Making Sense of Insensibility With The Dismal Science

Economics assumes rational decisions and efficient markets, though the world does not work that way. Yet, some tenets of the discipline hold up an essential mirror to human behaviour

- SATYAJIT DAS

In an 1849 essay, Thomas Carlyle described economics as the "dismal science." Attempts to elevate the discipline involves the use of mathematics and statistics, which John Maynard Keynes thought was limited by its assumptions and simplifications usually hidden in unhelpful symbols and equations. Fellow economist Kenneth Boulding concluded that quantitative tools brought both 'rigor' and 'mortis' to economics.

While much of economics only provides employment for economists and is a veneer of learning to decision making, some tenets are indeed insightful.

First, supply and demand of goods and services is the basis of life and economic activity. Around 60 percent of global national income is driven by consumption. While policymakers focus on maintaining the right level of demand, the supply of essentials like water, food, energy and minerals is increasingly constrained. Inability to produce sufficient raw materials is hampering the transition to lower-emission power generation.

The price of a product is where supply and demand equate in a market-clearing equilibrium. So a growing imbalance between demand and supply is likely to underpin increasing price pressures for many products.

Price sends off signals, with high prices decreasing demand and bringing new supply online to match it. It leads to boom-bust cycles as markets try to reach a sustainable balance. Businesses consolidate and try to lower competition, creating barriers for new entrants, by means fair or foul, to optimise profits. Oligopolies or monopolies in industries like technology, retailing, telecom and airlines manage supply to maintain prices. Items where demand increases as the price increases—called Veblen goods—explain the perverse characteristics of luxury products where affluent consumers purchase high-priced items as a status symbol.