The Morality of Supply and Demand

Abstract

Supply and demand curves do not often inspire consideration of morality.  Economics includes obtuse theorems and calculations, which makes it easy for the deeper meaning of its concepts to escape attention.  But certain economic principles are so fundamental to the human condition that they permeate our social interaction and organization.  Of necessity, these economic principles intersect with basic moral principles.  It is impossible to fully understand economics or morality without grasping this relationship.

Preamble

The following are fundamental aspects of the human condition that cause economic and moral principles to intersect:

1. We have desires that are practically unlimited.  Everyone prefers better rather than worse.  This means that we yearn for more than we currently possess, that we dream of adventures beyond our current circumstances, that we aspire to accomplishments beyond our current resumes, that we ache for more comfort and protection than our current security blankets, or that we compare ourselves to others who currently have more of these things.   We may reprimand ourselves and describe these desires as somehow spiritually debasing, but the desire for better rather than worse is universal for all cultures, for all races, and for all eras.
2. We have finite resources available to us.  There are only so many natural resources accessible on the planet.  There are only so many waking hours in a day and only so many days in a lifetime available for productive activity or recreation.   There is only so much energy that can be reasonably tapped.  There are limits to our current technology.  There are laws of nature that constrain our possible actions.  All of these constraints are real, and they must be dealt with, because there is no magical wizard or paternalistic deity to negate them.
3. The conflict between unlimited desires and finite resources must somehow be resolved.  There are billions of sovereign individuals competing for finite resources in a confined space called Earth.  There will necessarily be disagreements when billions of people must divvy up resources.  It is clear that some method must exist for allocating such scarce resources to fulfill everyone’s desires in an organized, peaceful manner.  Which method humanity chooses is a crucial moral test.

There are two basic philosophies for allocating scarce resources on a broad scale.   These are:

1. Free Markets.    This system empowers free people to make individual choices in various markets that allocate labor, capital, and products based on freely floating prices determined by these individual decisions.   Such a system includes a minimal set of rules generally based on a constitution supported by laws that defend and protect individual rights and property.   Economic power is exercised by free people trading with each other to optimize value, as determined by each trader.  The beneficiaries of economic transactions are the individuals who create wealth through effort, efficiency, and investment.
2. Government Coercion.    This includes any economic system that empowers government to allocate labor, capital, and products based on objectives established by government and imposed by implied or actual force on individual citizens.  Examples of economies based on government coercion include socialism, communism, and fascism.  Such societies generally feature laws that protect the prerogatives of the state or the ruling elites and limit the freedom of individual citizens.  Economic power is exercised by agents of the state determining resource allocation by means of taxation policies, wealth redistribution, regulations, and ownership or control of the means of production.  Priorities are determined by agents of the state.  The beneficiaries of economic transactions are agents of the state first, and then citizens of that state according to prioritization schemes chosen by the agents of the state.  Wealth is viewed as something to be divided up, rather than created.

There are many academic resources that address the comparative merits of these two different philosophies.  Most of these writings compare them on the basis of economic efficiency and effectiveness.  While these are important considerations, they pale in comparison to the more basic consideration of morality.  This exposition will focus on the moral implications of free markets versus government coercion, in the context of allocating scarce resources.

We will begin with an examination of the basic free market model.  This model includes a set of data representing demand (points on a curve that reflect individual customer intentions) and a set of data representing supply (points on a curve that reflect individual supplier intentions), with an equilibrium point at the intersection that represents a resulting market price.

Although this model is disarmingly simple, its moral implications are profound.   But before we can begin discussing moral implications, we must first discuss the mechanics of the model, in order to understand how it operates.  Here are the basic mechanics:

1. Demand curve:
   1. This curve represents the quantities of a market good that consumers are willing and able to purchase at various prices.
   2. Generally, when price is high, consumers will buy less.  When price is low, consumers will buy more.  This is a powerful and accurate description of human behavior.
   3. The law of diminishing marginal utility prevents demand from becoming infinite, no matter how low the price goes.  No matter how cheap something is, consumers simply do not need outlandish quantities, because each incremental unit has slightly less marginal utility to each consumer.
2. Supply curve:
   1. This curve represents the quantities of a market good that suppliers are willing and able to bring to market at various prices.
   2. Generally, when price is high, suppliers will bring more to the market.  When price is low, suppliers will bring less.  This is a powerful and accurate description of human behavior.
   3. The law of diminishing marginal returns prevents supply from becoming infinite, no matter how high the price goes.  No matter how much someone may be willing to pay for something, it gets increasingly difficult to obtain incremental quantities, because easily available resources get consumed first.
3. Equilibrium:
   1. Equilibrium is the point where the supply curve and the demand curve intersect, meaning that this is where supplier intentions and customer intentions are the same.
   2. At this equilibrium point, the actual price and the actual level of consumption is determined by the market.  This is the point where hypothetical curves of price/quantity combinations become a single, real expression of price and consumption.

Markets exist for anything that can be traded.  Markets exist for goods, such as things you might buy in a store, where you trade money for these objects.  Markets exist for services, such as those offered by restaurants or barbers, where you trade money for these conveniences.  Markets exist for labor, where your time and energy is traded for wages.  Markets exist for capital, where your savings and investments are used by others in exchange for a return, such as dividends, profit, or interest.  Markets exist for intellectual property, such as writings, artistry, or performances that are traded by entertainers for money.   Markets exist for real property, which is traded or leased by owners for money.

These various markets are astonishingly efficient.  Consumers and suppliers, who “vote” with their dollars and their resources in these markets, create a staggering amount of information about intentions and relative values.  The “vote” by each participant influences the equilibrium point (the price) without any other organizing force in society.  The price becomes a feedback mechanism to all consumers and suppliers.  This continual flow of feedback guides enormously complex economic activity among billions of participants around the world.  Adam Smith described it as the “invisible hand” of the market.  The implication is that societies (collections of individual market participants) can peacefully make decisions about resource allocation without the “visible hand” of government coercion.

Efficiency is important, but it is a mistake to rely on it as the sole justification for free markets.  The arguments used for government controlled economies are never based on efficiency.  They are always based on morality, although they are fundamentally flawed, as will be discussed below.  But they are arguments nonetheless, and people are influenced by them.   Unfortunately, the defenders of free markets are often so absorbed in arguing the merits of market efficiency that they risk losing the debate to advocates of government coercion, simply because they are fighting the wrong battle.  They lose the moral argument because they fail to engage in the moral argument.  Defenders of free markets lose sight of the fact that things are not right or wrong because they are efficient or inefficient.  They are right or wrong because they pass or fail certain moral tests.  In order for defenders of free markets to stem the continual encroachment of government coercion, it is far more important to win the morality debate than to win the efficiency debate.

So what is the moral argument for free markets?  What does morality have to do with esoteric things like demand curves, supply curves, and equilibrium points?  Aren’t these just mathematical abstractions of amoral materialistic motives?

This exposition argues that the supply and demand model described earlier is inherently a profound moral proposition.  The supply and demand model is not just a mechanism for achieving market efficiency.  It is also the proper moral basis for deciding how individual human desires should be fulfilled in a world of scarcity.

The Morality of Supply and Demand

The free market model, as represented by the traditional supply and demand curves, is also a moral foundation for organizing economic activity between humans.  The following points illustrate this truth:

• Free markets are an expression of free will. Individuals participating in free markets have the liberty to make decisions regarding consumption and production.  This freedom eliminates coercion from these decisions.  Coercion is the opposite of morality, because morality is inherently an exercise of free will based on values.   In a free market, you can’t force others to buy your products, and others cannot force you to buy theirs.  Peaceful agreement that is satisfactory to both parties must be reached before a transaction can occur.   Government controlled economies use taxation policies, wealth redistribution, asset seizure, regulation, quotas, and various other methods to overrule decisions that would otherwise be made by individuals exercising free will.
• Free markets are an expression of economic democracy. As consumers and producers “vote” with their dollars in the market, decisions are made regarding prices and consumption levels.  These decisions do not require governments or armies to happen.  They are simply the result of all participants expressing their wishes and then living with the market-clearing results of those wishes.   In this manner, economic valuations are established by society without guns being fired or individual rights being suppressed.  Government controlled economies are an expression of totalitarianism, wherein certain bureaucrats determine prices and resource allocation irrespective of individual desires.  The thousands of votes that each individual makes in the marketplace each year are a form of democracy that is far more influential and useful than a single political vote cast once every four years.
• Free markets recognize the equality of all perspectives. All participants in a market have an equal opportunity to choose.  There is no centralized bureaucracy that has a “supreme opinion” about what is valuable for society to produce or to consume.  All participants provide input to the markets.  If you have an obscure desire that you wish to be fulfilled, the market will fulfill it, if there is a price that is agreeable to both you and a producer.   There is no absolute “right” or “wrong” of demand or supply, because it is not possible to objectively determine whether one person’s opinion of what should be produced or consumed is any better than another person’s.   To allow elitist individuals or groups of individuals to make production and consumption decisions on behalf of  everyone else is tantamount to relegating average citizens to the status of children without rights or personalities, or worse still, to relegate them to the status of slaves.  When societies impose production and consumption decisions by force, individual desires get disconnected from societal desires, immediately and inescapably.   This disconnect disables morality completely, because not only does society arbitrarily cease to respect the desires of individual citizens, it actually violates their right to life.  When the common good of society becomes superior to the good of its individual citizens, individual rights are inherently diminished.  There can be no moral justification for this.  The rights of one person, or of one group of people, are not inherently superior to that of another, even if a government decrees it to be so.
• Free markets are an effective tool for determining value. If  free markets are eliminated, then the only meaningful mechanism for determining “value” is also eliminated.  It is not possible to know what society collectively values without allowing freely established supply and demand curves to set prices.  The information contained in a price is a magnificent summation of society’s collective valuation, because prices are simply the result of producers and consumers expressing their wishes freely.  Such information is not achievable in a coercion-based economy in which individual desires are suppressed or ignored.  If a society doesn’t allow price to reflect the collective valuations of citizens, then any resulting economic decision must be flawed, in the sense that the decision ignores the “votes” of some individuals in favor of other individuals whose input (and therefore power) is considered superior.
• Free markets are a beautiful expression of cooperation. Trade is a fundamental human activity.  When a trade is freely executed, both parties are inherently better off than if they didn’t trade.  This is necessarily so, because no one will freely make themselves worse off.   With free trade, all participants in society can take advantage of everyone else’s skills and resources by offering their own skills and resources in exchange.  This specialization and optimized resource utilization is accomplished without force and with full cooperation between consenting participants.  On the other hand, economies managed by government coercion result in unwilling obedience rather than willing cooperation.
• Free markets are synonymous with individual rights protected by law. The framework of limited government and individual sovereignty is not possible without free markets.   If individuals are not free to make their own decisions about the sale of their labor, the purchase of goods and services, and the control and investment of their wealth and property, then their individual rights are not only unprotected, they are an illusion.  If a centralized bureaucracy has the power to determine how your labor will be used and compensated, the power to determine what you can buy at what price, and the power to set limits on your wealth and the disposition of your property, then you are nothing more than a powerless ward of the state.  In such a condition, you have no rights, and you are protected by no laws.
• Free markets create the most output with the least amount of resources. In essence, free markets are the best conservators of the world’s resources.  Each person is intrinsically motivated to optimize value and minimize waste by selecting the best among possible alternatives.  The gain or loss from each trade accrues to each trader, who thus have a visceral drive to choose the best value.  An economy based on government coercion, on the other hand, separates those absorbing the risks and costs of transactions from those benefiting from them.  Not only does this necessarily introduce inefficiency because there is no longer a visceral drive to make the right choice and optimize value, a layer of unproductive bureaucracy is added to each transaction.  Governments will always be more wasteful than free markets, because government controlled transactions are more costly, they’re driven more by politics than value, they’re guided more by dogma than real information, and they’re motivated more by enhancement of the state (an artificial entity) than enhancement of each citizen (real entities).  Free market economies will always husband resources more effectively than economies managed by government coercion.  What is owned privately will always be taken better care of than what is owned collectively.

At the scale of a society, morality is inextricably bound with free markets.  Societies that do not allow their citizens to freely execute their economic transactions can lay no claim to morality.  Who among us has the absolute authority and wisdom to determine how everyone else should allocate their time and resources?  For any individual, or any collection of individuals, to claim such authority is an abomination lacking any moral legitimacy.  It is tantamount to saying that the wishes of some people are superior to others, and that this superiority can be manifested using coercion.  There can be no greater immorality than such a claim.  Such claims are the source of slavery and concentration camps, of gulags and re-education programs, of omnipotent leaders and subservient proletarians.  Such claims ignore the most fundamental element of morality – you own yourself and the consequences of your efforts.  All social evil begins with someone claiming otherwise.

For any civilization that has progressed beyond simple tribalism, free markets are the perfect expression of morality in society.   Oscar Wilde once said that economists know the price of everything and the value of nothing.  This is perhaps worth a chuckle, but nothing more.   The truth is that free individuals know the value of everything, and they seek only the freedom to exchange value for value in the marketplace.  The aggregate valuation of free individuals in a marketplace determines prices, and prices determine the proper allocation of resources in society.  It is government, operating with blind force and unconstrained ambition, which knows the value of nothing other than its own bureaucratic interests.  Knowing the value of nothing, governments can only improperly allocate resources and sub-optimize societal satisfaction.  This is why free market economies are more efficient, and more moral, than coercive economies.

Dr. Maria Montessori observed, “The very foundation of social morality is bound up with money.  There is something grand to be grasped here, to realize that this is the most important fact in the organization of society and in social morality.”  Ayn Rand adds, “Money demands that you sell, not your weakness to men’s stupidity, but your talent to their reason.”  Free markets are the epitome of morality.  Government controlled economies are the breeding grounds for evil.  The victims of government controlled economies in Cuba, the Soviet Union, Communist China, North Korea, Venezuela, and Eastern Europe will testify to the truth of this.