Supply, Meet Demand

December 3, 2008

Imagine that Safeway, a major grocery store chain in my area, decided tomorrow to adopt a new business plan. They’re getting out of the low-margin grocery business; from now on, they’re going to sell nothing but spatulas. So they make the switch. Groceries out, spatulas in.

At present, I get about 80% of my food from Safeway. What, then, will be the impact on my life of Safeway’s new policy?

If you said, “Your food consumption will drop by 80%” then Congratulations! You will have great success as a commentator on the current financial crisis.

Now, you know as well as I do what would happen if Safeway stopped selling groceries: I would go somewhere else for my food. Safeway didn’t create itself out of nothing, it was created in response to a pressing need people have: namely, the need for food. At present, I happen to rely on Safeway for many of my groceries, because they have a good selection at reasonable prices, and because I want to eat. If Safeway were to go bankrupt or stop selling groceries, it’s obvious that I wouldn’t starve; I would simply go somewhere else.

Contrast this with the descriptions of what would happen if our current financial institutions were to fail. All credit would freeze up. Small businesses wouldn’t be able to get loans, nobody would be able to make their payroll, everyone would be thrown out of work. At some point, we would be forced to crack each other’s heads open and feast on the goo inside.

All economic logic says that this is nonsense. Everybody knows that if one or more grocery stores were to go out of business, we would still be fine, because we understand that our need for food created the grocery stores, not the other way around. But we believe that the current banking system does something magical and necessary that we can’t begin to comprehend, let alone replace with new institutions.

Markets work because when an opportunity to profit by satisfying some desire exists, people take advantage of that opportunity. We feel that this is true for groceries, for computers, for automobiles, for airline tickets, etc., but somehow we can’t see that it is true for financial products as well. 

Believing that there will be no money because companies suffer the consequences of making bad loans is as silly as believing that I will starve because I can’t get my groceries from Safeway anymore.


2 Responses to “Supply, Meet Demand”

  1. Rrrrobert! Says:

    You oversimplify, as usual. If Safeway suddenly started selling spatulas, you would of course try to get your food somewhere else. But other local grocery stores would find themselves overwhelmed with the unexpected influx of customers. Their suppliers wouldn’t immediately be able to satisfy the increased demand and stock the shelves. And for a while, there would be a certain amount of grocery chaos.

    With larger financial institutions, the worry isn’t that credit will cease to be, forever. The worry is that, since the invisible hand doesn’t work instantaneously, the collapse of financial giants would temporarily disrupt credit – that, for a few weeks or months, businesses wouldn’t be able to get loans or make payroll; that this would cause a serious disruption in the short-term an order of magnitude (at least) more than the bailout itself; and that that would result in lots of medium-term fuckage as that disruption resonates throughout the economy.

    The microeconomics of supply and demand for credit are separate from the macro economy. While the former will always reach equilibrium eventually, the latter can be severely affected by a short-term disruption of that equilibrium. The object of the bailout is not to interfere with the supply of credit for its own sake – the object is to reduce the length and depth of the recession by intervening in the credit market. You can, of course, debate the wisdom or possibility of this, but it’s not as obvious as you imply.

  2. Thomas Says:

    is “fuckage” a technical term? :p

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