Topsy-Turvy: Turning that Well-Worn Graph on its Head

Here is one for the theorists amongst you - a longer and deliciously academic paper available on request. But for now just enjoy the sense of complete upset that could be caused to a neoclassical economist by the thought that, not only is there supply and demand model (see the figure) ridiculously simplistic, but both lines might actually be oriented in the opposite direction from those conventionally illustrated.



Such is the hypothesis of the German-New Zealand economist Stefan Arne Kesting, who argues that, not only might the directions of the two curves be reversed, but it might actually be possible to posit that an equilibrium is reached.

Conventionally (see the diagram) the supply curve is illustrated as upward sloping, since as the price of a good increases the producer is willing to supply more. However, Kesting points out that, 'Based on arguments of economies of scale and increasing returns by Alfred Marshall. . . marginal and average costs of production and prices are shown to decrease in some instances when output is extended.' This might suggest a supply curve that slopes downwards for a certain range of prices.

In the case of the demand curve, Kesting argues that Veblen's ideas about conspicuous consumption might cause this to be upward sloping. The conventionally downward sloping curve is based on the assumption that as goods increase in price people buy less of them. But if those goods are status goods, the higher price might increase demand (superior branded clothes might be an example).

Kesting argues that the two curves might again meet at an equilibrium point, although each is the mirror image of that suggested by orthodox economic theory.

The easy way in which the most basic apparently scientific formulation of neoclassical economy theory can be turned on its head in this way indicates clearly the vulnerability of the whole house of cards by which our complex global economy is justified. Tweet

Green Economics: Expanding the Circle of Influence

The glib phrase ‘economics for people and planet’ is one that green economists frequently use to describe how what they propose for the world’s economy is different. It is really shorthand for expressing a need to move beyond the narrow view of the economy as it is currently organised. So many perspectives are never considered by a system of economics that privileges white, wealthy, western men (see the extraordinary picture of the Bretton Woods conference). The way the global economy is organised can be seen as an extension of a colonial system whereby the resources and people of most of the planet are harnessed to improve the living standards of the minority of people who live in the privileged West. On the one hand, the rights of people living in the global South to an equal share in the planet’s resources should be respected. On the other, their approach to economics, especially that of indigenous societies which have managed to survive within their environments for thousands of years, has much to recommend it and much we may learn from. While we do not glorify low living standards we do see the value in learning from the South.

Even within western societies there are gross inequalities between people. The system of patriarchy has ensured that the majority of resources are controlled by men. Most of the world’s poor are women. The male dominance of the economy has resulted in a situation where women form 70 per cent of the world’s poor and own only 1% of the world’s assets (Amnesty International). According to UNFPA (2005), on a global basis women earn only 50% of what mean earn. And in spite of equal pay legislation in the UK and US the pay gap between the genders persists. Green economics also extends the circle of concern beyond our single species to consider the whole system of planet earth with all its complex ecology and its diverse species. As an illustration of the narrowness of the current approach to policy-making we can use the thought experiment of the Parliament of All Beings (see earlier post).

Policy-makers are happy to use the word ‘exploit’ when talking about resources such as oil or minerals. Yet for green economists exploitation of the planet’s resources is as unacceptable as exploitation of the people who live on the planet. The failure to respect the planet has led to problems as diverse as climate change and desertification. In order to address these problems green economists suggest that we need a completely different attitude towards meeting our needs that involves respecting ecology and living in balance with the planet.

Another short phrase that encapsulates something important about green economics is ‘beyond supply and demand to meeting people’s needs’. This contains an explicit criticism of the discipline of economics with its obsession with graphs and mathematics and its inability to look out of the window and see what is really happening in the world. Green economics begins with people and their concerns rather than with theories or mathematical constructions of reality. Conventional economics will provide a graph with two straight lines representing ‘supply’ and ‘demand’ and then apply this to the complex relationships which are entailed by the production and exchange of goods. Green economics calls for a richer and deeper understanding of people, their relationships, and how they behave and are motivated. The ‘needs’ we are concerned about are not merely physical needs but also psychological and spiritual needs.

The word ‘holism’ sums up the way in which we have to learn to see the big picture when making economic decisions. The absence of holistic thinking is clear in modern policy-making, where crime is punished by incarceration without attempting to understand how an economic system which dangles tempting baubles in front of those who cannot afford them and deprives them of the means of meeting their deeper needs is simply generating this crime. A similar comment can be made in the case of health, where pollution creates ill health which is then cured by producing pharmaceuticals the production of which simply generates more pollution. From a green perspective we need to see the whole picture before we can solve any of these problems.

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