Each semester while teaching Principles of Microeconomics, I invariably encounter a variant of this question on my exams:
- âJoe works at the local supermarket. One day, he mentions: âOn Monday, we sold oranges for $0.75 each and moved 200 units. By Friday, the price rose to $1.00, and we sold 400. So, the price went up, and so did the quantity demanded! This must mean the law of demand is incorrect!â Assess Joeâs assertion using economic principles. Is he right or wrong? Explain your reasoning.â
(If you wish to ponder this yourself, dear reader, pause here and return to the next paragraph afterward)
The response I seek resembles the following:
- âJoeâs assertion is fundamentally flawed. The law of demand operates under a ceteris paribus condition, meaning that, all else being equal, an increase in price typically leads to a decrease in quantity demanded. However, Joe’s observation can be readily explained by an increase in demand, which results in both a higher price and a greater quantity demanded, as consumers are willing to pay more for the same amount when demand surges.â
The educational takeaway I want my students to grasp is that we should approach claims of disproving established scientific laws with skepticism. Existing economic theories often provide comprehensible explanations for observed phenomena. In this scenario, the law of demand is a well-tested scientific principle. The motivation to find exceptions is undeniably strong. As George Stigler noted in his seminal work, The Theory of Price:
âHow can we convince a skeptic that this âlaw of demandâ is truly applicable to all consumers, at all times, across all commodities? Not through a few selected examples, surely. Not via an unyielding theoretical proof, as none existsâit is an empirical rule. Not by simply stating that economists believe in it, for we could be mistaken. Perhaps the most persuasive proof is that if an economist were to demonstrate its failure in a specific market at a certain time, they would achieve professional immortality and swift promotion while still alive. Given that most economists would welcome either reward, we can assume that the notable absence of exceptions is not due to a lack of effort to find them. This, of course, hints at the real evidence: countless instances, from the housewife who limits her strawberry purchases because they are out of season (and thus, more expensive) to comprehensive statistical analyses, substantiate this result.â (pp. 22â23 of the 4th ed, emphasis in original)
In essence, claiming that the law of demand is invalid is an exceptionally bold assertion.
Occasionally, theoretical models emerge that propose violations of the law of demand. Some even investigate specific goods that appear to contravene this law. Yet, upon closer inspection, these examples often falter, reaffirming that the law of demand remains intact. Robust evidence is required to substantiate strong claims.
I often reflect on this exam question when I encounter economic commentators suggesting that international trade has weakened the United States. Such a scenario would be uncharted territory. Historical evidence spanning millennia suggests that trade fortifies nations, while isolationism leads to decline. This is rooted in the principle of comparative advantage. Much like the law of demand, anyone who can furnish concrete and rigorous evidence to challenge our understanding of trade is destined for accolades and recognition. Yet, despite these incentives, no substantial evidence has emerged. Many assertions that these established economic principles have been invalidated originate from opinion pieces and lack scientific validity.
This is not to suggest that scientific laws are immutable. Scientific knowledge is continually evolving. Miasma theory was once upheld by centuries of experience and evidence, yet it was ultimately debunked. The individuals responsible for this paradigm shiftâJohn Snow, Louis Pasteur, and Robert Kochâare now immortalized in the scientific community.
Could our current understandings of international trade and the law of demand face a similar fate to that of miasma theory? Absolutely. However, those aiming to challenge these scientific laws must present extraordinary evidence. Thus far, the evidence put forth to disprove economic laws has been, at best, unimpressive, and often entirely erroneous.
Footnotes
[1] It is crucial to differentiate between the assertion that âtrade weakens a nationâ and the claim that âprotectionism fosters national growth.â The latter acknowledges that trade benefits a nation while arguing that protectionism generates greater prosperity.
