M. Northrup Buechner

A series of essays based on Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

In Parts II through IV of this series, I have argued that, as interpreted in modern economics, the Law of Supply and Demand is largely untrue. There are many important exceptions to the idea that the quantity demanded always equals the quantity supplied at the market price (Part II), and it is not true that changes in price are caused by changes in demand and supply, i.e., increases in demand and decreases in supply raise price while decreases in demand and increases in supply reduce price (Parts III and IV).

Modern economists will object that my analysis ignores that the law of supply and demand is a law of markets. It depends on large numbers of buyers on the demand side and large numbers of sellers on the supply side. Prices in the context in which the law of supply and demand applies are not set by individual businessmen. With millions of people bidding prices they want to pay and more millions asking prices they want to receive, the price settles where the quantity demanded equals the quantity supplied. The individual businessman and his customers have no influence on the price. Their individual goals and values are nullified by the impersonal forces of the market. The prices they receive and pay are given to them by the forces of supply and demand. They must adjust to those prices; they cannot set or change them.

Likewise, an increase in demand that takes the form of an increase in the quantity demanded by millions of buyers will raise the price, not increase output; and a decrease in demand embodied in a decrease in the quantity demanded by millions of customers will lower the price, not reduce output. The same argument applies to increases in supply and decreases in supply that reflect change in the output of millions of producers.

There are many things one could say about this argument. An explanation of why anyone would believe it would be illuminating. But that would take us too deeply into the details of modern economic thought (see Appendix A of Objective Economics). Suffice to say that the entire construct presented above is a fantasy that corresponds to nothing in reality. Note the evasion contained in the phrase “the price settles” in the fourth sentence of the second paragraph. “Settles” implies a change from one price to another. Who makes that change? Who settles the price? If the answer is “no one,” how does it happen? In fact, there is no answer to these questions, because there are no prices in reality that originate in this way. Every price is set by someone. If we hold on to that simple idea, we will avoid many dead ends and pitfalls.

Next time I will show how the law of supply and demand can be reformulated so that it is valid across the economy.