From: "Lev Lafayette"
In contrast I don't see much argument against a core economic principles,
example, that if the supply of a good is restricted the price goes up,
or if the price is increased the demand is reduced.
For sure... I think a lot of economic principles are true at a zeroeth
approximation, even a first approximation, but not much past that point.
Take for example, your suggestion that when prices go up the demand is
reduced. This is true sometimes.
For example, when customers take price to be a signal of quality, demand
can go *up* when the price is increased. I experienced this during my
consulting career when, after increasing my rate, the demand went up. Shops
like jewelry shops and other outlets for status goods also tend to find
demand can go up when the price is increased.
Another example, a very important one, is asset markets. After a long bull
run in the US stock market, various indicators of investor demand are at
all-time *highs* (margin lending, AAII sentiment, put/call ratios etc).
When house prices rise, people can get more desperate to get in "before
it's too late". The price is up and the demand has gone up as a result!
Having studied both economics (intermittently since 1971) and physics
(intermittently since about 2007), I find that the big difference is that
the physicists tend to take their models a lot less seriously than the
economists. Simplifications like "perfect markets" are very useful
abstractions, which help to explain much. But one should not confuse real
markets with perfect markets.
As another example the efficient markets hypothesis is true to a zeroeth
degree, but it depends on efficient arbitrage which breaks down in all
sorts of ways (agency problems, risk that cannot be gotten rid of,
regulatory impediments to competition etc).
Witness also the long delays in recognizing - and hostility to those
pointing out - the non-normality of fluctuations in financial market
prices (see eg Mandelbrot's autobiography). And this non-normality is not a
small issue. Out in the margins, it means the risks are thousands of times
higher than the standard models would suggest.