policy

Why does democracy work?

pnrj book reviews, ethics, politics, tribal paradigm , , , , , , , , , , , ,

May 14 JDN 2460079

A review of Democracy for Realists

I don’t think it can be seriously doubted that democracy does, in fact, work. Not perfectly, by any means; but the evidence is absolutely overwhelming that more democratic societies are better than more authoritarian societies by just about any measure you could care to use.

When I first started reading Democracy for Realists and saw their scathing, at times frothing criticism of mainstream ideas of democracy, I thought they were going to try to disagree with that; but in the end they don’t. Achen and Bartels do agree that democracy works; they simply think that why and how it works is radically different from what most people think.

For it is a very long-winded book, and in dire need of better editing. Most of the middle section of the book is taken up by a deluge of empirical analysis, most of which amounts to over-interpreting the highly ambiguous results of underpowered linear regressions on extremely noisy data. The sheer quantity of them seems intended to overwhelm any realization that no particular one is especially compelling. But a hundred weak arguments don’t add up to a single strong one.

To their credit, the authors often include the actual scatter plots; but when you look at those scatter plots, you find yourself wondering how anyone could be so convinced these effects are real and important. Many of them seem more prone to new constellations.

Their econometric techniques are a bit dubious, as well; at one point they said they “removed outliers” but then the examples they gave as “outliers” were the observations most distant from their regression line rather than the rest of the data. Removing the things furthest from your regression line will always—always—make your regression seem stronger. But that’s not what outliers are. Other times, they add weird controls or exclude parts of the sample for dubious reasons, and I get the impression that these are the cherry-picked results of a much larger exploration. (Why in the world would you exclude Catholics from a study of abortion attitudes? And this study on shark attacks seems awfully specific….) And of course if you try 20 regressions at random, you can expect that at least 1 of them will probably show up with p < 0.05. I think they are mainly just following the norms of their discipline—but those norms are quite questionable.

They don’t ever get into much detail as to what sort of practical institutional changes they would recommend, so it’s hard to know whether I would agree with those. Some of their suggestions, such as more stringent rules on campaign spending, I largely agree with. Others, such as their opposition to popular referenda and recommendation for longer term limits, I have more mixed feelings about. But none seem totally ridiculous or even particularly radical, and they really don’t offer much detail about any of them. I thought they were going to tell me that appointment of judges is better than election (which many experts widely agree), or that the Electoral College is a good system (which far fewer experts would assent to, at least since George W. Bush and Donald Trump). In fact they didn’t do that; they remain eerily silent on substantive questions like this.

Honestly, what little they have to say about institutional policy feels a bit tacked on at the end, as if they suddenly realized that they ought to say something useful rather than just spend the whole time tearing down another theory.

In fact, I came to wonder if they really were tearing down anyone’s actual theory, or if this whole book was really just battering a strawman. Does anyone really think that voters are completely rational? At one point they speak of an image of the ‘sovereign omnicompetent voter’; is that something anyone really believes in?

It does seem like many people believe in making government more responsive to the people, whereas Achen and Bartels seem to have the rather distinct goal of making government make better decisions. They were able to find at least a few examples—though I know not how far and wide they had to search—where it seemed like more popular control resulted in worse outcomes, such as water fluoridation and funding for fire departments. So maybe the real substantive disagreement here is over whether more or less direct democracy is a good idea. And that is indeed a reasonable question. But one need not believe that voters are superhuman geniuses to think that referenda are better than legislation. Simply showing that voters are limited in their capacity and bound to group identity is not enough to answer that question.


In fact, I think that Achen and Bartels seriously overestimate the irrationality of voters, because they don’t seem to appreciate that group identity is often a good proxy for policy—in fact, they don’t even really seem to see social policy as policy at all. Consider this section (p. 238):

“In this pre-Hitlerian age it must have seemed to most Jews that there were no crucial issues dividing the major parties” (Fuchs 1956, 63). Yet by 1923, a very substantial majority of Jews had abandoned their Republican loyalties and begun voting for the Democrats. What had changed was not foreign policy, but rather the social status of Jews within one of America’s major political parties. In a very visible way, the Democrats had become fully accepting and incorporating of religious minorities, both Catholics and Jews. The result was a durable Jewish partisan realignment grounded in “ethnic solidarity”, in Gamm’s characterization.

Gee, I wonder why Jews would suddenly care a great deal which party was more respectful toward people like them? Okay, the Holocaust hadn’t happened yet, but anti-Semitism is very old indeed, and it was visibly creeping upward during that era. And just in general, if one party is clearly more anti-Semitic than the other, why wouldn’t Jews prefer the one that is less hateful toward them? How utterly blinded by privilege do you need to be to not see that this is an important policy difference?

Perhaps because they are both upper-middle-class straight White cisgender men (I would also venture a guess nominally but not devoutly Protestant), Achens and Bartel seem to have no concept that social policy directly affects people of minority identity, that knowing that one party accepts people like you and the other doesn’t is a damn good reason to prefer one over the other. This is not a game where we are rooting for our home team. This directly affects our lives.

I know quite a few transgender people, and not a single one is a Republican. It’s not because all trans people hate low taxes. It’s because the Republican Party has declared war on trans people.

This may also lead to trans people being more left-wing generally, as once you’re in a group you tend to absorb some views from others in that group (and, I’ll admit, Marxists and anarcho-communists seem overrepresented among LGBT people). But I absolutely know some LGBT people who would like to vote conservative for economic policy reasons, but realize they can’t, because it means voting for bigots who hate them and want to actively discriminate against them. There is nothing irrational or even particularly surprising about this choice. It would take a very powerful overriding reason for anyone to want to vote for someone who publicly announces hatred toward them.

Indeed, for me the really baffling thing is that there are political parties that publicly announce hatred toward particular groups. It seems like a really weird strategy for winning elections. That is the thing that needs to be explained here; why isn’t inclusiveness—at least a smarmy lip-service toward inclusiveness, like ‘Diversity, Equity, and Inclusion’ offices at universities—the default behavior of all successful politicians? Why don’t they all hug a Latina trans woman after kissing a baby and taking a selfie with the giant butter cow? Why is not being an obvious bigot considered a left-wing position?

Since it obviously is the case that many voters don’t want this hatred (at the very least, its targets!), in order for it not to damage electoral changes, it must be that some other voters do want this hatred. Perhaps they themselves define their own identity in opposition to other people’s identities. They certainly talk that way a lot: We hear White people fearing ‘replacement‘ by shifting racial demographics, when no sane forecaster thinks that European haplotypes are in any danger of disappearing any time soon. The central argument against gay marriage was always that it would somehow destroy straight marriage, by some mechanism never explained.

Indeed, perhaps it is this very blindness toward social policy that makes Achen and Bartels unable to see the benefits of more direct democracy. When you are laser-focused on economic policy, as they are, then it seems to you as though policy questions are mainly technical matters of fact, and thus what we need are qualified experts. (Though even then, it is not purely a matter of fact whether we should care more about inequality than growth, or more about unemployment than inflation.)

But once you include social policy, you see that politics often involves very real, direct struggles between conflicting interests and differing moral views, and that by the time you’ve decided which view is the correct one, you already have your answer for what must be done. There is no technical question of gay marriage; there is only a moral one. We don’t need expertise on such questions; we need representation. (Then again, it’s worth noting that courts have sometimes advanced rights more effectively than direct democratic votes; so having your interests represented isn’t as simple as getting an equal vote.)

Achen and Bartels even include a model in the appendix where politicians are modeled as either varying in competence or controlled by incentives; never once does it consider that they might differ in whose interests they represent. Yet I don’t vote for a particular politician just because I think they are more intelligent, or as part of some kind of deterrence mechanism to keep them from misbehaving (I certainly hope the courts do a better job of that!); I vote for them because I think they represent the goals and interests I care about. We aren’t asking who is smarter, we are asking who is on our side.

The central question that I think the book raises is one that the authors don’t seem to have much to offer on: If voters are so irrational, why does democracy work? I do think there is strong evidence that voters are irrational, though maybe not as irrational as Achen and Bartels seem to think. Honestly, I don’t see how anyone can watch Donald Trump get elected President of the United States and not think that voters are irrational. (The book was written before that; apparently there’s a new edition with a preface about Trump, but my copy doesn’t have that.) But it isn’t at all obvious to me what to do with that information, because even if so-called elites are in fact more competent than average citizens—which may or may not be true—the fact remains that their interests are never completely aligned. Thus far, representative democracy of one stripe or another seems to be the best mechanism we have for finding people who have sufficient competence while also keeping them on a short enough leash.

And perhaps that’s why democracy works as well as it does; it gives our leaders enough autonomy to let them generally advance their goals, but also places limits on how badly misaligned our leaders’ goals can be from our own.

The Race to the Bottom is not inevitable

pnrj development economics, ethics, inequality, macroeconomics, market failure, public policy , , , , , , , , , , , , , , , , , , , ,

Jul 19 JDN 2459050

The race to the bottom is a common result of competition, between firms, between states, or even between countries. One firm finds a way to cut corners and reduce costs, then lowers their price to undercut others; then soon every firm is cutting those same corners. Or one country decides to weaken their regulations in order to attraction more business; then soon every other country has to weaken their regulations as well.

Let’s first consider individual firms. Suppose that you run a business, and you are an upstanding, ethical person. You want to treat your employees, your customers, and your community well. You have high labor standards, you exceed the requirements of environmental regulations, and you make a high-quality product at a reasonable price for a moderate profit.

Then, a competitor appears. The owner of this company is not so ethical. They exploit their workers, perhaps even stealing their wages. They flaunt environmental regulations. They make shoddy products. All of this allows them to make their products for a lower price than yours.

Suppose that most customers can’t tell the difference between your product and theirs. What will happen? They will stop buying yours, because it’s more expensive. What do you do then?

You could simply go out of business. But that doesn’t really solve anything. Probably you’ll be forced to lower your standards. You’ll treat your workers worse, pollute more, reduce product quality. You may not do so as much as the other company, but you’ll have to do it some in order to get the price down low enough to still compete. And your profits will be lower than theirs as a result.

Far better would be for the government to step in and punish that other business for breaking the rules—or if what they’re doing is technically legal, change the rules so that it’s not anymore. Then you could continue to produce high-quality products with fair labor standards and good environmental sustainability.

But there are some problems with this. First, consider this from the point of view of a regulator, who is being lobbied by both companies. Your company asks for higher standards to improve product quality while protecting workers and the environment. But theirs claims that these higher standards will push them out of business. Who will they believe?

In fact, it may be worse than that: Suppose we’ve already settled into an equilibrium where all the firms have low standards. In that case, all the lobbyists will be saying that regulations need to be kept weak, lest the whole industry fail.

But in fact there’s no reason to think that stricter regulations would actually destroy the whole industry. Firm owners are used to thinking in terms of fixed competitors: They act in response to what competitors do. And in many cases it’s actually true that if just one firm tried to raise their standards, they would be outcompeted and go out of business. This does not mean that if all firms were forced to raise their standards, the industry would collapse. In fact, it’s much more likely that stricter regulations would only moderately reduce output and profits, if imposed consistently across the whole industry.

To see why, let’s consider a very simple model, a Bertrand competition game. There are two firms, A and B. Each can either use process H, producing a product of high quality with high labor standards and good sustainability, or use process L, producing a product of low quality with low labor standards and poor sustainability. Process H costs $100 per unit, process L costs $50 per unit. Customers can’t tell the difference, so they will buy whichever product is offered at the lowest price. Let’s say you are in charge of firm A. You choose which process to use, and set your price. At the same time, firm B chooses a process and sets their price.

Suppose choose to use process H. The lowest possible price you could charge to still make a profit would be a price of $101 (ignoring cents; let’s say customers also ignore them, which might be true!).

But firm B could choose process L, and then set a price of $100. They can charge just one dollar less than you charge for their product, but their cost is only $50, so now they are making a large profit—and you get nothing.

So you are forced to lower your standards, in order to match their price. You could try to undercut them at a price of $100, but in the long run that’s a bad idea, since eventually you’ll both be driven to charging a price of 51 and making only a very small profit. And there’s a way to stop them from undercutting you, which is to offer a price-matching guarantee; you can tell your customers that if they see a lower price from firm B than what you’re offering, you’ll match it for them. Then firm B has no incentive to try to undercut you, and you can maintain a stable equilibrium at a price of $100. You have been forced to used process L even though you know it is worse, because any attempt to unilaterally deviate from that industry norm would result in your company going bankrupt.

But now suppose the government comes in and mandates that all firms use process H, and they really enforce this rule so that no firm wants to try to break it. Then you’d want to raise the price, but you wouldn’t necessarily have to raise it all that much. Even $101 would be enough to ensure some profit, and you could even maintain your current profits by raising the price up to $150. In reality the result would probably be somewhere in between those two, depending on the elasticity of demand; so perhaps you end up charging $125 and make half the profit you did before.

Even though the new regulation raised costs all the way up to the current price, they did not result in collapsing the industry; because the rule was enforced uniformly, all firms were able to raise their standards and also raise their prices. This is what we should typically expect to happen; so any time someone claims that a new regulation will “destroy the industry” we should be very skeptical of that claim. (It’s not impossible; for instance, a regulation mandating that all fast food workers be paid $200 per hour would surely collapse the fast food industry. But it’s very unlikely that anyone would seriously propose a regulation like that.)

So as long as you have a strong government in place, you can escape the race to the bottom. But then we must consider international competition: What if other countries have weaker regulations, and so firms want to move their production to those other countries?

Well, a small country may actually be forced to lower their standards in order to compete. I’m not sure there’s much that Taiwan or Singapore could do to enforce higher labor standards. If Taiwan decided to tighten all their labor regulations, firms might just move their production to Indonesia or Vietnam. Then again, monthly incomes in Taiwan, once adjusted for currency exchange rates, are considerably higher than those in Vietnam. Indeed, wages in Taiwan aren’t much lower than wages in the US. So apparently Taiwan has some power to control their own labor standards—perhaps due to their highly educated population and strong industrial infrastructure.

However, a large country like the US or China absolutely has more power than that. If the US wants to enforce stricter labor standards, they can simply impose tariffs on countries that don’t. Actually there are many free-trade rules in place precisely to reduce that power, because it can be easily abused in the service of protectionism.

Perhaps these rules go too far; while I agree with the concern about protectionism, I definitely think we should be doing more to enforce penalties for forced labor, for instance. But this is not the result of too little international governance—if anything it is the result of too much. Our free trade agreements are astonishingly binding, even on the most powerful countries (China has successfully sued the United States under WTO rules!). I wish only that our human rights charters were anywhere near as well enforced.

This means that the race to the bottom is not the inevitable result of competition between firms or even between countries. When it occurs, it is the result of particular policy regimes nationally or internationally. We can make better rules.

The first step may be to stop listening to the people who say that any change will “destroy the industry” because they are unable (or unwilling?) to understand how uniformly-imposed rules differ from unilateral deviations from industry norms.

Lukewarm support is a lot better than opposition

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July 23, JDN 2457593

Depending on your preconceptions, this statement may seem either eminently trivial or offensively wrong: Lukewarm support is a lot better than opposition.

I’ve always been in the “trivial” camp, so it has taken me awhile to really understand where people are coming from when they say things like the following.

From a civil rights activist blogger (“POC” being “person of color” in case you didn’t know):

“Many of my POC friends would actually prefer to hang out with an Archie Bunker-type who spits flagrantly offensive opinions, rather than a colorblind liberal whose insidious paternalism, dehumanizing tokenism, and cognitive indoctrination ooze out between superficially progressive words.

From the Daily Kos:

Right-wing racists are much more honest, and thus easier to deal with, than liberal racists.

From a Libertarian blogger:

I can deal with someone opposing me because of my politics. I can deal with someone who attacks me because of my religious beliefs. I can deal with open hostility. I know where I stand with people like that.

They hate me or my actions for (insert reason here). Fine, that is their choice. Let’s move onto the next bit. I’m willing to live and let live if they are.

But I don’t like someone buttering me up because they need my support, only to drop me the first chance they get. I don’t need sweet talk to distract me from the knife at my back. I don’t need someone promising the world just so they can get a boost up.

In each of these cases, people are expressing a preference for dealing with someone who actively opposes them, rather than someone who mostly supports them. That’s really weird.

The basic fact that lukewarm support is better than opposition is basically a mathematical theorem. In a democracy or anything resembling one, if you have the majority of population supporting you, even if they are all lukewarm, you win; if you have the majority of the population opposing you, even if the remaining minority is extremely committed to your cause, you lose.

Yes, okay, it does get slightly more complicated than that, as in most real-world democracies small but committed interest groups actually can pressure policy more than lukewarm majorities (the special interest effect); but even then, you are talking about the choice between no special interests and a special interest actively against you.

There is a valid question of whether it is more worthwhile to get a small, committed coalition, or a large, lukewarm coalition; but at the individual level, it is absolutely undeniable that supporting you is better for you than opposing you, full stop. I mean that in the same sense that the Pythagorean theorem is undeniable; it’s a theorem, it has to be true.

If you had the opportunity to immediately replace every single person who opposes you with someone who supports you but is lukewarm about it, you’d be insane not to take it. Indeed, this is basically how all social change actually happens: Committed supporters persuade committed opponents to become lukewarm supporters, until they get a majority and start winning policy votes.

If this is indeed so obvious and undeniable, why are there so many people… trying to deny it?

I came to realize that there is a deep psychological effect at work here. I could find very little in the literature describing this effect, which I’m going to call heretic effect (though the literature on betrayal aversion, several examples of which are linked in this sentence, is at least somewhat related).

Heretic effect is the deeply-ingrained sense human beings tend to have (as part of the overall tribal paradigm) that one of the worst things you can possibly do is betray your tribe. It is worse than being in an enemy tribe, worse even than murdering someone. The one absolutely inviolable principle is that you must side with your tribe.

This is one of the biggest barriers to police reform, by the way: The Blue Wall of Silence is the result of police officers identifying themselves as a tight-knit tribe and refusing to betray one of their own for anything. I think the best option for convincing police officers to support reform is to reframe violations of police conduct as themselves betrayals—the betrayal is not the IA taking away your badge, the betrayal is you shooting an unarmed man because he was Black.

Heretic effect is a particular form of betrayal aversion, where we treat those who are similar to our tribe but not quite part of it as the very worst sort of people, worse than even our enemies, because at least our enemies are not betrayers. In fact it isn’t really betrayal, but it feels like betrayal.

I call it “heretic effect” because of the way that exclusivist religions (including all the Abrahamaic religions, and especially Christianity and Islam) focus so much of their energy on rooting out “heretics”, people who almost believe the same as you do but not quite. The Spanish Inquisition wasn’t targeted at Buddhists or even Muslims; it was targeted at Christians who slightly disagreed with Catholicism. Why? Because while Buddhists might be the enemy, Protestants were betrayers. You can still see this in the way that Muslim societies treat “apostates”, those who once believed in Islam but don’t anymore. Indeed, the very fact that Christianity and Islam are at each other’s throats, rather than Hinduism and atheism, shows that it’s the people who almost agree with you that really draw your hatred, not the people whose worldview is radically distinct.

This is the effect that makes people dislike lukewarm supporters; like heresy, lukewarm support feels like betrayal. You can clearly hear that in the last quote: “I don’t need sweet talk to distract me from the knife at my back.” Believe it or not, Libertarians, my support for replacing the social welfare state with a basic income, decriminalizing drugs, and dramatically reducing our incarceration rate is not deception. Nor do I think I’ve been particularly secretive about my desire to make taxes more progressive and environmental regulations stronger, the things you absolutely don’t agree with. Agreeing with you on some things but not on other things is not in fact the same thing as lying to you about my beliefs or infiltrating and betraying your tribe.

That said, I do sort of understand why it feels that way. When I agree with you on one thing (decriminalizing cannabis, for instance), it sends you a signal: “This person thinks like me.” You may even subconsciously tag me as a fellow Libertarian. But then I go and disagree with you on something else that’s just as important (strengthening environmental regulations), and it feels to you like I have worn your Libertarian badge only to stab you in the back with my treasonous environmentalism. I thought you were one of us!

Similarly, if you are a social justice activist who knows all the proper lingo and is constantly aware of “checking your privilege”, and I start by saying, yes, racism is real and terrible, and we should definitely be working to fight it, but then I question something about your language and approach, that feels like a betrayal. At least if I’d come in wearing a Trump hat you could have known which side I was really on. (And indeed, I have had people unfriend me or launch into furious rants at me for questioning the orthodoxy in this way. And sure, it’s not as bad as actually being harassed on the street by bigots—a thing that has actually happened to me, by the way—but it’s still bad.)

But if you can resist this deep-seated impulse and really think carefully about what’s happening here, agreeing with you partially clearly is much better than not agreeing with you at all. Indeed, there’s a fairly smooth function there, wherein the more I agree with your goals the more our interests are aligned and the better we should get along. It’s not completely smooth, because certain things are sort of package deals: I wouldn’t want to eliminate the social welfare system without replacing it with a basic income, whereas many Libertarians would. I wouldn’t want to ban fracking unless we had established a strong nuclear infrastructure, but many environmentalists would. But on the whole, more agreement is better than less agreement—and really, even these examples are actually surface-level results of deeper disagreement.

Getting this reaction from social justice activists is particularly frustrating, because I am on your side. Bigotry corrupts our society at a deep level and holds back untold human potential, and I want to do my part to undermine and hopefully one day destroy it. When I say that maybe “privilege” isn’t the best word to use and warn you about not implicitly ascribing moral responsibility across generations, this is not me being a heretic against your tribe; this is a strategic policy critique. If you are writing a letter to the world, I’m telling you to leave out paragraph 2 and correcting your punctuation errors, not crumpling up the paper and throwing it into a fire. I’m doing this because I want you to win, and I think that your current approach isn’t working as well as it should. Maybe I’m wrong about that—maybe paragraph 2 really needs to be there, and you put that semicolon there on purpose—in which case, go ahead and say so. If you argue well enough, you may even convince me; if not, this is the sort of situation where we can respectfully agree to disagree. But please, for the love of all that is good in the world, stop saying that I’m worse than the guys in the KKK hoods. Resist that feeling of betrayal so that we can have a constructive critique of our strategy. Don’t do it for me; do it for the cause.

The scissors of supply and demand

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JDN 2457299 EDT 17:03

In recent posts I talked about demand and then I talked about supply. Now it’s time to talk about both at once–which is where the real magic happens. Alfred Marshall famously compared supply and demand to the lower and upper blades of a pair of scissors:

We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens.

~Alfred Marshall, Principles of Economics

Before Marshall, it was actually rather common to debate whether prices are determined by supply or by demand. Actually there seems to be a certain branch of Marxists today who insist upon the “labor theory of value” that seems to rest upon a similar sort of confusion, basically saying that the real value of something is entirely determined by its cost of supply. If the value of something were strictly determined by the labor put into making it, there would be literally no reason to ever make anything. If the value you get from a good is precisely equal to the labor put into it, there is no net benefit to ever making any goods. At most, embodying labor in a product might allow you to transfer labor from one person to another; but there would be no such thing as real economic growth. In order to have real economic growth, products must end up being worth more than what it cost to make them—that is, their value of demand must exceed their cost of supply.

Toward the other end of the political spectrum, we have “Say’s Law”, which says that “supply creates its own demand”; that is, that there is never any such thing as too much or too little overall demand in an economy, because supplying a good automatically makes that good available to trade for something else. I hate to even call it a “law” because isn’t even like the Pirate Code; it’s not even useful as a guideline, it’s just flat wrong. There is absolutely no reason that making something would make someone else want to buy it from you. You can make all sorts of things that nobody wants to buy; the possibilities are endless, really. Balls of lint dusted with powdered sugar, broken ballpoint pens dipped in motor oil, burnt-out lightbulbs covered in melted Swiss cheese. It’s possible that someone might want to buy such bizarre items (call them “postmodernist found art” or something), but there clearly isn’t a large market for such goods, even if you should decide to manufacture thousands of them. Even in an aggregate sense, there’s also no particular reason to think that we can’t have an economy where millions of products pile up on shelves because no one can afford to buy them; indeed, that’s basically what happens in a recession.

In fact, the converse, “demand creates its own supply”, is considerably closer to true. It’s still not strictly true—centuries of searching for the elixir of immortality have failed to produce it, though modern genetic engineering just might finally succeed where all else has failed. (After all, every new technology is impossible… until it isn’t.) But in the long run, this converse law (it doesn’t have a name so far as I know) does contain an important grain of truth: If people want something badly enough, they will spend enormous resources in order to find a way to get it. If you know that a lot of people want something that no one is supplying, it behooves you to find a way to provide it—it might just make you a billionaire. Over centuries of technological advancement, humanity has found ways to provide many goods and services that were previously thought impossible, and one of the central benefits of a capitalist economy is that it provides powerful economic incentives for entrepreneurs to innovate and find ways to provide goods that people have always wanted but never had. Yet, even so, it isn’t true that demand creates its own supply—certainly not in the short run.

Neither supply or demand on its own does much of anything. You can have insatiable demand for something nobody can supply (the aforementioned elixir of immortality), and it still won’t be sold. You can have endless supply of something nobody demands (vacuum?), and it will remain worthless. It’s only when you have both supply and demand that a market becomes possible.

One of the central insights of modern economics is that prices and quantities in a capitalist market are determined simultaneously by supply and demand. In general, both supply and demand are constantly changing in response to events in the world, and thus the prices and quantities of goods shift from one equilibrium to another. In order to predict exactly how they will shift, we would need to know how both supply and demand have changed.

As Marshall alludes to in the above quotation, in some cases we can take either supply or demand as fixed and then the other one is what matters; but these are only special cases. In general, both supply and demand are subject to the winds of changing markets, and we need to keep track of both at once. If that sounds really difficult, that’s because it is—most of what economists do in the real world ultimately amounts to finding ways to distinguish supply effects from demand effects in various situations. Even most statistical methods in econometrics were basically designed as means of separating out demand-related causes from supply-related causes.

A lot of policy questions ultimately depend upon whether supply or demand is the dominant factor: If the business cycle is primarily driven by changes in demand, it makes sense to use monetary and fiscal policy to stabilize the economy (short version: it is, and it does). If it were instead driven by supply (“supply-side economics”), it would instead be better to make structural changes that reduce costs of production. (Why is this obviously wrong? Because there weren’t sudden increases in production costs in 2008—but there was a sudden collapse of consumer buying power. Maybe the 1973 recession can be explained by a sudden increase in oil prices, but there was no such supply shock in 2008.) If the labor market is primarily driven by demand, we need to find ways to get business to hire more people; but if it’s primarily driven by supply, we need to find ways to get people to get off their butts and try to find work. (Again, I think it’s pretty obvious that the former is true, not the latter—since at least 2000 there have never been as many job openings in the US as there were unemployed people.)

In the above policy questions the liberal view is the demand-side and the conservative view is the supply-side, but that need not be the case. Regarding renewable energy, for example, the more liberal view is that lots of people would want to buy electric cars and solar panels, if they were made available, but they aren’t—we are supply-constrained. The more conservative view is that the reason they aren’t selling more is that nobody particularly wants them and trying to force them on us is a fool’s errand—we are demand-constrained. Likewise when it comes to banking, liberals generally think that the reason there isn’t more credit is that banks refuse to supply loans, while conservatives (particularly from the banks themselves) usually argue that it’s because people aren’t willing to take the risk of taking out more loans.

The point, however, is that a lot of policy debates ultimately hinge upon the question of whether demand or supply is more important in driving a particular market—and since sometimes they are both important, sometimes the policy solution requires a combination of different approaches. One of the advantages of quantitative economic analysis is that we can determine exactly how much the costs and benefits of each policy option will be, and thereby choose the one that is most cost-effective.

In this way, “supply or demand?” is a lot like “nature or nurture?”; the answer is always “both”, but there are times when one factor or the other is more important for the policy question at hand.