[ExI] Psychology of markets explanations

[dan_ust at yahoo.com]

--- On Sat, 5/30/09, painlord2k at libero.it <painlord2k at libero.it> wrote:
> Il 30/05/2009 4.50, Stathis Papaioannou ha scritto:
>> The law of supply and demand is an emergent phenomenon
>> supervening on
>> social psychology. The supply-demand curve would be
>> affected if people
>> prefer to buy more of a product if it is more
>> expensive, for example.
> 
> Where do you see this happen?
> I never saw this happen in 40 years of my life.

This is not exactly what happens.  People may demand something based on its price -- as with status symbols (status symbols are often valued because of their exclusivity; higher price makes them more exclusive and they show off that the buyer can afford them) or when people conflate quality and price (the usual notion that lower price means lower quality, higher price, higher quality).  This is NOT, however, in contradiction to the Law of Supply and Demand.  The case simply means that the demand is affected by the price (or, more precisely, indirectly via whatever the price is used as a proxy for, such as exclusivity or quality). 
 
> When will be have phycology of physics explanations?
> For example, if people believed that air planes don't work,
> there would not be air planes flying, so the laws of
> aerodynamics could be told to not work, because air planes
> can not fly if people don't believe they will fly.
> 
> The supply-demand curve work perfectly with rational
> agents.

I disagree.  The law applies to all agents.  The use of rational by mainstream economists assumes certain specific behaviors -- usually where the economist assumes a certain set of values/traits, such as money profit maximizaton*, and then constructs models based on agents with these properties.  These models, notably, rarely map onto the real world because real world actors don't have these traits or have them mixed with other traits.  E.g., people don't choose jobs, as economic rational actors would based soley on salary.  Many people, in fact, choose a lower salary job because, e.g., they like the mission, the colleagues, or the work environment.  Think of how many people choose to work on Broadway versus Wall Street.  It isn't because working on Broadway showers you in riches.

(This is in contradistinction to the use of "rational" by Mises and Rothbard.  Their use in this context is not to describe someone as following the rules of logic, but rather as someone who acts purposefully.  In this sense, all agents in a market are rational: they are all acting to advance their goals.  As economists, we cannot judge their goals, but only explain their actions in terms of them.)

> Irrational agents will be weeded out of the market as unfit
> (they will pay more than needed and ask less than needed)
> Any explanation that say the supply-demand curve is due
> only to psychological causes require that ALL agents must be
> always irrational (a market of fools).
> A single rational agent would gain more than all the others
> and would control the market given enough time. Agents that
> are partially rational would have a success proportional to
> their rationality.

I think it'd be better to put this in terms of economization: given a set of ends and limited means to achieve them -- specifically, where the means are limited so that not all ends can be achieved -- there are more or less economizing ways of achieving them.  Some agents will be better and some worse at this in real world cases.  This would simply result in some being better at achieiving their ends -- achieving more of them or achieving them with less effort or some mix of the two.

Regards,

Dan

*  People do expect to profit from their actions; this is why they act in the first place.  This goes without saying -- and this covers all actions.  But the sort of profit motive underlying all action is a pure betterment -- not whether the action results in more money.  The person who gives money to charity is expecting a profit -- a betterment in her conditions from a condition where the object of her charity is not so well off to one where the object is better off -- just as is a person executing an asset trade or making a sandwich.  And this is something that can't be empirically contradicted.