Roberto Verzola: Finite demand makes relative abundance possible

A very important contribution to abundance theory by Roberto Verzola:

“It is almost by definition that economists predominantly focus on scarcity, when they define economics as the study of “the most efficient ways to allocate scarce resources to meet infinite human wants”. If, indeed, people had infinite wants, then not even all the resources of this finite world will be enough for a single person.

But I contend that consumer demand is not infinite. There exist physical, physiological, psychological and cultural limits – both actual and potential – to consumption which can keep individual as well as collective needs and wants within finite bounds.

If demand is finite, then satisfying this demand becomes a real possibility, and relative abundance is within reach.

The following three concepts will help show that demand can remain within finite bounds:

Satiation. Economists define satiation as the consumption level which the consumer most prefers.

The closer he is to this level, writes economist Hal Varian, “the better off he is in terms of his own preferences”.This satiation level is also called bliss point. Beyond it, the consumer becomes indifferent towards getting more of the same good or may even prefer to have less of the good. While many economists still cling to the hedonist principle that “more is always preferred to less,” some acknowledge, at least in theory, that a satiation level exists for some, if not most, goods. Varian, in particular, says that most goods have a satiation point and that “you can have too much of nearly anything,” which contradicts the “infinite wants” assertion in most definitions of economics.

Saturation. While satiation may apply more to the psychological attitude of a consumer not wanting more, saturation is more about the physiological or physical incapacity of a person to consume more.

Beyond the saturation point, one’s body will either become incapable or involuntarily reject additional servings of food and drinks. One can only wear so many clothes, or shoes. One can listen to only so many CDs or watch only so many videos. There are only twenty-four hours a day after all.

To reach the brain, a sense stimulus takes around 10-20 milliseconds. To respond in a conscious way, neuro-scientists have found out, the brain takes longer – around 500 milliseconds (half a second).2 This suggests that our brain can only enjoy at most two distinct events every second or about 170,000 every twenty-four hours. For a world with some six billion people, that adds up to maximum of one quad (i.e., quadrillion) consumption events per day. That is a huge number, it is true, but finite nevertheless. Most of us will probably be too saturated long before that point.

However, the concept of saturation as distinct from satiation is missing in consumer theory and most economists still cling to the “infinite wants” idea.

Satisficing. Even before we reach our satiation or saturation levels, we may already reach our “satisficed” level, in which the quantity we have of a particular good or bundle of goods already suffices to satisfy, and beyond which we would only weakly prefer more.

The idea that consumers satisfice rather than optimize when fitting their wants to their budget was first raised by psychologist Herbert Simon, who subsequently won the Economics Nobel Prize in 1978.

Any of these “sat” concepts – certainly all of them, together – are sufficient to argue that individual and likewise aggregate demand have finite bounds.

This justifies the following assertion: some consumers have a satisficing level for some goods. We will leave to future research the debate whether the weak assertion of “some consumers” and “some goods” can, in some contexts or periods, be changed to a stronger assertion of “some consumers for all goods”, “all consumers for some goods”, or even “all consumers for all goods”.

The above assertion leads directly to a formal definition of abundance: when a person can afford enough quantity of a good to reach his/her satisficed level, then the person enjoys a state of abundance for that good.

The concept is not new. Gandhi must have been referring to abundance when he said, “the Earth has enough for everyone’s need”. This definition also allows a good’s state of abundance with respect to one person to be quantified. For instance, if a person’s satisficing level is five pairs of shoes, but s/he can only afford two pairs, then s/he enjoys a state of abundance of 40% (two out of five) with respect to shoes. This makes it simple to relate abundance to its inverse, scarcity: the person needs three pairs more to reach the five-pair satisficed level. Thus s/he faces a scarcity level of 60%.

Economics usually assumes that business firms maximize their profits by producing until their marginal cost (the cost of the next additional unit) equals their marginal revenue (unit price of the good). If, in addition to this behavioral assumption, we also assume diminishing returns or decreasing returns to scale, this will eventually result in increasing marginal costs. Thus business firms will, in theory, reach their satiation level when they reach their maximum profits.

This also means, however, that profitable firms employing technologies with constant or increasing returns to scale will face constant or decreasing marginal costs. They will therefore have no profit maximum and likewise no satiation level. These firms will conform to the theoretical hedonist image for whom “more is always preferred to less”, and whose desire to purchase is limited only by their budget and nothing more. They will also try to keep increasing their scale of operations, as they go after higher and higher profits – making them an engine of globalization. Here is a possible answer, by the way, to what some economists consider a mystery, that “neoclassical theory has no full explanation of why firms grow at all, nor why it is that the typical pattern of the growth rates of firms seems to lead inexorably towards persistently increasing aggregate business concentration.”

6 notes and references available here.

1 Comment Roberto Verzola: Finite demand makes relative abundance possible

  1. Pingback: P2P Foundation » Blog Archive » Classical capitalism, peer production, and the consequences of limited demand

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