The Spiritual Science of Economics. Lecture 8: Supply and Demand, and Price

The Moving Finger of Price in the Holy Grail of Economics

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Lecture 8 of 14.

Rudolf Steiner, Dornach, Switzerland, July 31, 1922:

Ladies and Gentlemen:

Today we shall have to correct certain current misconceptions which merely hinder anyone who wishes to think objectively, in accordance with realities, on matters of Political Economy, or to enter with such thinking into the actual course of economic life. For an economic science which cannot fertilize our practical life is of no real value. The concepts derived from this merely contemplative economic science must always prove rather inadequate.

We have already seen that the most important question in Economics is that of Price. The point will now be to observe prices in the sense which I have indicated. The rise or fall, or stability, of prices — the fact that the prices of certain products are too high or too low (for one can have a feeling of these things) — indicates whether or not the economic organism is in good order. It must fall to the Associations to discover, from the barometer of prices, what is to be done in the economic life as a whole.

Now, you are familiar with the point of view, still widely prevalent, according to which nothing can be done in practice with the price problem except to allow the so-called law of supply and demand to take its course. It is true that under the pressure not so much of economic facts as of the increasingly urgent demands of the social movement, this theory has been shaken — the theory (maintained by many others besides Adam Smith) that prices regulate themselves of their own accord through the working of supply and demand. The theory simply says: If the supply is too great, this will of itself lead to its reduction — the supply will not be maintained at that level. In this way a regulation of prices will automatically ensue. Similarly, if the demand is too great (or too small) it will inevitably follow that the producers will regulate matters so as not to produce too little (or too much). Under the influence of supply and demand it is thus imagined that prices on the market will, automatically, as it were, approach a certain stable level.

It is important to know whether with such an idea as this we are merely moving in a theoretical world — in a notional system — or whether we are truly entering into realities. And we are certainly not entering into realities. For as soon as you really tackle these concepts of “supply” and “demand” you will see that it is quite impossible, economically speaking, even to establish them. As contemplative students of Economics you can do so, no doubt — you can send people into the market to observe how supply and demand are working. But the question is: With such observations, are you entering deeply enough into the working of the economic processes? Can you make any use of these concepts? In reality you cannot, because you are leaving out in every case what lies behind the processes which you are trying to grasp. You look at the market; you see the working of “supply” and what is called “demand.” But that does not include what lies behind the phenomenon of “supply”; nor will it comprise all that precedes the appearance of “demand.” Yet it is there that you will find the real economic processes, processes which are only summarized, so to speak, in the market itself. The best evidence of this is the extraordinary fragility of these concepts.

If we wish to form proper, useful concepts, our concepts can and must be mobile in relation to life. We must be able, as it were, to carry such a concept about from one domain of reality to another, and as we do so the concept itself must change. It must not simply go up in smoke. But that is just what happens with the concepts of “supply” and “demand.” Take “supply”: It is “supply” when a man brings commodities on to the market and offers them for a price. That is “supply,” you say; but I say: No, it is “demand.” For if a man brings commodities on to the market and wants to sell them, in his case it is unquestionably a demand for money. In effect, if we do not enter further into the economic process, it makes no difference at all whether I have a supply of commodities and a demand for money, or whether I come forward with a “demand” in the cruder sense. If I wish to develop a demand, I must have a supply of money.

Supply of commodities is demand for money and supply of money is demand for commodities. And these are economic realities, for the economic process (in so far as it consists in trade or barter) cannot take place at all unless there are both supply and demand in the case of both buyer and seller. For what the buyer has for supply — namely, money — must also first have been evolved in the economic process somewhere behind his back, or behind the back of the demand, just as the commodity which appears as a supply must also first have been evolved or produced.

Our concepts are quite unreal if we imagine that price arises from the interaction of what is ordinarily called “supply and demand.” In actual fact, price does not evolve at all as it is defined by this line of thought. For the development of price is undoubtedly influenced by the question, whether the demander can become a supplier of money, or whether perhaps, at a given time in the whole working of the economic process, he cannot become a supplier of money with respect to a given product. The point is not only that there must be a certain number of commodities available as supply, but also that there must be a certain number of people able to develop a supply of money for these particular commodities. This will show you at once that we cannot simply speak of an interaction of supply and demand.

On the other hand, if we look now not to the concepts (which may always be wrongly formed) but to the real facts — the facts of the market or even of the pure, “marketless” exchange of commodities and money — it is unquestionable that prices evolve as between supply and demand. Only the supply and demand are always there on both sides. This is undoubtedly the case, as a pure matter of fact.

The important thing is this: Supply, Demand, and Price are three factors, every one of which is primary. We cannot merely write: “Price is a function of supply and demand,” or — to speak mathematically — treat S and D as variables and P, the price, as a third magnitude resulting from the two, i.e., P = ƒ (S, D). No; we must regard all of them, S and D (supply and demand) and P (price), as mutually independent variables and by that means arrive at another magnitude, X. You see, we are coming to a formula. We must not merely suppose that S and D are the independent variables and that the price is a function of the two. No; we have three mutually independent variables which come into mutual interplay and give rise to something new: X = ƒ (S, D, P). The price is there between the supply and demand, but it is there in a peculiar way.

The fact is, we must approach this whole line of thought from another angle. If we do see supply and demand, at any given point on the market, in the relationship in which Adam Smith saw them — if it really is so in any particular domain — then it is approximately so for the circulation of commodities as seen from the standpoint of the Trader. Even here, it is not entirely the case. And it is absolutely not the case from the standpoint of the Consumer, nor from that of the Producer. For the consumer something quite different is true. The standpoint of the consumer is conditioned by what he has. Between what the consumer has and what he gives, a relationship arises similar to that which arises for the trader as between supply and demand. The consumer has to consider the mutual interaction between price and demand. He demands less when for his pocket the price is too high; he demands more when for his pocket the price is sufficiently low. Altogether, as a consumer he confines his gaze to price and demand.

We may say, therefore, that in the consumer's case we must observe rather the interaction of price and demand; in the trader's case we must observe rather the interaction of supply and demand. Lastly, in the producer's case we shall have to observe the interaction between supply and price. For he will in the first place arrange his supply of commodities according to the prices that are possible in the whole economic process. Thus we may call our first equation — P = ƒ (S, D) — the Trader's Equation. Adam Smith applied it to the economic system as a whole. Thus applied, it is incorrect. For we can also form the following equation: We can regard supply, S, as a function of price and demand. And thirdly, we can indicate demand as a function of supply and price. In this last equation we shall have D = ƒ (S, P) — that is to say, demand is a function of supply and price. This is the Producer's Equation. And in the equation where supply is a function of price and demand — S = ƒ (P, D) — we have the Consumer's Equation. But as I beg you to observe, we shall still have made these equations qualitatively different, inasmuch as here (in the consumer's case) the supply is a supply of money, in the producer's case it is a supply of commodities.* In the case of the trader we have to do with something that lies midway between “money” and “commodity.” †

P = ƒ (S, D) ......... Trader's Equation.

S = ƒ (P, D) ......... Consumer's Equation.

D = ƒ (S, P) ......... Producer's Equation.

* In the producer's case the demand appears to be a demand for money; in the consumer's case it is a demand for commodities. — Ed.

† Price. — Ed.

At any rate, you see how far more complicated our thoughts on the economic life must be. It is just because we try to get at the ideas so easily and quickly that we have no proper science of Economics today. If we wish to enter into the realities, we must ask ourselves: What is there in this economic life? What really lives in it? We may say: What I get for my own needs comes in the first place into my realm. (I will speak of “property” and “ownership” at a later stage; at present I will express myself as indefinitely as possible — even so, it will suffice to cover the facts). It passes — under the conditions that obtain today — into my realm. I give money, or something that I have produced instead of money. That is how things happen as a rule. But think: In saying this, have we really exhausted the full reality of economic life? After all, I may acquire things otherwise than by giving a commodity for money or money for a commodity. I may acquire money and commodities in a different way. Suppose I steal them. Then, too, I shall have acquired something. And if I should carry on the stealing on a large enough scale, as the old robber chieftains sometimes did for decades at a time — why, to apply to such conditions, a very different science of Economics would have to be evolved from that which has, generally speaking, to be evolved for our own code of ethics! Well, it may seem to you a grotesque example when I say: “Suppose I steal the things!” But what is stealing in reality? To steal is to take something away from someone else without his being in a position to defend himself; or again, without the stealer finding it convenient to exchange the thing for an adequate return. Compare, for example, this now disreputable concept of “stealing” with the concept which we (in the German language) signify with a foreign word when we speak of “requisitioning” or “commandeering.” Under certain circumstances one commandeers things — that is to say, one takes something away from people and gives them nothing in return. In other cases, too, it happens in the economic process that something is taken away from people and they receive nothing in return. These are things which we need only mention, for if we dwelt on them any longer, people would imagine that we were anxious to agitate; and I only wish to develop a science here, I do not wish to “agitate.” Now assume for a moment that somewhere or other — within a comparatively small region — I establish a social order wherein money is abolished. Instead, I organize a system of raids with the necessary armed forces. Those who possess anything are knocked down or killed and the things taken away from them. Well, what is there against that happening? There is this: that the others may perhaps defend themselves. In that case they must have the means to do so. Or again, it might not be worth while. If my territory were not large enough, it would not be worth while.

All this shows that something else has to play over into the economic process at this point. I cannot without more ado take something away from someone else. Why not? Because first, it must somehow be recognized by my fellow-men that I shall be allowed to keep it. And it will by no means be recognized that I am allowed to keep what I have acquired by killing my fellow-men in the surrounding country. What is it then that plays into the economic life at this point? It is the life of Rights; it is Law and Order. You cannot really consider the economic process without observing how law plays into it at every point. You cannot think out the economic life, nor can you bring to pass whatever it may be that you intend, without considering this interplay of legal Rights and Economics. Why, the moment you pass from mere barter to trade assisted by money, you see directly how the principle of Law plays into Economics. For how otherwise, ladies and gentlemen, could it be possible, in return for a pair of boots, to get not a top hat, say, but a pound or whatever it may be? I have saved myself the trouble of giving the tradesman a top hat; I have given him a pound instead. I have my boots; he has the pound. How otherwise should this be possible? If the pound (even if it were a golden sovereign) were recognized by no one as a real value — a value for which something could be received again in return — if it were not rightly installed in the whole economic process, the cobbler might have collected ever so many pounds; it would be of no use to him. Thus the moment Money makes its appearance in economic intercourse we see quite palpably the appearance of the element of law. It is extremely important to bear this in mind. We can only look at the social organism as a whole if we pass from purely economic events to events which take place under the influence of the life of rights.

Let us now assume that I have got my pair of boots from the cobbler and have given him the pound. Now it might happen that the cobbler, just after having sold me the pair of boots, suddenly remembered that cobblers have at times in the world's history been something else besides cobblers (witness Hans Sachs and Jacob Boehme) and having got the pound he might think of doing something quite different with it instead of making another pair of boots. He might do anything with it, into which he put his ingenuity, his genius. So that the pound would suddenly have quite a different value for him than the value of a pair of boots. Thus, the moment we have transformed the commodity into money, that is to say into a lawful right, the right can either be kept (I use the pound to buy me something of equal value with the pair of boots) or through my ingenuity I can do something with the money to produce an altogether new value in the economic process. It is here that the human faculties come in. The individual faculties, which grow quite freely among men, enter in and incorporate themselves in the rights which men acquire with money, just as money, which may be regarded — in this sense — as rights realized, incorporates itself outwardly in the commodity. Thus we have now placed into the organic process which we described provisionally when we spoke of Nature, Elaborated Nature, and Labor divided and organized by the Spirit — we have now placed into this whole process the principle of Law or Rights and the Individual Faculties of men. We have found, within the economic process itself, a division which is in truth a threefold order — a Dreigliederung (threefold memberment, threefold articulation). Only it is necessary that we think of this Dreigliederung in the right way.

If we observe the economic process, we perceive that just because the things I have now been describing are real facts, just because of this, certain impossibilities are actually realized in the economic life. For, you see, one can also acquire a right by conquest or the like; by having the power to take it. One does not always acquire a right by mere exchange; one can also acquire it by having the opportunity or the power to take it for oneself. Here we have an element in right, which, in so far as it is present, is quite incapable of comparison with commodities. There is no point of contact between commodities and rights. Nevertheless, in the actual economic process, commodities (or the money-values representing them) are perpetually being exchanged for rights. Precisely when we pay for land, even when we merely help with our rent to pay for the value of the land, we are paying for a Right with a Commodity or with the money which we have received for a Commodity. At any rate, we pay for a Rights-value with a Commodity-value. Again, when we appoint a school teacher and give him a certain salary, we are (sometimes, at any rate) paying for spiritual faculties with the value of a commodity or a corresponding money-value. Thus there perpetually occur in the economic process exchanges between Rights and Commodities, between Faculties and Commodities, and also between Faculties and Rights.

Mutually incommensurable things are exchanged for each other in the economic process. Consider what happens when someone gets paid for an invention that he has patented. To begin with he accepts payment for a purely spiritual value that is being paid for in commodity-values. There is absolutely nothing that could figure as a standard of comparison in such a case. Here we are touching on an element where Life enters into the economic process with a vengeance! And the thing becomes still more complicated when we introduce the concept of Labor.

I have already said that the wage-laborer does not in reality receive what is generally understood by the idea of “wages,” but that he really sells the product of his Labor for shillings and pence to the enterpriser and thus receives payment. It is only through his expert knowledge of the market that the enterpriser gives the proper value — or at any rate a higher value — to that which he buys from the laborer. Economically considered, the profit is not extracted from the Labor as a surplus value. By economic thinking we cannot possibly arrive at such a judgment. We can at most arrive at it by a moral judgment. The profit is due to the fact that the laborer is in a less favourable social situation. The products which he sells have less value at the point where he sells them than at the point where the enterpriser sells them. For the enterpriser is in a different position — he knows the circumstances far better, he can sell at a greater advantage. The worker's relation to the enterpriser resembles the case of a man who goes on to the market and buys a commodity for a given price. He must buy it there, for the simple reason that his circumstances will not allow him, let us say, to buy it anywhere else. Another person may perhaps be able to buy it more cheaply at another place. The two cases are exactly the same. Economically speaking, that which obtains as between the enterpriser and the wage-laborer is simply a kind of market.

But it undoubtedly does make a certain difference, ladies and gentlemen, whether I am fully conscious that this is the case or whether I imagine that I am paying the laborer for his Labor. You may think the difference merely theoretical, but let such a view of things — or two such views, the one and the other — become real. Let them be realized, and you will see how the economic relationships change under the influence of one view or the other. For what happens between human beings is, among other things, the result of their mental outlook, of the ideas they entertain. As our mental outlook changes, it changes the course of events. Today the whole proletariat bases its agitation on the idea that Labor must be properly paid for, But in fact Labor is nowhere paid for; only the products of Labor are paid for; and this — if it were truly understood — would also come to expression in the actuality of price. We cannot say that it makes no difference whether we call something a wage or the price of a commodity. For the moment we speak of wages, we imagine that we are paying for Labor, and then we go on to all the secondary concepts which confuse Labor as such with other economic processes which are value-creating. Then the social conflicts arise in a false way. The social contracts arise in a true way in so far as they arise out of sentiments and feelings. Sentiments and feelings are always in some way right; but we can never correct what ought to be corrected if we have not the right concepts. This, ladies and gentlemen, is the fatal thing in social life. Often the grievances arise in a way which is right, but the corrections are made under the influence of false concepts. In every detail people evolve these false ideas and carry them over into their whole conception of the economic process, so as to wreak havoc.

Take a very simple example. A gentleman (this is a true story) once said to me “I am very fond of sending picture postcards to my friends. I send lots of them.” I said, “I am not at all fond of sending picture postcards — and that,” I said, “for economic reasons.” At that time I had not quite as much to do as I have now. “Why?” he asked. I said, “Every time I send a picture postcard, I cannot help thinking: Perhaps a postman will have to run right up to the fourth floor with it. In short, I cause a change, a redistribution, in the economic process. It is not the Labor of the postman that matters, but in the postman you cannot easily distinguish the ‘service,’ the thing done, from the Labor. It is the service that we must estimate. If I keep sending picture postcards to my friends, I increase in an uneconomic way the services to be rendered by postmen.” “That is an economic fallacy,” said the other man, “for on the assumption that one postman need only do a limited amount, an increase in the number of picture postcards will mean that new postmen will have to be employed, and these postmen will get paid. So you see,” he said, “I am really a benefactor to the people who get these jobs.” I could only answer: “Yes, and do you also produce all that they eat? You do not increase the available means of consumption in the very least. You merely bring about a redistribution. To employ more postmen is not to increase the available means of consumption.”

Yet this very idea, ladies and gentlemen, often brings about the very crudest errors in individual cases. For suppose that there is a Borough Council consisting of people like my friend — as may well happen; indeed, such men may even become Cabinet Ministers and then it will be a Cabinet. Then they will say “There are so and so many unemployed. Let us put up new buildings or the like, then the people will be provided for.” Yes, for the next five steps ahead you have rid yourselves of the problem, but you have still produced nothing new. The workers as a whole have no more to eat than they had before. If I let one side of the scale sink, the other side must rise. Thus if you give such instructions not as part of a whole coherent economic process but as a mere isolated measure, an economic calamity must necessarily have arisen on the other side. If we knew how to observe these things, we should be able to reckon it up: By making social reforms in this way, merely giving means of subsistence to the destitute or unemployed, by having new buildings erected, we shall have increased the price of this or that article for a number of other people. In the economic sphere, above all, we must not think short-sightedly. We must think all things in connection. We must think things in connection with one another, as a whole.

But, you see, that is not at all easy to do, for the simple reason that the economic process is very different from a scientific system. A scientific system in its totality can be contained in a single human being — perhaps only in outline, but still, it can be contained within a single human being. But the economic process can never take place in its totality within a single human being. The economic process can only find its reflection where judgments, proceeding from men who stand in the most varied spheres, are working together.

The only possibility of arriving at a real judgment on these things — not a theoretical but a real judgment — is by way of association. In other words, take the three equations once again: A man who is familiar only with the ways and customs of a tradesman will always have the first equation in his head. He himself will trade under the influence of this equation; he will thus be in a position to know the influence which this equation exerts. Likewise the consumer who intelligently follows and observes the process of consumption will understand the influence of the second equation; and the producer will know all that is subject to the influence of the third. At this point you may say: But surely, men are not so unintelligent as not to be able to think beyond their own narrow horizon. Surely a man who is merely a consumer or merely a tradesman can think beyond his own horizon? Yes, that is perfectly right, where one general world outlook is concerned. But in practical economic life there is no other effective way of knowing what is going on in trade, for example, except to be engaged in trade oneself. You must be in the midst of it, you must be trading. There is no other way. There are no theories about it. Theories may be interesting, but theories are Natural Science. The point is not that you should know how trade goes on in general, but that you should know how the products circulate in the process of trade in Basel and its immediate neighborhood. And if you know that, you do not thereby know how they circulate in the Lugano district. The point is not that we should know about things in general, but that we should know something in a particular region. Likewise if you can form an effective judgment as to the higher or lower prices at which scythes or other agricultural implements can be manufactured, you do not thereby know the prices at which screws can be manufactured or the like.

The judgments that have to be formed in the economic life must be formed out of immediate, concrete situations. And that is only possible in this way: For definite domains or regions (whose magnitude, as we have seen, will be determined by the economic process itself) Associations must be formed, in which all three types of representatives will be present alike. From the most varied branches of the economic life, there must be the representatives of the three things that occur in it: Production, Consumption, and Circulation.

It is really tragic that no understanding should be found in our time for what is after all so simple and so sensible. For the moment there is a real understanding, the thing can be done, not even by the day after tomorrow, but by tomorrow. It is not a question of radical changes, but of seeking for the proper associative union and cooperation in each case. You need only summon the will and the intelligence to do it. This is the thing that touches one so painfully, for at this point, after all, economic thinking does to some extent coincide with moral and religious thinking. To me, for instance, it is quite unintelligible how this way of tackling the economic problem could have been entirely neglected by those who are officially in charge of the religious needs of the world. For there can be no doubt about it: during recent times it has clearly emerged that the economic facts are no longer being mastered. The facts have gone beyond the mastery of human beings. Today we stand before this question: How can the thing be mastered, how shall we grapple with it? It must be mastered by human beings, by human beings in association.

I do not wish to make a pun at the end of a very solemn line of thought, but I would say: Our science of Economics has not kept pace, in its conceptions, with the transition which has actually taken place from the economics of barter to the economics of money and the economics of human faculties. In its essential concepts, our Economic Science still fumbles about within the economics of barter. It continues to regard money as though it were just a symbol for barter. I know that this will not be readily admitted. But it is implicit, nonetheless, in the prevailing theories. And so we have this situation: In the older economic systems (though these may no longer appeal to us today) people bartered or exchanged (German tauschen = to barter). Then money came in. (As I said, I do not wish to make a pun, but the genius of language itself is working here.) “Tauschen” (barter) became “täuschen” (illusion or deceit) and everything became unclear. Today we deceive ourselves in almost all our economic processes. The “tauschen” has become a “täuschen” — the exchange (or barter) an illusion. I do not mean that there is deliberate deceit, but that the whole process becomes confused and deceptive. We must first get to the root of things once more and see how our economic processes inwardly take place.

Source: https://wn.rsarchive.org/Lectures/GA/GA0340/19220731a01.html