Each semester I teach Principles of Microeconomics, I ask several variations of this question on the exam.
“Joe works at a local supermarket. One day he says to you, ‘On Monday, oranges were selling for $0.75 each, and that day we sold 200. On Friday, oranges were selling for $1.00, and we sold 200.’ 400 pieces were sold that day. The price went up and the quantity demanded went up. The law of demand must be wrong!” Use economics to evaluate Joe’s statement. Is he right or wrong? Why?
(Readers, if you want to answer for yourself, stop reading here and move on to the next paragraph when you’re done)
The answer I’m looking for is something like:
“Joe’s statement is incorrect. The law of demand is a paribus statement. Assuming all else is equal, if the price increases, the quantity demanded will fail. But what Joe witnessed is easily explained by an increase in demand. An increase in demand means buyers will pay more money for the same quantity, thus causing an increase in both price and demand.”
The educational lesson I want students to take away from this question is that we should be skeptical whenever someone claims to overturn the laws of science. Existing theories can often explain observed phenomena. In this case, the law of demand is truly a scientific law, and its validity has been tested many times. And the incentive to find exceptions is very strong. To quote from George Stigler’s classic Theory of Prices:
“How can we convince skeptics that this ‘law of demand’ really applies to all consumers, all times, and all goods? Not by a few (4 to 4,000) selected examples; but by rigorous theoretical proofs? That’s not true, because it doesn’t exist. It’s not about claiming that economists believe it. Perhaps a convincing proof can be summed up quickly. would be something like this: If you can prove that you have failed in a particular market at a particular time, you are technically invulnerable and will be guaranteed rapid promotion during your lifetime.Most economists would not dislike either reward, so there are exceptions. The fact that there aren’t any is probably not because we’re not trying to find exceptions, and of course there is real evidence that this is the case in countless cases where people don’t eat strawberries because they’re out of season. (4th edition, pages 22-23, emphasis in original)
In other words, it is a very strong argument to say that the law of demand does not hold.
Of course, sometimes someone builds a theoretical model of violation of the law of demand. In some cases, this may include investigating products that appear to violate the law of demand. However, further investigation shows that such an example breaks down and the law of demand holds. Strong claims require strong evidence.
Every time I read an economic commentator who claims that international trade has weakened America, I am reminded of this exam question. Such an outcome would be unprecedented. Thousands of years of experience and evidence suggest that trade strengthens nations and that moving away from trade weakens them. This is explained (and evidenced by) the law of comparative advantage. Similar to the law of demand, all kinds of professional and financial honor are guaranteed to those who can provide robust and rigorous evidence that overturns our understanding of trade. Despite these incentives, no evidence has emerged. Most of these claims that established economic rules have been overturned are made in editorials and clearly lack scientific value.
None of this is to say that scientific laws can never be overturned. Scientific knowledge is constantly evolving. The miasma theory is supported by thousands of years of experience and evidence. However, that was ultimately proven to be false. And that’s proof of my point. The people who debunked the miasma theory are immortalized in the world of science: Jon Snow, Louis Pasteur, and Robert Koch.
Could our understanding of international trade and the laws of demand suffer the same fate as miasma theory? Of course. But these attempts to overturn scientific laws require extraordinary evidence to back them up. So far, the evidentiary support for overturning economic laws has been lackluster at best and, in many cases, flat-out wrong.
footnote
[1] Note: The argument that “trade weakens countries” is different from the argument that “protectionism makes countries grow.” The latter still argue that trade improves nations, but protectionism creates more prosperity.
