By John F. Sase, Ph.D.
Gerard J. Senick, chief editor
Julie Sase, copyeditor
"Education can help us only if it produces 'whole men.' The truly educated man is not a man who knows a bit of everything, not even the man who knows all the details of all subjects (if such a thing were possible). The 'whole man' may have little detailed knowledge of facts and theories; he may treasure the Encyclopædia Britannica because 'she knows and he needn't,' but he will be truly in touch with the center. He will not be in doubt about his basic convictions, about his view on the meaning and purpose of his life. He may not be able to explain these matters in words, but the conduct of his life will show a certain sureness of touch which stems from this inner clarity."
-Ernst Friedrich Schumacher, Small Is Beautiful: A Study of Economics as if People Mattered (Frederick Muller Ltd., 1973)
In the past five episodes, we laid out some basics of economic scarcity, resources, needs, wants, and production that Detroiters must "grok" as we rebuild the economy of the City. For successful work to thrive, our approach must include everyone in the Metropolitan area. We have subtitled our episodic series "Economics for Everyone" while using the basics of Economics as the theme.
In this episode, we continue our foray as strangers in this strange land. Our parallel intention with this in-depth approach is to provide background for attorneys and other professionals to develop their primers for sharing with their staffs and with jurors in cases involving economic issues. Ultimately, we hope that our primer will help to redirect any remaining negative energy that others have focused on Detroit by educating our readership on how the Principles of Economics work in reality. In doing so, we hope to foster a greater positive spirit concerning the City of Detroit.
We will discuss marketplaces and the process of how we buy and sell to exchange goods and services with one another. At the center of Market Economics, we find the mechanism of Supply and Demand. College sophomores often view this subject as intimidating. Usually, instructors present it in a very technical manner; some instructors even teach Supply and Demand with nothing but math and graphs. However, by using common sense; simple illustrations; and clear, plain language, anyone should be able to comprehend this important topic for economic growth and redevelopment.
The first myth about Economics is that consumers and producers focus on markets as only physical spaces. Though we tend to think of the general concepts of Economics in terms of markets that resemble Trader Joe's grocery store or the Gibraltar Trade Center, markets also may exist in cyberspace. Examples include online trading with Wall Street, Web sites such as Ebay.com, or call-in television marts such as the QVC Shopping Network. Therefore, we should recognize markets as existing whenever or wherever transactions occur in which we exchange goods or services.
Attorneys engage in matters of markets as they pertain to contracts, profits, wages, and other aspects of and their practices and their clients. In order to understand markets, let us step back and consider what markets are not. If a person approaches us at an airport and hands us a flower without a direct request or expectation of receiving something of comparable value in return, we do not experience a market-defining exchange. Instead, we have a transfer-a one-directional gift-giving. However, if the two of us meet and hold out items of value to one another, we may wish to exchange our item for what the other party has. For example, if I walk into our global village holding a catch of trout that appeals to you and you hold a chicken that looks good to me, we may arrive at an exchange that we mutually consider a fair trade. In this case, we engage in a two-way action, a transaction in which we give to one another. This transaction involving goods of equitable value constitutes and defines our market activity.
Direct exchange of goods or services occurs most often within the family circle or an intentional community. For example, given a household in which two children each have regular weekly chores, one child may volunteer to do the dishes if the other agrees to take out the garbage. This form of exchange involves barter between two individuals who have a double coincidence of wants. In other words, you want what I have to offer and vis à vis. In society at large, though, traders often lack a Double Coincidence of Wants (DCW). As a result of the lack of balance, the direct exchange does not work smoothly. The recourse may require a series of side trades in order to arrive at a DCW. For example, you accept my leg of lamb and I take your chickens, which I may not need or want, with the expectation that I can trade the chickens with a third person who has something that meets my desires.
Across the millennia as economies and legal systems have developed, the solution to this trade conundrum has been the development of tokens, markers, and IOUs. We commonly accept that these items or actions stand in place of ones that hold real value. These can serve as satisfactory tools for exchange. Symbols such as pieces of paper printed with ink may not possess any inherent value. However, this characteristic appears irrelevant if the symbol merely provides a transitory medium that anyone involved in complex rounds of exchanges accepts as a marker. Commonly, we have come to call these markers "money."
Money, Money, Money
The English word "money" may have evolved with the Roman goddess Juno [the] Monetas, as pre-Christian Romans appear to have minted silver coins in or near her Temple of the Moon in Rome. Our moon has served as a tool for counting as well as marking monthly cycles since ancient times. Also, silver was associated with the moon (as gold was associated with the sun) in the myth and magic of classical Greece and other earlier cultures. Underscoring this relationship, the most widely accepted silver coin in ancient Athens had an owl and a crescent moon on one side. Alternately, etymologists suggest that the word "money" may have originated with the proto-Polynesian words "mani" (beads) or "mana" (life force or power). The root word entered the Rg-Vedic language as "mani" (jewel, gem, pearl) and passed through Mediterranean culture as the word "nomos," which denoted the scales of justice for weighing in classical Greece (etymonline.com).
A monetary system of money provides another quality in that we can use money as a commonly understood measure of value for a myriad of products. For example, if I were to ask you how many fish one chicken is worth, you may not have a clue. Let us agree that one chicken equals the value of three fish. Then we may use our paper markers in accordance and agree that two pieces of paper represent each fish and that six pieces represent each chicken. We close this discussion about the value of commodities themselves while addressing one additional issue. By the fourth day following the trade, any unpreserved fish that we carry around our village may lack freshness while drawing a following of feral cats. They may represent the only creatures in the village that hold any interest in the aging product. In short, fish do not maintain their intrinsic value as a trade good because they do not constitute an adequate store of wealth.
A pricing system develops once we establish the relative value of fish, chickens, goats, shirts, shovels, and anything else that we might exchange in terms of our special pieces of paper. We can observe the resulting market behavior as the price of each good rises above or falls below its known average trade-value. In effect, we expect to find that those who have some of this particular good to offer will have a greater desire to part with it when the price rises above average than when the price falls to the low side. However, there exists an exchange price agreeable to the ones providing the good and to the others who desire to possess it. The former group will supply just enough of the good to meet the demands of the latter party interested in obtaining it. Therefore, when achieving a mutually agreeable price, the quantities offered and requested will equal one another as the market goes toward a steady state of equilibrium. This logic represents our basic laws of supply and demand.
Nevertheless, this state of equality may change for reasons that have little or nothing to do with the agreed price. A change in the non-price variables may lead to divergent increases and decreases in the equilibrium-price and -quantity. Though the quantities exchanged between buyers and sellers may increase or decrease, the price may remain unchanged. Therefore, we will explore the seven major influential variables in the next section. Two of these variables affect the behavior of sellers supplying the product and five different ones that lead buyers to purchase a different quantity of this product collectively. These actions reflect one of the basic social contracts around which commercial law has developed.
Supply "Is" Cost
First, we consider two major variables that affect supply-the number of producers and the changes in their costs. In a normal market, we expect several producers to remain situated at any given time. At the bottom margin, some suppliers enjoy lower costs that allow them to break even at low price-points. This ability may result from greater experiences or business skills. Alternately, other suppliers only manage to break even when the price rises to a higher point.
In contrast to the first group, these higher-cost producers may not possess the skill and experience developed by the lower-cost group. This difference results in reduced cost-efficiency. In short, a greater number of suppliers exist who have the ability and willingness to offer their goods only at higher prices. Given this status quo, greater quantities enter the market at any price-level when a similar mix of new sellers arrives on the scene. In contrast, the number of goods available decreases in this market when producers exit it permanently.
Beyond the size and number of active producers, the reason for which supply increases or decreases points to some change of direct cost. Effectively, we recognize that the measurement of the costs involved in producing and selling a product constitutes the measurement of supply. The question that we must ask is, "Does a change in a specific variable cause the cost to increase or to decrease?" Once we can identify a variable and its direction of the cost-change, the resulting movement of supply appears obvious. Under normal conditions, the cost and quantity supplied move opposite of one another. When a cost increases, supply decreases - conversely, supply increases when the cost decreases.
There are two ways in which we regard this cause/effect process. For example, we can bake, wrap, and sell loaves of bread at a given price. However, we may not be able to sell as many loaves when our cost per loaf increases. We can sell more loaves when costs decrease, though selling more may not result in increased revenue or profit because of a lower price. Our second viewpoint of this economic phenomenon requires that we consider what happens when we desire to sell the same number of loaves, though we must increase or decrease the price accordingly to break even. Let us say that we sell each loaf at $2.00, a price that covers our costs in a way that leaves our employees with a fair wage and us with a fair profit. However, if our cost of producing a loaf increases by fifty cents, then we must raise our price to $2.50 lest we lose money and go out of business. Alternatively, if we can find a way to reduce our cost of production by fifty cents, then we could afford to lower our price to $1.50 and be as well off as before on a per-loaf basis.
Now we can ask the question, "What variables affect the cost?" Though we can cite many, the universal ones include wages and benefits paid to employees, taxes paid to a government, the cost of several raw materials, and gains from improved technology and know-how. For the first three, labor, material, and taxes, any increase in their dollar amounts causes costs to increase and supply to decrease. If the wages or benefits paid to a worker rise, costs will rise unless an increase in productivity offsets the pay increase. For example, if it costs ten cents to wrap one loaf of bread and we pay our employee, Pat, $10.00 per hour, then we expect him/her to wrap 100 loaves per hour to cover his/her wages. If we increase his/her wage to $12.00 per hour and Pat continues to wrap 100 loaves per hour, our cost of wrapping increases to twelve cents per loaf. For everything else to remain the same, we would have to increase the price per loaf by two cents. However, if Pat increases his/her wrapping to 120 loaves per hour, s/he meets his/her raise through his/her increased productivity, and our cost of wrapping a loaf remains at ten cents. As a result, both parties benefit: Pat earns 20% more per hour, and we do not need to increase our price to cover the additional wage-cost.
We can construct a similar scenario for taxes, raw materials, or any other costs of doing business within a system of law. An increase in any of these variables will raise costs unless they produce offsetting benefits. For example, increased taxes paid to our local or state government may result in an equitable benefit through improved road-maintenance that reduces delivery time-cost as well as repair costs to our vehicles. Such a benefit offsets the tax increase. Likewise, if both the quality and the price of raw-material increases in a way that decreases scrap, this event may result in savings on overhead and labor due to lower scrap-rate downtime. Let us consider another example made famous by the American mathematician and physicist W. Edwards Deming: If a sewing establishment switches to the more expensive thread of higher quality, the business should expect to reduce the non-productive time of rethreading the sewing machines because cheap thread breaks more often. As Deming explains it, quality control starts with inputs, not outputs.
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