If supply and demand equilibrium were an economic “law,” the 1929 and 2008 financial crises would have never existed. Rather than ready-made theories, economics needs the experimental background provided by systems thinking.
|This post belongs to a reading series of Doughnut Economics by Kate Raworth. For quick access to all chapters, please click here.
Disclaimer: This chapter summary is personal work and an invitation to read the book itself for a detailed view of all the author’s ideas.
For a long time, it was assumed that since rationality is by definition universal, there could only be one model of scientific methodology; the one notably followed by Galileo Galilei and Isaac Newton. This is how, for instance, the 19th-century economist William Stanley Jevons came to think that since physics explains the world from the atomic to the planetary level, the market should too—from the behavior of a single consumer to national and global outputs. In his own words, “Just as we measure gravity by its effects in the motion of a pendulum, so we may estimate the equality or inequality of feelings by the decisions of the human mind. The will is our pendulum, and its oscillations are minutely registered in the price lists of the markets. I know not when we shall have a perfect system of statistics, but the want of it is the only insuperable obstacle in the way of making Economics an exact science.”1
Since there is perfect regularity in how bodies in motion interact, assumed W. S. Jevons, science is set to measure action and reaction as mere quantities the exact same way in any other field of research than physics. Simply put, these other fields of research cannot be labeled as scientific ones otherwise. This narrow understanding of science made the law of equilibrium between forces reign supreme in economics. As Kate Raworth explains, “Crucially the nascent theory hinged on assuming that, for any given mix of preferences that consumers might have, there was just one price at which everyone who wanted to buy and everyone who wanted to sell would be satisfied, having bought or sold all that they wanted for that price. In other words, each market had to have one single, stable point of equilibrium, just as a pendulum has only one point of rest. And for that condition to hold, the market’s buyers and sellers all had to be ‘price-takers’—no single actor being big enough to have sway over prices—and they had to be following the law of diminishing returns.”
- Jevons, W.S. (1871) The Theory of Political Economy (1.17)