The Price of Power: Supply and Demand Delusions in Neoclassical Economics

Supply and demand are two of the most important concepts in economics, but the way neoclassical economists often talk about them is downright delusional. In this post, I’ll explain what prices actually mean in relation to supply and demand, and how these phenomena are entangled with the broader social order.

Introduction: The Marshallian Scissors

It’s certainly true that supply and demand provide important constraints on economic activity and the dynamics of the nominal domain. If 95 percent of the world’s apples suddenly disappear tomorrow, it’s a safe bet that global apple prices will rise dramatically. In the critique that follows, I am not rejecting supply and demand as useful categories of economic analysis; I am specifically rejecting the way that these two concepts have been abused and manipulated within neoclassical theory itself. I have often employed supply and demand as explanatory concepts in my book, The Physics of Capitalism, and throughout my writings, both here on Substack and elsewhere. But I have only done so by placing these phenomena within broader causal and historical contexts.

What I’m attacking in this post is the naïve Newtonian picture in which supply and demand function like mechanical forces that pull and push prices in different directions. Too often in both academic and public discourse, it’s this silly picture that’s blindly repeated, and virtually all changes in prices, wages, and profits are automatically attributed to “supply and demand” like a Pavlovian reflex. This was especially the rationale du jour during the height of the Covid pandemic, when much of the media and many academic economists kept spitting out the phrase “supply and demand” for any unusual patterns in consumer goods prices, labor markets, real estate markets, or any other strange activity in the global economy, making hardly any further attempts at deeper explanations.¹

We’ve arrived at a point where “supply and demand” has become a popular catchphrase, repeated just because everyone else seems to be saying it, but without any actual awareness of its meaning or implications. In reality, the nominal domain of prices, profits, and wages is heavily filtered and structured by intermediary social relations and various economic and political struggles over the distribution of economic resources.² Prices don’t just move in tandem with changes in the biophysical world; their actual trajectories are heavily influenced by intervening social dynamics. In other words, prices are symbolic indicators of corporate power and class dynamics. The ruling classes establish the economic conditions that govern the world, and prices then emerge from these conditions as an artificial landscape.

In his 1890 work Principles of Economics, the American economist Alfred Marshall argued that prices are determined jointly by supply and demand, mocking people who favored one side or the other with a famous analogy about scissors:

We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production.³

The Marshallian scissors have since become an endemic component of neoclassical theory, etched in the memory of every undergraduate through a gazillion charts showing supply and demand curves producing equilibrium prices. But this otherwise perfect analogy contains the seeds of its own destruction. Scissors don’t magically move themselves. Someone is there controlling them. Someone is there deciding how quickly or slowly to cut. Someone is deciding the lines and shapes that are being cut. And therein lies the crux of the problem. By heavily focusing on this seductive catchphrase, we miss the underlying forces that actually drive economic behavior.

The traditional neoclassical story tells us that prices are determined by supply and demand. The law of demand states that, all else being equal, prices are inversely related to the quantities demanded. If something becomes more expensive, people will want to purchase less of it. And the law of supply says almost the opposite: all else being equal, prices are directly related to the quantities supplied. If prices rise for a particular commodity, then producers will want to supply more of it, so they can make more money. The dynamic competition between these two economic levers is supposed to yield the “equilibrium” price. That’s the neoclassical story in a nutshell: scarce things are expensive and plentiful things are cheap. There are many good reasons to doubt whether this neoclassical story is universally true at an empirical level, especially for subsistence items like cheap food.⁴ Nevertheless, this won’t be the main focus of my criticism. There are deeper and more foundational issues at play in this discussion, and that’s where my focus will be instead.

Causation and Demarcation

The first major reason why neoclassical price theory is so vacuous has to do with causation. If changes in prices are caused by changes in supply and demand, then what’s causing changes in supply and demand? One cannot fall back on tropes about how there’s a feedback loop here, because real feedback loops are always causally embedded in a larger environment; they’re never isolated. For example, the water cycle can be seen as a series of feedback loops, but all of those feedbacks depend on gravity, chemistry, and so many other background conditions. It’s therefore not convincing to rely on circular reasoning and to claim that prices and supply and demand cause each other.

The basic truth is that supply and demand are incidental causes, at best. Price dynamics are fundamentally caused by social and political struggles over the distribution of economic resources. Supply and demand cycles are usually engineered by powerful individuals, corporations, and governments, as a strategy to yield the prices and profits they ultimately desire. There is perhaps no better example of this in American history than Standard Oil, an infamously corrupt corporation that frequently bribed entire state legislatures and toggled all the supply and demand levers imaginable as a way of manipulating prices and crushing competition.⁵

Figure 1: A 1904 depiction of Standard Oil as a ruthless octopus extending its tentacles across the American political system, holding everyone and everything in a death grip.

Gas prices in the Western world skyrocketed in 1974 because the OPEC cartel temporarily suspended oil shipments to Western countries as punishment for supporting Israel in the October War.⁶ The price of gas didn’t rise because a shortage magically and spontaneously appeared out of nowhere. It increased because of geopolitical dynamics, which caused the shortage in the first place. The De Beers cartel deliberately restricted the supply of diamonds in global markets throughout the twentieth century, leading to grotesque price inflation along the way. In some years, De Beers held back and warehoused up to 60% of its annual global diamond production from wholesale and retail markets.⁷ A typical neoclassical economist would look at the situation and blame a supply shortage for the high price of diamonds, just like they’d reflexively blame a supply shortage for the high price of anything. But there was only a supply shortage because De Beers artificially created one to cement its stranglehold over the diamond industry.

The examples go on and on. In the First Browser War, Microsoft deliberately gave away Internet Explorer for free by bundling it with the Windows OS, all in an effort to drive Netscape out of business.⁸ That strategy, along with other similar anti-competitive practices, eventually worked (see Figure 2). In recent times, meatpacking monopolists like JBS, Cargill, and Tyson have artificially reduced the number of cows they purchase for slaughter, driving thousands of independent ranchers out of business and using the artificial scarcity they created as a convenient scapegoat for sky-high beef prices at the grocery store.⁹ This is what pricing fundamentally reveals: the corporate landscape of power and domination under capitalism.

Figure 2: Internet Explorer dominated the browser market by 2002 after Microsoft went on a ruthless monopolistic warpath. See here.

To think of supply and demand as omnipresent forces that somehow control prices behind the scenes is to ignore the active agency of powerful individuals and corporations in establishing the critical parameters of the nominal domain, from prices and wages to profits and interest rates. Imagine a child hitting a baseball that accidentally smashes the neighbor’s window and then has the nerve to tell his neighbor, “Well I didn’t break the window. The ball did.” In a silly and pedantic way, it’s of course true that the ball physically penetrating the window caused it to be smashed into pieces. But then again, it was the child who swung the bat and gave the ball its unfortunate trajectory, and this is the cause we ultimately care about. Neoclassical economists recycle ritualistic propaganda about supply and demand and the “invisible hand” of the market as a way of obscuring and marginalizing the critical factors, like social power and class domination, that collectively have a far more profound impact on the dynamics of the nominal domain.

Next, let’s turn to the problem of demarcation. It’s not easy to know how to define or measure supply and demand in specific circumstances. Take oil as an example. What is the global supply of oil? Is it all the oil on planet Earth? Is it all the oil in proven reserves? All the oil in commercial or strategic inventories? How about the finished oil products stored in refineries or marine terminals? Take housing as another example. What’s the supply of housing? Is it the stock of existing homes for sale? The stock of new homes for sale? Both combined? What about non-rental vacant properties? What about new finished homes held back for inventory? The fundamental reason why this issue matters is because we might find results that are consistent or inconsistent with the laws of supply and demand depending on how we define these terms and what we actually measure. If the global oil supply is all the untapped reserves on planet Earth, then oil extraction over time depletes that finite stock, implying that prices should get consistently and continuously higher, if the law of supply is right. But that’s not what we see; oil prices actually exhibit huge swings and variations over time.

Given these problems, economists typically understand the term supply to mean whatever is available for sale in a market. Business economists often differentiate between the stock, which is what the seller holds in reserve, versus the supply, which is the amount offered for sale in the market.¹⁰ This distinction is relevant because market supply is often poorly defined, and the available supply will depend on what we decide to include as part of the market in question. But more importantly, supply is often artificially constructed by those who have the power to do so. Capitalists routinely create artificial scarcity by controlling how many products show up in markets in the first place. As mentioned above, De Beers used to keep diamonds off the market so it could inflate diamond prices, and OPEC does the same thing with its production quotas on oil. Ticketmaster often sequesters upfront a large percentage of tickets for major events, leading to sharply higher prices on tickets sold by brokers, especially in secondary markets.¹¹ Real estate developers have deliberately reduced and constrained the production of new single-family homes, allowing them to justify higher prices on the homes that are available for sale.¹² Pharmaceutical companies in the United States use a variety of legal and political methods to limit available drug supplies, like evergreening and lifecycle management, thus pumping up prices for millions of people.¹³ Restricting supply is a time-honored capitalist tradition designed to make goods and services seem like they’re special and exclusive. For that reason, defining supply as just the stuff that’s available for sale in the market is often an ideological cover for the corrupt and self-interested decisions of elite capitalists.

Demand is even more notoriously difficult to define than supply. Here’s how the economist Susan Feigenbaum puts it: “The quantity of a good a person is willing and able to purchase at any given price during a specified time period . . . all other factors held constant.”¹⁴ Two other economists used a bit of mathematical caricature to define the concept: “Demand = Desire to Acquire + Willingness to Pay + Ability to Pay.”¹⁵ These definitions all sound great and intuitive, but it doesn’t take much thought to realize that they’re pseudoscientific pablum. How does an economist exactly measure someone’s desire or willingness to purchase something? The short answer is that they can’t; all they can do is measure what products were purchased, in what quantities, and the corresponding prices. Desire and willingness are neurobiological phenomena that cannot be accurately and consistently measured with our current technological systems. Speaking in these silly terms is part of the lazy neoclassical effort at explanations based on methodological individualism, the notion that economic behaviors and decisions are derived from the autonomous preferences that exist within individuals. But the reality is that people take plenty of economic actions that have absolutely nothing to do with their internal desires and personal preferences, simply because we’re social creatures whose actions are often influenced, and sometimes even forced or manipulated, by others.

Time and Equilibrium

As if these issues aren’t bad enough, there are also problems related to time and equilibrium. It’s possible to get conflicting conclusions about the laws of supply and demand depending on the time intervals under analysis. This issue points to a general problem in economics: a cherished empirical relation might hold for five years or so, then break down completely once we get out to twenty or thirty years. Alternatively, the relation in question might hold up pretty well over long periods of time, but could easily break down over short time intervals, such as weeks or months.

Another issue is the problem of stability and equilibrium. For any given price point, there exist an infinite number of supply and demand curves that could generate that price. Because it’s practically impossible to measure supply and demand, at least as they’re typically defined, it’s also practically impossible to identify which curves are responsible for generating any given feature of the nominal domain, from individual salaries to commodity prices. This is an especially important point, because even if we grant the neoclassicals all their wildest fantasies about supply and demand determining everything, the practical consequences of that admission are virtually irrelevant as there’s no way to empirically nail down the supply and demand curves to which specific markets are supposedly responding. And if we can’t do that, it becomes hard to make policy recommendations based on supply and demand considerations, since we wouldn’t know which supply and demand curves apply to households and businesses, both at a microeconomic level and at an aggregate level.

In the 1970s, the economists Hugo Sonnennschein, Rolf Mantel, and Gérard Debreu published a series of papers concerning the uniqueness and stability of general equilibrium in neoclassical economics.¹⁶ General equilibrium is a hypothetical macroeconomic state where aggregate supply is supposed to equal aggregate demand. Their work came in the context of earlier results from Debreu and the American economist Kenneth Arrow showing that general equilibrium could exist, but only under highly idealized assumptions that apply absolutely nowhere in the real world. The results of Sonnennschein, Mantel, and Debreu collectively became known as the “SMD theorem” after their last names. The SMD theorem states that general equilibrium, even if it exists, is neither stable nor unique. If an economy reaches a state of general equilibrium, it won’t be able to stay there. And what’s worse, there are multiple paths toward general equilibrium, opening up the problem of which path we should pursue. In short, the SMD theorem is a highly negative and deflationary result for neoclassical theory because it shows that even if you know the equilibrium prices that prevail in general equilibrium, that information cannot tell you anything about the underlying economy that actually produced those prices. In effect, there are many “microscopic configurations” that can produce the same state of general equilibrium. Later results from economists like Alan Kirman, Donald Saari, Donald Brown, Chris Shannon, and others have only strengthened and expanded the original conclusion.¹⁷

And finally, there’s the problem of interdependence. Neoclassical economists often think that supply and demand are autonomous and independent forces that jointly settle to some equilibrium state and determine the corresponding economic outcomes. That’s the fantasy. In the real world, however, supply and demand are not actually independent functions that magically settle on some equilibrium price. The two are fundamentally synergistic and interdependent precisely because governments and corporations usually try to control both levers when they plan for the future. Large corporations actively intervene to shape and influence the demand patterns of consumers through a bewildering array of strategies. For example, AI and semiconductor companies like NVIDIA have been recently adopting circular and vendor financing models to allow their customers to keep buying.¹⁸ In other words, they’re starting to artificially generate their own demand. More broadly, dominant corporations spend hundreds of billions every year on advertising to persuade people to buy junk they don’t need. They also spend vast sums of money to lobby politicians, to make campaign contributions, and in some cases to outright bribe lawmakers to get their desired legislative result. They exploit their monopoly power to knock out potential competitors and to erect barriers to market entry, thereby substantially narrowing and limiting the available market options for consumers.

These actions and patterns speak to a broader truth about capitalism: markets never bring about order by themselves, they are always constructed from pre-existing orders and social structures. Dominant corporations don’t just sit around waiting until consumers “like” their products; they ruthlessly manipulate the law and the political system to shape and corner the market as they wish. The notion that economic outcomes are the product of decentralized and distributed networks is a lazy and vapid fairy tale designed to excuse the failures of the status quo. All social and economic orders are constructed from the dynamic interplay of pre-existing class and power relations. But elites and capitalists are largely missing from neoclassical theories. In this fantasy world, it’s only consumers and regular people who make choices, like what house to purchase, where to go to college, or what business to start. The rich and the powerful apparently have no agency whatsoever. It’s not capitalists who set wages and prices; it’s the market, through spontaneous orders, invisible hands, and ghosts in the machine. In the neoclassical paradigm, the market has the same function as God did for elites in the Middle Ages: it’s a convenient deus ex machina for justifying and eternalizing the current structure of the world. In the neoclassical vision, the consequential decisions of powerful elites are reimagined and abstracted as mysterious market forces, both to legitimize the social impacts of those decisions and to obscure their true origins, making the resulting social order seem completely normal and natural instead of imposed and constructed.

In practice, it’s also quite difficult to empirically test most claims about supply and demand. Take demand as an example. Sure, it may be easy enough to notice simple correlations between rising prices and lower sales. But the “law” of demand has another part, its infamous ceteris paribus condition, “all else being equal.” This condition implies that quantities can change for many other reasons besides price fluctuations, and vice versa. The empirical problem for the economist is to show that any change along the demand curve was specifically caused by variations in prices, as opposed to the thousands of other factors that could have driven the exact same observation. But how exactly is one supposed to do that? How do you keep “all else” equal in any real-world situation? How does one account for all possible confounding factors and variables? There are numerous statistical methods in econometrics to deal with these kinds of issues, but absolutely none of them are foolproof, and neoclassical economists are infamous for creating juvenile models that explain nothing useful about the world. Unlike laws in the natural sciences, most of the claimed “laws” in economics are pseudoscientific gimmicks meant to rationalize the existing order.

Conclusion: The Social Construction of Supply and Demand

The ultimate constraints on supply always come from nature, but society can and does intervene in numerous ways to adjust the levels of supply and demand that are actually available. This intervention can occur through concerted government action, through strategic economic decisions from dominant corporations and other economic groups, through various kinds of class struggles, or through some dynamic combination of all these things.

The conservative British prime minister Margaret Thatcher once seriously suggested, in an effort to deprioritize the role of government in solving social problems, “There is no such thing as society. There are individual men and women, and there are families.”¹⁹ This is a bit like saying, “There is no such thing as a human being; there are only atoms and molecules.” And if you want to explain and understand human behavior, you must do so at the level of atomic and molecular interactions. Of course, even atoms and molecules are not the most basic constituents of nature. We can just keep the reduction going all the way through to strings and branes, if we care about consistency, assuming that those things exist. In parroting this nonsense, Thatcher failed to grasp that what constitutes a “thing” is not just its components, but also the interactions that underlie the components, which is why the “thing” is capable of changing in the first place. Individuals do not exist in a vacuum, sunbathing on their private islands away from everyone else. Society represents the mental abstractions and organized interactions that allow people to communicate and work together. It does exist, it does affect the distribution of goods and services to individuals, it does provide an extra lever of constraint on supply and demand, and it affects our lives in so many different ways. Economic outcomes affect individuals, but they are socially constructed based on the class-power dynamics of society.

A glib statement like “prices are determined by supply and demand” means nothing unless it considers the role that various social forces play in establishing and reinforcing those cycles. In the words of economist Mariana Mazzucato, “Prices and wages are often set by the powerful and paid by the weak.”²⁰ Neoclassical economists largely ignore these hard realities, pretending that individual preferences somehow come out of thin air, divorced from the causal webs and structures of society and the natural world.

Footnotes

1

The economist Larry Summers was perhaps the worst offender. For an example of his usual pablum, in which he largely blamed extra demand from government stimulus measures for the post-pandemic inflationary wave, see Alvin Powell, “Summers says pandemic only partly to blame for record inflation,” Harvard Gazette, February 4, 2022, https://news.harvard.edu/gazette/.

2

Contrary to the assertions of Larry Summers, for example, much of the post-pandemic inflationary wave was driven by supply chain disruptions and dominant corporations using a moment of historical crisis to jack up prices. See Tom Perkins, “Top US corporations raising prices on Americans even as profits surge,” The Guardian, April 27, 2022, https://www.theguardian.com/us. For an excellent academic approach on the subject, see Isabella Weber Evan Wasner, “Sellers’ inflation, profits, and conflict: Why can large firms hike prices in an emergency?” Review of Keynesian Economics 11 (2023): 183–213. For the supply chain argument, see Robin Brooks, Peter R. Orszag, and William. E Murdock III, “Covid-19 inflation was a supply shock,” Brookings Institution, August 15, 2024. https://www.brookings.edu/. For broader discussions about the relationship between prices and sociopolitical dynamics, see Jonathan Nitzan, “Inflation as restructuring: A theoretical and empirical account of the U.S. experience,” PhD dissertation, McGill University, 1992. Also see Jonathan Nitzan and Shimshon Bichler, Capital as Power (New York: Routledge, 2009).

3

Michael Munger, “Alfred Marshall’s Scissors,” The Daily Economy, September 23, 2024. https://thedailyeconomy.org/.

4

Robert T. Jensen and Nolan H. Miller, “Giffen Behavior and Subsistence Consumption,” American Economic Review 98 (2008): 1553-77.

5

Ron Chernow, Titan, (New York: Vintage, 2004).

6

Office of the Historian, “Oil Embargo, 1973—1974,” Department of State, https://history.state.gov/milestones/1969-1976/oil-embargo.

7

John Emshwiller and Neil Behrmann, “Restored Luster: How De Beers Revived World Diamond Cartel After Zaire’s Pullout,” Wall Street Journal, July 7, 1983.

8

Steven Vaughan-Nichols, “How Internet Explorer really beat Netscape,” ZDNET, August 18, 2021. https://www.zdnet.com/.

9

See Julie Creswell, “Your Steak Is More Expensive, but Cattle Ranchers Are Missing Out,” The New York Times, June 23, 2021. https://www.nytimes.com/.

10

For example, see K. Rajagopalachar, Business Economics (New Delhi: Atlantic Publishers, 1993), 105–6.

11

Press Release, “FTC Sues Live Nation and Ticketmaster for Engaging in Illegal Ticket Resale Tactics and Deceiving Artists and Consumers about Price and Ticket Limits,” Federal Trade Commission, September 18, 2025. https://www.ftc.gov/.

12

Amy Scott, “Homebuilders are constructing fewer homes on purpose,” Marketplace, July 29, 2021. https://www.marketplace.org/.

13

Rebecca Robbins, “How a Drug Company Made $114 Billion by Gaming the U.S. Patent System,” The New York Times, January 28, 2023. https://www.nytimes.com/.

14

See Susan Feigenbaum, Principles of Macroeconomics: The Way We Live (New York: Macmillan, 2011), 519, G-1 Glossary.

15

See M. Kasi Reddy and S. Saraswathi, Managerial Economics and Financial Accounting, 2007, 47.

16

For an excellent description of these results, see S. Abu Turab Rizvi, “The Sonnennschein-Mantel-Debreu Results After Thirty Years,” History of Political Economy 38 (2006): 228–45.

17

In addition to the review paper from Rizvi cited above, another great review paper on the subject is Frank Ackerman, “Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory,” Journal of Economic Methodology (2002): 119–39. For the individual economists mentioned in the paragraph, see Alan Kirman, “The intrinsic limits of modern economic theory: the emperor has no clothes,” Economic Journal 395 (1989): 126–39. Next, see Donald Saari, “Mathematical complexity of simple economics,” Notices of the AMS 42 (1995). Finally, see Donald Brown and Chris Shannon, “Uniqueness, stability, and comparative statics in rationalizable Walrasian markets,” Econometrica (2000): 1529–39.

18

Aisha Down and Dan Milmo, “NVIDIA insists it isn’t Enron, but deals are testing investor faith,” The Guardian, December 28, 2025. https://www.theguardian.com/us.

19

For the quote itself, refer to the highly misguided article by Samuel Brittan, “Thatcher was right—there is no society,” Financial Times, April 18, 2013.

20

Mariana Mazzucato, The Value of Everything (New York: Hachette, 2018).