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 practical background provided by systems thinking.
| This post is part of a reading series on Doughnut Economics by Kate Raworth. To quickly access 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 was a single 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
Overcoming Our Inheritance
In the course of approximately 100,000 years, Homo sapiens have lived relatively short lives in small groups, learned from quick feedback, and had little impact on their wider surroundings. Our brains are consequently used to cope with the short-term, the near, and the responsive, all the while expecting incremental and linear change. “But these traits leave us ill equipped when the world turns out to be dynamic, unstable and unpredictable,” says the author. Moreover, “our understanding of complexity has been topped off by 150 years of economic theory that has reinforced our biases with mechanistic models and metaphors.”
However, reducing economics to mathematics and physics oversimplified the vision of how markets and people work. The assumption was 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.” Applied to economics, the law of gravity also implies that no single actor is big enough to have sway over prices and that all of them follow the law of diminishing returns. This is what underpins the widely known diagram of supply and demand.