whoever wanted
them in the world, :-) what would be the demand? We could hire someone like
Nobel Prize winner in Economics Paul Krugman to do the math. :-) Brilliant
guy that he is, he might suggest there would be three sets of demands for
such a good: primary, secondary, and tertiary (I'm making these terms up,
pretending to be him. :-).
Primary is the intended use, so as a personal communicator, there is not
that much more demand for iPhones in the globe than the human population, or
about seven billion people. Sure, some people would want spares, one for
home and office and car, and so on, but the demand there is limited by the
population times some small multiplier, so maybe a few tens of billions of
them. At $200 a piece in quantity, that's about US$6 trillion dollars or so
for 30 billion iPhones at about for or five per person. I'm sure we could
swing that if we tried on the OM list (like if open manufacturing got a few
of those banking bailouts from the USA. :-)
Secondary demand would be clever repositioning related to its unique
attributes. So, people might want free iPhones to build supercomputers, or
to build display walls, or to build into toys, or to take them apart to get
the electronic parts to use for other things, or people might want the
batteries to build into electric cars. So, the entire electronic industry
might reorganize itself around free iPhones. Everyone wants some
electronics, plus infrastructure needs some, so, let's say there might be a
demand for 1000 iPhones per person globally for parts, or about seven
trillion iPhones, or about $1400 trillion dollars worth of iPhones. We'd
have to call in some derivatives to swing that much cash, but maybe we
could? :-) Obviously, this is a dumb way to organize an electronic industry,
but that might be what happens if iPhones were the *only* free product in
the world.
Then there is tertiary demand, where the product is just used for its value
as mass. So, we might use iPhones instead of gravel in concrete (assuming
they were as good), or we might build houses out of iPhones, or we might
burn iPhones to produce power. Clearly, there might be a demand for
quadrillions of iPhones for this sort of use. So, maybe a million trillion
dollars worth of iPhones? That is probably well within our abilities on the
open manufacturing list, although it would take changes to banking computer
balances to magic up the money, the kind of thing the Federal reserve does
legally, and which it would have to do in extreme; naturally I'm not
advocating anyone do that illegal thing themselves, this is just a thought
experiment -- I'm sure magicking a million trillion US dollars would get
noticed, at the very least, whoever did it. :-) You can't even slip by a
measly fourteen trillion dollars these days:
"Miami man charged with trying to con federal government out of $14 trillion"
http://www.sun-sentinel.com/news/local/breakingnews/sfl-14-trillion-man-bn061509,0,3658684.story
Maybe soon those numbers will seem small though:
http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation
"Germany went through its worst inflation in 1923. In 1922, the highest
denomination was 50,000 Mark. By 1923, the highest denomination was
100,000,000,000,000 Mark. In December 1923 the exchange rate was
4,200,000,000,000 Marks to 1 US dollar. In 1923, the rate of inflation hit
3.25 × 106 percent per month (prices double every two days). Beginning on
November 20, 1923, 1,000,000,000,000 old Marks were exchanged for 1
Rentenmark so that 4.2 Rentenmarks were worth 1 US dollar, exactly the same
rate the Mark had in 1914."
But here is the key point -- even in the worst tertiary case in our
hypothetical open manufacturing project to give out free iPhones to anyone
for any reason, demand would end. We'd all build Bill Gates' size homes out
of iPhones, or Warren Buffet smaller houses out of iPhones -- and then we'd
stop. We'd crush iPhones to repair the roads connecting our houses, and
then, roads built or repaired, we'd stop. Granted, if we burned iPhones to
get power, maybe that would continue at some level, but it would not be an
infinite level, it would be some fixed annual level related to seven billion
people living in Bill Gates' size homes. It would be *limited* demand, even
if it was *large* demand.
And, once all that pent up demand for free iPhones was met, what would be
the value of the next iPhone out of an open manufacturing 3D printer?
*Zero*. The next iPhone would be worthless because people would not want it,
just like when people in the wild have so many blueberry bushed blooming all
at once they can't pick and eat all the berries. The extra stuff falls to
the ground and rots, as would any extra iPhones at that point, even if our
economy was built around them. More iPhones would be about as valuable as
more seawater at the seashore.
So, that Supply and Demand curve is wrong. At some point, the value of more
products is zero in an economy of mentally healthy somewhat rational
economic actors -- even in absurd situations like grinding up free iPhones
to pave roads.
==== Time cost of handling "free" goods
Here is another way to look at that issue of limited demand. Every consumer
product has a handling cost in terms of free time that could otherwise be
spent with friends and family and nature and other activities. Every iPhone
we buy requires opening the box, reading the manual, charging it, finding a
place to put it, worrying about it getting damaged, cleaning it, and
eventually disposing of it somehow. Everything we own, also owns us. Now,
that cost is not very noticeable when you pay a lot for a product. When you
pay US$6000 for a computer, an hour to unpack it, or a corner of your desk
to place it on, or a final trip to the recycling center to get rid of it,
all those activities don't seem like much of a cost. But, when a computer
only costs $100, then you start thinking, how much is my time worth to me?
And it gets to the point that even if the computer was free, and as good as
the one you paid $6000 for many years ago, it just isn't worth your time to
get it, even if a store is giving you one for free. I pass up "free"
computers all the time at the local recycling center.
This is similar in some ways that the cost of operating system software at
$200 is nothing for a $6000 computer, but it is a ridiculously high cost to
add to $100 of computer hardware. At some point, the non-monetary costs
related to our time and environment (including pollution, but also just
space used) become the obvious dominant costs for handling "free" goods. The
true cost of anything is never the price tag, but the price tag plus our
time (as well as hidden costs related to the life cycle like disposal). So,
given every free good still costs us in time, even in a world of StarTrek
matter replicators, we would become choosy about what free goods we want.
The same is true on the internet -- there are billions of free web pages and
emails like this one out there, and yet each one takes time to read, so we
become choosy how much we let into our lives.
So, even in a world of an enormous amount of free web pages and other free
goods and free services, demand for them is limited by the human capacity to
consume them. Demand is even limited by the human capacity to even *waste*
them, like in the example above using iPhones for things like road
construction materials.
=== Implications
Anyway, I hope I have made the case that demand is limited. It's true,
people will invent new products, but it is also true that the best things in
life are already cheap or free, and more products distract from enjoying
those (not to mention that new products almost always replace old ones --
the truly new product category is very rare).
And if demand is limited, then if we can produce more and more products with
less and less people using automation and better design and better
processes, the number of people who need to work in a conventional economy
is limited and falling. (There can always be an enormous need for
human-to-human interaction, but most of that has always been outside the
conventional economy, and rationing human-to-human contact has never been
the main point of mainstream economics, and even it it became so, we would
then see human-like robots providing those services to most people.)
Thus, as technology improves, there will be less jobs making goods and
providing services. Thus, we will see the world of Marshall Brain's
Terrafoam (from "Manna") unless we transform our economy.
Mainstream economics denies this; again from 1964:
http://www.educationanddemocracy.org/FSCfiles/C_CC2a_TripleRevolution.htm
"As machines take over production from men, they absorb an increasing
proportion of resources while the men who are displaced become dependent on
minimal and unrelated government measures—unemployment insurance, social
security, welfare payments. These measures are less and less able to
disguise a historic paradox: That a substantial proportion of the population
is subsisting on minimal incomes, often below the poverty line, at a time
when sufficient productive potential is available to supply the needs of
everyone in the U.S. The existence of this paradox is denied or ignored by
conventional economic analysis."
So, this note is to show exactly where, at its most basic, mainstream
economics goes wrong in the first day of classes, or on the first page of
every textbook. And by basic formal logic, once you've made a serious bad
assumption, everything else that rests on it is suspect.
Or, as is said here:
"Confessions of a Recovering Economist*"
http://www.paecon.net/PAEReview/issue21/Stanford21.htm
"A recovering economist can confess - even in public - that they might have
something to learn from other disciplines. Turn to your friends, those who
haven't been hypnotized by supply and demand graphs, for help in
understanding the world and how it works."
Still, the Roman Catholic church burned people at the stake for not
believing in the church's dogma, and functioning in a Roman Catholic country
would be hard if you did not talk the talk (whatever you believed in
private). (That was true for other religions, too, of course, Catholics have
no monopoly on intolerance.) So, the fact that mainstream economic ideology
is based on half-truths like the classical Supply and Demand Curve does not
mean that the religion of economics has any less hold on our lives and our
behaviors. If everyone believes in the Supply and Demand curve, and acts
like it was true, and fights or disgraces or makes jobless anyone who says
it is not true, then, for all intensive purposes, that curve of scarcity is
"true" (or, true enough). Mainstream economic ideology thus creates the
scarcities it bemoans, through artificial means, by using the post-scarcity
informational technologies of printing, bureaucracy, lecturing, schooling,
mass-media, electronic Kanban-like fiat-dollar tokens, charitable and
government dollars subsidizing economics professorships, and so on, to
reinforce the ideology of scarcity and competition. The religion of
economics gets us to virtually hang up a portrait of the Supply and Demand
curve in all our sacred institutions like Congress or Universities or the
White House, as a continual reminder of that ideology. But, as I have shown,
ultimately that curve is a half-truth built on flawed assumptions about
human nature and technology.
The Protestant Reformation took centuries:
http://en.wikipedia.org/wiki/Protestant_Reformation
and it is questionable if it really made things any better, :-) so who knows
where we will end up from here or how long exactly it will take? Still, I
feel within twenty years or so, with 3D printing, we will see a huge mind
shift on this topic. But it may be hard in the interim.
By the way, Catholics on abundance since the 1950s:
http://www.michaeljournal.org/
"Welcome to the new on-line version of the “Michael” Journal, which exists
since 1953 in its printed version, to promote Catholic principles and the
Social Credit monetary reform, conceived by the Scottish engineer Clifford
Hugh Douglas. You will find in the following links a mine of information on
all that is related to this journal: ..."
And also from there:
http://www.michaeljournal.org/obama.htm
"Barack Obama is a man of consummate skill and incisive intelligence. (His
name "Barack," in Arabic and Swahili, means "blessed.") He can become a
great President, or he can become a toady for the corporate powers that have
brought both parties to their knees. Will Obama be the servant of Wall
Street or Main Street, the servant of the bankers or of ordinary people?
Obama has much to offer. But he needs prayer... for when one considers who
advises and surrounds him, it would take a real miracle for him to buck the
system and stand for the ordinary people. ... We know who are the greedy and
irresponsible people: the international bankers. The dogma that states that
only the debt-money borrowed at interest from private bankers is good, and
not the money issued interest-free by society, is a worn out dogma that
should no longer be in use. The production capacity of the nation has not
diminished, it is only the artificial money system that is defective and
needs to be corrected. Our nation will be really rich if every citizen can
benefit from the fruits of progress and natural resources, through a
dividend (since we are all shareholders in the resources and inventions of
our nation)."
(Personally I feel it unfair to blame the "bankers" -- that is like blaming
the Cardinals and the Pope for the Inquisition. It was a whole big social
network and ideology thing full of complex feed-back loops, same as our
belief in the mainstream Supply and Demand curve.)
We can all grow and change in different ways, like Catholics going back to
deeper roots of abundance, and maybe someday economists and the rest of us
too. :-)
--Paul Fernhout
http://www.pdfernhout.net/
Paul D. Fernhout
> Some more commends on the curve pictured here:
> http://en.wikipedia.org/wiki/Supply_and_demand
I posted some more on this to the P2P Research list, included below:
Michel Bauwens cites Andy Robinson as saying:
>> I think on close examination the capitalist/libertarian types don't
>> actually expect capitalism to realise "abundance" as such, since they assume
>> insatiability of desires and constant emergence of new marginal utilities
>> generating preferences, which ensure that scarcity is part of the "human
>> condition".
I posted the below to the Open Manufacturing list, but I am forwarding it to
the P2P research list with some prefacing notes because I feel this analysis
gets at the core of the difference in sentiment from classical capitalism
and peer production (as well as issues related to a gift economy and a basic
income). Essentially, I am trying to show that a specific key assumption of
macroeconomics (infinite demand for consumer goods and services) is flawed,
and to consider the consequences of assuming limited demand.
Classical macroeconomics assumes demand for consumer goods and services is
unlimited (infinite), and so it makes sense to automate the production of
these goods in centralized factories to the point where they are produced as
cheaply as possible (or to redesign them to that end), even if the
consequence is unemployment from automation and centralization and redesign,
since (the theory goes) the unemployed will be able get jobs in other
centralized factories producing other consumer goods and services to meet
the assumed never ending infinite demand for more stuff and services.
Essentially, infinite demand means infinite jobs. Also, based on the
thinking that flows from this assumption, there is no need for a basic
income, because there will always be good jobs producing goods and services,
even if there may be some temporary discomfort while the unemployed search
or new jobs in new industries making new goods and services (thus, maybe a
little need for temporary unemployment insurance). The Supply and Demand
Curve, at the core of such classical economic thinking, reflects this
assumption of infinite demand by the asymptotic tail going to the left
approaching but never touching the X-axis. The theory goes that each
commodity is like this, and when you add up all these microeconomic curves
for an infinite demand by people for each product if it was only cheap
enough, you get a macroeconomic curve for our society that is the same shape
reflecting an infinite demand for all products. It is easy to see limited
demand for any specific good on a microeconomic level (my free iPhone
example below, showing eventual market saturation), but the macroeconomic
implications are easily handwaved away for any specific produce, even as the
big curve depends on adding up the little curves -- essentially, there is
some slight of hand here by mainstream economists, where the sum of
macroeconomic demand is somehow greater than the microeconomic parts. :-)
However, if you instead assume limited demand (or, at least, demand growing
more slowly than productivity, which has essentially the same effects) for
all products added over all of an emotionally healthy society, where that
tail of the curve on the Supply and Demand graph touches the X-axis at some
point of material saturation (or service saturation) the macroeconomic
implications are very different from classical economics. If that was true,
that the curve touches the X-axis, then there would *not* be an infinite
demand for goods and services, and so there would not be an infinite number
of jobs as productivity increases so less people can produce more goods. So,
rising productivity (given a stable population) would mean rising
unemployment, either directly by layoffs or indirectly by "jobless
recoveries" as we have already experienced in the USA. There would be no
classical way for these unemployed people to get jobs, because there would
be no demand for more goods and services beyond what were already being
produced by other people augmented by machinery. And, with exponentially
increasing technological capacity, including the development of ever more
human-like robots, this jobs situation will only get worse from here on, as
Marshall Brain talks about in "Robotic Nation" and "Manna".
There are at least four possible interpretations of the implications of
limited demand (beyond mass unemployment). These interpretations, or paths
of future development for our global society, are not necessarily mutually
exclusive, although our society may tend more towards one depending on
social movements.
A first interpretation is that there should then be a basic income, so
everyone can have access to this productivity of goods and services by the
few with jobs in a society. This is point made in the Triple Revolution
memorandum in 1964, as well as Marshall Brain's Manna. For decades, there
have been social movements towards this end; related laws were passed by the
US House of Representatives (but no the Senate) during the Nixon
administration, and there are several other historic and ongoing examples of
this (like Canada, the Netherlands, Brazil, Namibia, and South Africa).
A second interpretation is that, at some point, the few can produce so much
for the many, that it is easy to find a few who will produce just because
they enjoy producing or do it because they want the results themselves, and
thus we can have a gift economy. Debian GNU/Linux is a good example here,
with a few hundred core maintainers providing free software used by a few
hundred million people every day (including through Google searches). This
is an example of a million-fold increase in value, with a few people mainly
producing software for themselves but making possible a vast digital
abundance of free and open source software and content due to extremely
cheap (essentially free) duplication costs. We are just starting to see the
beginnings of that in the physical world too, like with RepRap, CupCake CNC,
Fab@Home, and other 3D printers under free licenses. This is a digital side
of peer production.
The third interpretation is that at some point of productivity (probably
already reached with CNC machines, 3D printers, agricultural crop diversity,
permaculture, and the internet), it makes more sense to focus on the
enjoyability of the work as play (Bob Black's point in "The Abolition of
Work") as well as to emphasize the social nature of the work, even if
productivity is not maximized (thus, leading to a reorganization of social
relationships towards some joyful goal). E.F. Schumacher talks about this in
"Buddhist Economics". An example is various sorts of physical peer
production done for a medium of exchange or barter, so, a local bicycle
repair shop participating in a local currency system is an example of that,
as would be all the other local community businesses also participating in
this local economy. This physical side of peer production has different
rules than the digital side because of high duplication and materials costs,
but the digital and physical versions might converge as 3D printing and
other types of digital fabrication spread, and as cradle-to-cradle design
makes local recycling and resource extraction and more feasible in an
environmentally responsible way.
The fourth interpretation is pathological IMHO. There are several related
aspects to it, which essentially define our dominant culture today both in
the USA and many other places. It is the thinking that demand needs to be
stimulated by ever more advertising to get people to buy goods and services
they don't really need and which don't really make them more happy. It is
the thinking that production needs to be sabotaged by destroying equipment
(by intelligence operatives or even unions) or that peer production needs to
be slowed by suppressing ideologies of sharing and abundance (like shutting
down the old Napster). It is the ideology of making production harder by
extending copyrights and expanding patents in scope. It is the thinking
behind creating day prisons to keep young people from producing things as
well as dumbing them down to the point where they can only be mindless
consumers, compliant but unproductive and uncreative workers, and where they
will be obedient soldiers destroying abundance of lives and infrastructure
when ordered. It is the thinking that creates a university PhD system
putting out "Disciplined Minds" who can't examine these questions for
ideological reasons or because they have not been assigned to do that. It is
also to plan for the excess goods to be removed through war preparation
(stockpiling arms) and eventually war making (using arms to destroy
abundance). In this fourth state of mind, a global nuclear war to wipe the
Earth clean of messy abundance would be a very good thing, because the
capitalism could start over again with scarcity, thus preserving the
ideological underpinnings of our capitalist (and imperialist) society by
avoiding the part of the Supply and Demand curve that is drawn in error.
(James P. Hogan's novel "Voyage From Yesteryear" has a character think that
for a moment.)
So, abundance threatens this fourth world view, but it is this fourth world
view that is dominant in many parts of our society, and may well have been
time and time again in the past (see Daniel Quinn's writings). And, the
irony is, the people who most support this world view to date have had the
most access to post-scarcity technologies to spread, enforce, and realize
this world view -- so they wield post-scarcity technologies like biotech,
nuclear tech, computers, robots, nanotech, bureaucracy, the internet, the
printing press, and many other things to suppress a post-scarcity society,
by using post-scarcity technology to create and maintain artificial
scarcities. The use of guns, germs, an steel to destroy most of the
abundance based societies of the Americas in the second half of the second
millennium (1500 to 2000) were an example of this. Einstein saw part of the
problem when he said: "The release of atom power has changed everything
except our way of thinking...the solution to this problem lies in the heart
of mankind. If only I had known, I should have become a watchmaker." But he
missed that even mainstream watchmaking fits into this problem, both in how
it is done in centralized factories now and in the nature of portable
timepieces in relation to social control (see Philip Zimbardo's recent work
on "The Time Paradox"). :-( But, Einstein got the big picture part about the
change of heart right. :-)
So, "limited demand" is the theoretical underpinnings of what makes each of
these first three possibilities a path that *should* to be pursued as
mainstream economics generates "divide by zero" errors from limited demand;
otherwise, some people will be tempted to continue along the fourth path
that results from scarcity fears from trying to make a system work that is
built around a flawed assumption, which probably leads eventually to
somewhere most of us don't want to go (global war to destroy abundance, to
make the facts fit the theory).
Still, as I said at the start, all four paths are not necessarily mutually
exclusive, and our society is currently pursuing all four of them at once in
different ways. What we can at best hope to do is shift the emphasis away
from the fourth path (post-scarcity technology used to create artificial
scarcity) and towards the first three (a basic income, a gift economy,
and/or peer production -- all using post-scarcity technology to create
abundance).
(Michel, you can feel free to use any of this in the p2p blog if you think
it of value. An artist putting two curves side by side, classical asymptotic
and abundance one with a curve going from Y Axis to X axis and touching
each, would add a lot to this presentation. :-)]
--Paul Fernhout
http://www.pdfernhout.net/
Forwarded note below:
"More on the Supply and Demand Curve"
http://groups.google.com/group/openmanufacturing/msg/b69f072328468352