A Radical Look at Supply and Demand

By Andrew Dobbs

Do you enjoy original radical analysis like this? Please give what you can to my Patreon here!

Imagine that you are trying to reduce the cost of tuition at the University of Texas. You could cut spending at the University and reduce services, but you’d rather not. You could identify other sources of funding to cover costs that tuition covers today, but you know the people who control that money don’t want to be asked and they are more powerful than you are.

Imagine if at this impasse you decide that the best strategy for making UT more affordable is to dramatically lower admissions standards. You eliminate minimum SAT/ACT requirements, hell, you don’t even require that they have a high school diploma. You reason that in so doing you will erode the value of the UT degree to the point that you won’t be able to command as much tuition and therefore over time costs will drop.

A terrible idea to be sure, but believe it or not just such a farce is taking place in Austin politics today. Our political class has decided to solve the city’s problems of “affordability” through the mechanism of a new land use code--Code NEXT--a scheme only a little less ridiculous than using admissions standards to lower UT’s tuition. Both are ridiculous because zoning isn’t driving our housing displacement crisis any more than admissions are to blame for UT’s tuition bills.

This specific mess is Austin’s alone, but in cities around the world working class and poor families are being driven out of their homes and communities by rising housing prices. Supply-side arguments are peddled everywhere as explanation and solution, and neighborhood activists are blamed for phenomena unfolding on a global scale.

To explain how we got into such a logical mess and how we might get out of it, I have written a long essay about the actual forces at play here. I have split it up into four parts and I’ll be publishing one part a day this week. These will deal with the actual nature of supply and demand, why granting new entitlements to developers won’t solve our housing problems, the actual economic forces driving this global crisis, and some of the local tactics we might be able to use to mitigate their impacts here in town.

When we set aside our misunderstandings and instead clarify the real forces at play and how they operate in a landlord-controlled housing market we can move beyond the absurdity engulfing housing politics in Austin and elsewhere today. Real solutions become clear. They are not easy, however, and they require changes that more or less nobody in our present political establishment are willing to take up. If we are to solve the problems at hand, we’ll need to change them out too.

What are Supply and Demand Really?

The supply-side argument echoes liberal conventional wisdom of “rational markets.” When supply exceeds demand prices drop, when demand exceeds supply prices go up. Housing supply is inadequate to the demand in our communities, the neoliberal urbanists claim, and therefore prices are skyrocketing.

But clearly supply and demand can’t be the only factors that go into setting a price. If we had perfect equilibrium between supply and demand of, say, tennis balls the price they would settle upon would be much different than the equilibrium price for Rolex watches. The difference in these levels is a product of their different values, which is distinct from price.

Value reflects the priority our society places on the production of a good or service, and this priority is reflected in turn by how much labor power we put into producing it. The more labor power expended on it, the more we value it, and the higher its price would be even if supply and demand were perfectly balanced. They rarely are balanced, however, so its price is almost always different than its value.

Now, we can’t just ask workers to swing the hammer harder and voila, value goes up because their labor increased. Value is determined by society at large, and therefore labor power is determined on a society-wide basis. Only the effort necessary to meet society’s primary goal--its reproduction, and the recreation of the power structures that rule within it--counts towards the value of the commodities produced to achieve this goal. Labor in excess of the work required by the enterprise expending it is wasted; labor processes that can produce more than the same effort in other firms are, by definition, exceptionally valuable.

In cases where prices are consistently higher than value capitalists will see larger than average profits in that market and direct investment there. If prices are lower than value, then capitalists will experience falling profits and will put resources elsewhere. On the surface it appears as though investment flows towards areas where demand exceeds supply and increases production there until those demands are met, while capital flows away from areas where supply has glutted the market, allowing the excess to be consumed with prices returning to normal.

Underneath the surface, however, this is not necessarily the case. It may be that a producer expended an average amount of labor power making a commodity, nonetheless producing less of the good than the economy as a whole needs to reproduce itself. This would mean supply lags behind demand and prices are driven up--exactly what neoclassical economics says. It may instead be that the production process for this commodity is especially efficient, extracting more surplus value from its workers than average, and so its market price commands a greater profit than the labor power put into it would normally indicate--prices are higher than value because of the intensity of exploitation, not supply and demand.

Capitalists actually respond to either scenario the same way: they invest in that part of the market, increasing production. If excessive prices were a product of demand outstripping supply, then they will eventually meet this demand and prices will go down. If labor power efficiency was driving prices and profits, then they either reallocate labor in such a way as to bring the process back down to the average, or this successful, profitable process is extended to the rest of the market, making it the new average. As efficiency reverts to the average one way or the other, so does price drop back down to the level of value.

In all instances it appears from the outside that an increase in production--i.e. supply--has brought prices back to equilibrium. On the level of business analysis you can say that prices were going up until supply was increased, demand driving up prices and supply bringing them down.

As for the reverse, maybe prices are lower than value because supply has exceeded demand and an outflow of investment will bring things back to normal. Maybe instead labor power has been expended inefficiently, and the capitalist needs to repair the ratio of output to hours worked. In theory they could increase output for the same hours worked and an increase in supply would actually bring up profits and prices. But this means investing in new technology, and this is a sector where investment is flowing OUT--capitalists are not going to put resources into a venture that has falling prices and profits.

In practice what they will do instead is to lay off some workers and make the rest work harder. The practical effect is that production dials back, supply drops, and the labor process more accurately matches the social average--prices rise back to the level of value. Again, business observers see supply reductions and then price increases--supply and demand dominate the discourse again. Socialists, however, know that--once again--they just got better at exploiting their workers.

The Real Invisible Hand: The Ruling Class

Regardless of what supply and demand are doing, prices compel the market to do what it was designed for: concentrate resources and power in the hands of the capitalist class. We are told that supply and demand rule things because this makes it look like consumption drives the economic order. The implication is that people actually really want to status quo to continue. The truth is that production is what determines economic outcomes, and capital controls the system of production. Their continued and expanded power is the point of it all, not any satisfaction of popular needs, which are at best incidental.

This something the average politician, journalist, activist, or person on the street does not understand, or may not want to admit. The result is the confusion consuming our political debates in Austin--and many other cities--today.

As we shall see, supply and demand are at best secondary sources of our current affordability problems. The power of the classes that benefit from exploitation of the many is primary, always.

Part Two: Let’s (Blame) the Landlord. Follow me on Twitter. Support me on Patreon.