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Keith Rankin: Demand Versus Supply

Demand Versus Supply

Keith Rankin 23 November 2000

Labour MP Georgina Beyer said in Parliament a couple of weeks ago that "prostitution is a demand-driven activity". She's wrong. Sure, all goods and services that are freely sold have a demand. But a demand-driven industry is one that expands when the demand for it increases, contracts when the demand for it decreases, and stays the same size when demand neither increases nor decreases. Prostitution, on the other hand, increases when (especially) young women have fewer alternative employment opportunities. The more difficult it is to get work in more reputable professions, the more likely young women are to become sex workers.

The demand for sexual services is relatively constant. However, the number of persons plying the oldest trade varies markedly, within and between countries. Prostitution, when chosen in preference to other activities, is chosen as the lesser evil rather than as a positive choice. When there are only unsatisfactory alternatives, a person's best chance of making a living is to seek a slice of the action in a trade which has a stable and high demand and which has few barriers to entry. This strategy is valid, even when such industries are oversupplied and therefore underpriced.

The existence of industries that fluctuate considerably despite a constant demand represent a challenge that few economists have confronted. Other examples – in addition to prostitution - include taxi-driving, lawn-mowing, commission-only selling, and the myriad of other self-employment or small business activities that require little capital, no formal qualifications and have few gatekeepers.

Possibly the main single difference between first world and third world economies is the difference in the proportion of the population 'employed' in supply-driven trades. The most obvious examples of supply-driven market activity in the third world are the ubiquitous street vendors. Prostitution is of course, in its essence, a form of street vending. Further, we only have to read novels set in 18th or 19th century London (or watch them on television) to appreciate the extent to which that city was once host to a supply-driven street economy.

A useful metaphor for the supply-driven market economy is that of the street- vendor. The 'street' literally or figuratively hosts activities that are oversupplied during recessions. This oversupply is a disguised form of unemployment; a point well illustrated by the film The Full Monty, albeit with a reversal of established gender roles.

One poignant historical example of the backstreet vendor economy is that of abortion services in the 1930s. Large numbers of women entered or re-entered the workforce during the Great Depression, as their husbands' or fathers' sources of income disappeared. Being available for work didn't mean regular employment for most of these women, of course, despite their willingness to accept very low wages. Most had to turn to casual self-employment. The birth rate fell dramatically in 1931 and 1932, due in some part to self-induced pregnancy terminations, as women sought to avoid the opportunity costs of non workforce participation. The incidence of abortions stayed high, despite the recovery of the late 1930s. Relatively more younger single women terminated their pregnancies in these later years. The supply of women willing and able to perform back-street abortions for a fee was much higher than at the onset of the Depression in 1930. The high rate of abortions in, say, 1936 may have been more a consequence of the ready availability of backstreet practitioners than of an unusually high incidence of unplanned pregnancy.

Orthodox 'neoclassical' economics posits (i) that the level of activity in any trade is determined by demand (ie by the decisions of the market; of consumers) and (ii) that the level of activity in all trades taken together is determined by the supply of resources (especially the supply of labour). In other words, most economists believe that demand determines what is produced (the microeconomy), and that supply determines how much in total is produced (the macroeconomy). Whereas Keynes challenged, with limited long run success, the supply-side macroeconomic orthodoxy in the 1930s, the demand- side microeconomic orthodoxy has faced no significant challenge.

In this conception of the market economy, changes in demand use the price mechanism to "signal" to producers to change what they produce. If prostitution were demand-driven, a rise in the relative price of sexual services would induce some employed nurses and schoolteachers to switch professions. An efficient economy was an economy in which supply was responsive to changes in demand. By that definition of economic efficiency, the pre-1985 economy was efficient. Almost everybody participated positively, choosing careers that offered both personal and financial rewards. On the other hand, the post-1987 economy, with its considerable misallocation and non-allocation of labour, became quite inefficient.

In the 1980s, the drive to more-market economic policies eliminated most of the regulations that made it difficult for new entrants to supply a saturated market. Further, the introduction of monetarist macroeconomic policies created endemic unemployment from 1987. The destruction of employment options for many created the critical conditions for a supply-driven street-vendor economy to become established.

The availability of social welfare benefits, however, limited the growth of the self-exploitative self-employment that characterises the street vendor economy. So, while the sex industry in New Zealand expanded, it never approached third world proportions.

Another activity with few barriers to entry (in New Zealand) is tertiary education. From the student point of view, education is a non-market alternative to employment or self-employment. Student numbers always rise when there are reduced opportunities in the paid workforce. Indeed, having the option of being a student, and being able to get a student loan living allowance without too much difficulty, limits the rise of the street-vendor economy.

While a preponderance of street-vendor activities is a symptom of inefficiency (of what development economists call a low-level equilibrium), we should hesitate to assume that the cure for a supply-driven market economy is the "demand-driven market economy" of economics textbooks. An alternative cure for the supply-driven market economy, more appropriate to the 21st century, is in fact the "supply-driven non-market economy". After-all, the demand-driven economy is a straightjacket that obliges people to do what someone else wants doing instead of what truly free persons would prefer to be doing. It is the non-market economy that maximises freedom.

In fact the technological changes in particular (and productivity changes in general) of the 1990s' global economy are taking us somewhere completely different from the demand-oriented Keynesian system of the 1960s.

Why is it that we can get so much – indeed expect so much - for free on the Internet? Advertising is a part of the answer, but only a part. The Internet is a medium through which each of us can do our own creative thing. Constrained only by the need to buy food and pay rent, we increasingly prefer to utilise our time for ourselves and not in the paid service of others. The Internet can be understood as the infrastructure of a modern gift economy; the host for a myriad of communities.

The pre-1984 university was a similar place, a gift community, at least for those who could gain employment as scientists, social scientists etc. (In those days, entry barriers were fewer than today, and teaching loads were much lighter. Many very good lecturers and researchers who were born in the 1940s or earlier got into the system without PhDs.) Before that, monastic life in the Middle Ages was also based on giving rather than selling.

Before 1984, academics, in receipt of a living salary and tenure, could determine their own line of research. Theirs was a gift economy, and, as such, was supply-driven. The giver, not the receiver, decided what the product - the gift – should be. Outputs – gifts - were directed to the public domain. The best academics were driven by passion, curiosity, creativity and intellect, not by the profit motive. Many could never have contributed to public science had they faced the demand-driven market model that has colonised professional life today. There was a freedom in the universities of the past that does not exist in these days of the "free" market.

So, to summarise, countries like New Zealand at the turn of this century, have three kinds of economy, with the demand-driven economy being the least free, in both senses of the word 'free'.

  1. We have a demand-driven professional economy. The source of demand is often monopsonistic agencies such as the Health Funding Authority (HFA). To a large extent, professional services are demanded to fix problems that arise from the failure of past attempts to create a textbook market economy.
  2. We have a supply-driven vendor economy (which contains the sex industry) made up mainly of people excluded from the above.
  3. We have a supply-driven non-market economy that is increasingly linked to the Internet and the many voluntary and quasi-voluntary activities that it facilitates.

Under what conditions will the latter economy flourish? If the resources required to satisfy our principal needs are relatively few, as they now are, then the market economy that is needed to allocate those resources need not be large. This means that it is possible for most of us to be employed free from the constraints and discipline that market-forces have imposed upon us. In other words, the 'leisure-society' is now possible.

What is required is that we think of 'leisure' not as idleness but as employment in the 'doing our own thing' freeware economy that is already huge and, thanks to the Internet, increasingly visible.

Once we understand that the abstract markets of neoclassical economics restrict rather than enhance choice – fostering discipline rather than freedom - then we can look to a genuinely free post-market economy. The irony is that, as a supply-driven economy, the new gift economy is (misleadingly) in some respects similar to that of the street-vendor economy of unemployment and prostitution. Both are responses to a reduction of opportunities within the demand-driven market economy. It is education, in New Zealand an accessible alternative to the desperation of the street, which serves as both a means of escape from the self-exploitation economy and as a ticket into the sophisticated gift economy of the world wide web.

© 2000 Keith Rankin

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