Our economic system is an interacting community of physical systems and belief systems. Suppliers’ make decision which determine how much food, homes or cars will be produced (supply) and then sold at specific prices and customers’ make decisions which determine when, where and how much of each thing are purchased (demand). In both cases they decide based upon what they believe and feel; not by objective reality.
Beliefs are organized and maintained as parts of systems; they are not held in isolation. Examples of belief systems are economics, science, engineering, religion, culture, languages, skills, memories and myths. Belief systems reside in brains (primarily) as highly crude and massively redundant patterns of physical synapses but are manipulated as interactive networks of symbols.
Physical systems are subject to the laws of physics and thermodynamics. Belief systems are not; symbolic interactions in our brains may or may not correspond to external realities or to any natural laws, and at best are based on imperfectly remembered combinations of authority and past evidence and therefore may be entirely divorced from what “is” or at best represent an approximation of a reality that existed in the recent or distant past.
One of the defects of classic economic theory —which is itself a belief system— is that it explains economics as though belief systems don’t exist. In the real world, all our individual actions including buy/sell/trade or hang-on-to economic decisions are made on the basis of what we rationally believe as modified by non-rational aspects of beliefs such as fear, confidence, and greed. Classic economic theory is an example of what Albert Einstein meant when he said “Make everything as simple as possible, but not simpler.”
The “Law of Supply and Demand” demonstrates my point. It states that the price of something moves up or down in a stochastic dance towards an equilibrium price at which supply and demand are roughly in balance. This law appeals to common sense, and at first it looks like the economic equivalent of the physical equilibrium between, voltage (E), current(I) and resistance (R) expressed in the electrical equation E= IR, or between pressure (P), volume (V) and temperature (T) in the thermodynamic equation PV=kT (where k is a constant, a fudge factor that makes things work out). However these and other formulas of science and engineering are valid because all the variables interact directly.
But no such formula has ever been developed for the Law of Supply and Demand because there are no direct connections between Supply, Price and Demand; they are decoupled from one another by beliefs. Sellers set Prices for their goods based on what they believe Demand will be, buyers decide whether to buy or not based on their emotions, on what they believe about supply, what they believe about what they’re getting in addition to the goods —such as service, status, or convenience— and what they believe about their competitive alternatives; including waiting or preserving their credit. Beliefs and emotions of buyers and sellers are primarily based on authority and past evidence; so that a rational Supply, Demand, Price relationship can be grossly out of whack indefinitely, in any direction.
In real life, economies of the industrial revolution are based on chronic surpluses; growth always requires an available surplus of energy, raw materials and credit. Sellers start with a product surplus (including finished goods, work in process and raw materials) created in anticipation of a believed in future demand. Sellers are at risk— buyers are not— particularly if their products are perishable. So they advertize and develop selling approaches that manipulate the beliefs of prospects— beliefs about supply, price, and other benefits attached to the purchase price—that encourage them to buy.
Chronic surpluses have also created one of our dearest marketing myths: The customer is always right! I’ve always believed that this myth was nonsense— because a relationship in which one party is always right is unhealthy to both parties and ultimately sustainable only by force (the only naturally sustainable relationship is between consenting adults). However, I didn’t realize where this myth came from until October 1989 when I taught a course on Project Management in Shanghai to a group of business and government people. (This was only a few months after Tiananmen Square, and a comparable less publicized disturbance in the People’s Park in Shanghai.)
One of my students was in charge of several major department stores in Shanghai. She invited my wife and me to visit one of her stores; what we found was a crowded store with everything out of reach and with people scrambling to make purchases from far too few and far too surly sales clerks. When we left the store she asked me what I thought might improve things. Of course, being the expert from out of town, I immediately said that in our country there would be more sales people and they would have been trained to treat customers with more respect. I said that some of the most important people in US organizations were in sales. She smiled and gently replied that “in China the most important people in our organizations are buyers.” She continued “We have chronic shortages and a buyer who can secure a supply of what we need is extremely valuable. We can sell anything we can make, and if it’s so bad we can’t sell it to Chinese, we can always sell it to the Russians!”
