Economics has few “laws”. The most notable is the Law of Demand, which simply states that there is an inverse relationship between the price of a thing and how many units people are willing to buy (i.e., when the price goes down (up), people buy more (less)). The Law of Demand is basically just the culmination of the most basic observations of human behavior; specifically, The Basics with which I started this blog.
There are a few other things that sometimes get labelled as “laws” in economics textbooks. The “law of supply” only applies to things still actively produced, for which the necessary inputs are available; but in general, the more people are willing to pay for something, the more of it producers will try to produce. The “law of diminishing returns”–typically applied in the context of production–assumes there is at least one fixed input that constrains the marginal productivity of the rest. It’s more a rule of thumb than a “law.” But it is also analogous to Rule #3 in The Basics: More more is less better.
Whether we consider them “laws” or not, one thing is for certain: when we ignore these basic principles, we do so at our own peril. And that brings me to the motivation for this post; namely a recent blog post by “The Edgy Optimist” (aka Zachary Karabell) at Reuters.com titled “The ‘laws of economics’ don’t exist.” Continue reading “The "Laws" of Economics”