I’ve been thinking about the fundamentals of economics and how optimisation and computation of equilibrium in economics assumes a closed system. And the problem is that the economy is an open system – new products and services keeps getting created. New business models comes into play that puts a price not just on the product or service but also the time dimension of when you consume or how you consume it. These complexities cannot be easily modelled.
But above all, the basic premise in economics that consumer preferences is the main driver of the market is flawed. At the heart of economics and the understanding of scarcity is that the world’s limited resources meets our unlimited wants – and the market is the device that makes the allocation so that things are optimised (based on whatever ways we weigh various preferences). In this line of thought, consumer preferences are supreme. But are they?
Just by mere observation one realises that the firm (ie. the producers) invest into marketing, branding and promotions in order to create wants. At the same time, there are addictive substances that also generate cravings and skew the preferences of people who have had a taste of it to begin with. Addiction either by chemistry or psychology is a channel by which the market can turn back to alter consumer preferences for its own goals. Therefore, it is important for us to recognise and understand what is the problem we are getting the market to solve when we simply leave things up to the market.