Demand and Supply, What do you really know about them?

Monday 12th August 2019

It is not rare to hear people in general, even the well educated, extol the benefits of market forces and the importance of the workings of demand and supply. However, a deeper analysis of market forces is that they are not designed to create growth but to contain it, which is not useful for poor countries: if there’s barely anything to contain and per capita incomes a are low, what is created is a ring fence in which poorer countries are trapped because they are taught to believe there’s nothing better beyond the fence. What free markets theories peddle, even in savvy sophisticated finance circles, is that a national economy does not need a stimulus to grow, because growth will come naturally from free markets. Therefore, there should be no government intervention in an economy, that is, leave economic growth to the free market or private sector to create this on its own.

Sadly, even education at tertiary levels reinforces this belief. Developing countries are persistently deceived by this kind of economics due to the fact that well learned policy makers are taught to think this way. For instance it’s easy to state that as demand for a product increases its price will rise or that as supply increases price will fall making a product cheaper and sell this magic mechanism in introductory economics as a wonderful self regulating device that should be left to itself to ignorant wide eyed listeners. However, if this mechanism is preventing growth rather than providing it how is it fundamentally useful in its current state to poor countries like Zambia, and why should it be left alone? The stagnation and deadlock created by market forces dictate the opposite, which is that the government through a central bank and ministry of finance cannot afford to manage an economy without providing a stimulus. If these institutions sit back and do nothing because this is what the text book says, the risk is slow growth and in a worst case scenario recession. Without a stimulus Zambia faces this very dilemma. More on the deadlock in economic growth created by market forces left to themselves is explained later, in the excerpt.

Its common sense that businesses position themselves in the free market to obtain the best or highest profits they can reasonably obtain in order to grow and yet a fundamental doctrine in neo-classical economics is an abhorrence for profit which is referred to as abnormal or super-normal. In other words neoclassical economic theory (SRT) by nature, inherently designs an economy where businesses are expected to cope with an income they can barely survive on [a hair above the break even point]. In other words it is neoclassical economics learned, yet somewhat deranged, desire for businesses not to stray far from debilitating zero growth whilst at the same time it applauds mediocre growth rates such as 4% or 7% per annum. A pertinent reason why viable industries in developing countries seem to flounder such as aviation [e.g. Zambia Airways] and mining is simply due to issues to do with economies of scale. These industries are highly capital intensive and without economies of scale to deliver the financing they need to run smoothly there is no level of management that can successfully run these industries. No one will tell an African management team this, instead they will say these industries fail because Africans, locals or developing countries in general are poorly qualified. When a Split Velocity system is engaged the financial sector gains the capacity to successfully fund industries that are generally capital intensive, operating costs fall and the myth that developing countries cannot participate in these sectors alongside FDI will be dispelled.

Technocrats in developing countries are simply not equipped to understand how inadequacies in neoclassical economics, even at such basic levels are working against them and the economies they manage, instead they are taught not to deviate from these flawed theories that inspire them to sit back and watch market forces melt down a potentially robust and healthy economy. They maintain policies related to these flawed theories for the sake of appearance, in order to conform and appear professional to the international financial community when these approaches are in fact hurting their economies. A change in mind set is long over-due.

Similarly, most of the solutions offered for Zambia’s domestic and international debt crisis are a boring parody of approaches to neoclassical economics developed countries would prescribe, blindly read in a textbook or garnered from some conventional research journal in the hope that repeating ideas from credible sources suspends the need to apply logic to them. Pundits do their best to remain in conformity with intellectually weak economic theory gained from developed countries when these same approaches are riddled with inadequacies and a mediocre understanding of economic growth they themselves are unaware of and just as readily trapped in. A Split Velocity system, which goes further than developed countries have ever gone, in recent times, to address poverty and accelerated growth would wipe out Zambia’s economic woes, with relative ease.