The Lie of Supply and Demand

By George P. Brockway, originally published March 24, 1997

1997-3-24 The Lie of Supply and Demand Title

THE RECENT four-cents-a-pack boost in the wholesale price of RJR Nabisco‘s line of cigarettes, the reactions of economists thereto, and the presumptive reactions of the other tobacco companies, may serve as a casebook lesson in how today’s economists profess that the economy works, how it actually works, and what the discrepancy portends.

To begin with, there’s no suggestion on anyone’s part that the sacred law of supply and demand had anything remotely to do with the RJR Nabisco price increase. The company was not enticed into raising the price because of a shortage, anywhere in the world, of its current or prospective supply of tobacco. Nor are the company’s competitors lacking in stuff to sell. There are and will be cigarettes to bum.

At the same time, there is no sign of a substantial increase in demand. Regardless of what one may think of President Clinton’s war on teenage smoking (I certainly see no objection to it), the demographics, at least in the United States, point toward a decrease in demand for cigarettes, pipe and chewing tobacco, snuff, and even-despite extraordinary hoopla -cigars. Kids today don’t know enough about tobacco to appreciate the earthshaking humor of asking a tobacconist whether he has Prince Albert in a can. (On receiving an affirmative answer, we broke down in uncontrollable giggles and shrieked, “Well, let him out!”)

The tremendous fuss being made over Social Security should have drummed into everybody’s consciousness the fact that the present younger generation is noticeably smaller than its parents’ baby boomer generation. Whether or not this demographic imbalance is sufficient to put Social Security at risk of insolvency and thus to ignite an intergenerational war, it is not likely to presage a rise in the number of cigarette smokers.

Then there’s the question of market discipline. We were brought up to believe that a shrinking market leads competing producers to lower prices in order to maintain or improve market share. But here we have the precise contrary: Competing producers are expected to raise prices in a shrinking market. You’d think that competitors would be dancing in the streets, advertising their lower prices, and preparing to cut deeply into RJR Nabisco’s market share.

Instead, the New York Times reports economists saying that an increase of almost 5 per cent “is a big number for any consumer products company,” and that “it would be highly unusual for the other tobacco products companies not to follow suit.” What we’re witnessing, in other words, is both the flouting of the law of supply and demand and the failure of the theory of free competition.

Since the economists commenting on the tobacco price hike have not attributed it to the law of supply and demand or to the market discipline of the competitive system, what do they think is going on here? The favored explanation seems to be that the tobacco companies, presumably consulting more than tobacco leaves, believe that a general settlement might be possible in the many and various lawsuits now-facing them, not to mention those still to come. How such a settlement is possible, I am not devious enough to imagine; but I am sufficiently experienced in the ways of the world to fancy that whatever is agreed to will be less costly to the companies than allowing the cases to go to trials, jury verdicts and ultimately to appeals.

Now, if the tobacco companies expect that their expenses will be reduced, why should that be thought an occasion for raising prices? The Wall Street gossip seems to be that the settlement will cost the companies $6 billion, in which case the cost of going to trial is estimated to be rather more than $6 billion, in which case the settlement would represent a handsome improvement in the companies’ prospects. Such an improvement may well justify Wall Street’s reactions to the rumored settlement (stocks of the four leading tobacco companies rose modestly; shares of the fifth largest company, which had previously begun negotiating a settlement, fell). But an improvement in prospects is, according to conventional theory, an occasion for holding prices steady, if not lowering them.

So we find in this episode another example of the failure of the standard theory of free enterprise as it is taught almost universally in American colleges; as it is extolled almost universally in American legislatures, boardrooms and newsrooms; and as it is regularly adjudicated by Federal, state and local courts.

It is, of course, clear enough why the standard theory is failing in this instance. There may be competition of sorts among the leading brands, but it is mostly shadow-boxing between their advertising agencies. The companies are too few and too big for serious warfare. None of them would gain much by competing so vigorously that one or even all of the others was forced out of business, and the attempt would be very costly.

For one thing, each company can count on a certain amount of brand loyalty. In the bad old days, for example, I, as an upwardly mobile young man of educated and refined taste, resolutely smoked Chesterfields because their packs were the easiest to open. More important, smokers, once hooked, don’t have much choice. At the same time that someone is boycotting RJR Nabisco for raising prices, somebody is boycotting Brown & Williamson for something their president said (or, perhaps, refused to say) to Mike Wallace of 60 Minutes, somebody else is boycotting Philip Morris for sponsoring an exhibit of an unfavored artist, and so on.

So long as the boycotters keep smoking, it’s a game of musical chairs in which the music never stops. As some philosopher said, you win some, and you lose some.

ON REFLECTION, it’s the same with big-ticket items as it is with cigarettes. We used to have two cars. Our first fleet, as we called it, was of Chevys. It happened, when it came time to get new ones, that I was mad at General Motors for some reason I’ve forgotten; so we cased the Ford showrooms, finally coming to an agreement on a station wagon and a convertible (we were still upwardly mobile). The wagon, which my wife drove, reached the 1,000-mile mark first, and one evening she drove it over to the dealer, me following in the convertible, for its scheduled tune-up.

The dealer said it would be ready in three days, and when my wife objected at so much time for so minor a job, he explained that they were very busy. Three days later we went back, but it wasn’t ready. Sorry: we should call beforehand the next time. I suggested that he call us when it was ready, but he protested that he didn’t have the time. I drew myself up to my full height and proclaimed that if he didn’t call, we’d never buy a car from him again.

Our next fleet, as I imagine he expected (if he gave a damn), was of Plymouths, and somebody was probably deserting Plymouth for Ford for some reason as weighty as mine. You win some, and you lose some.

And that’s the way competition and market discipline and all that stuff really works, with big tickets as well as small. I’m not claiming that all automobile dealers are surly fools, or even that all cigarette manufacturers are indifferent to the hopes and fears of the public. It is altogether possible that many, or even most, producers modify their products when they are convinced they are losing business to competitors.

Such modifications, however, are not necessarily for the better. When concerned citizens complain about the trash available in movie theaters and on television and at supermarket checkout counters, the bland reply is that the public gets what it wants. Are the editors of THE NEW LEADER to be criticized for stubbornly printing this sort of column instead of running something more appealing in the centerfold?

When push comes to shove, it’s pretty clear that we really do not believe in market discipline, whatever that may be, and however much we may prattle on about it. We do not believe that the sellingest bestseller is ipso facto the best book, nor that the most widely boomed music is the best music, nor that the most colorful sunset is the best painting. We do not believe that the Wright brothers were fools for sticking with their idea even though it seemed there would never be any money in it. We do not believe that Mahatma Gandhi‘s life was a failure because he died broke.

Our theory and our practice are obviously in conflict with each other. This is, to be sure, not the first time in our history that we have faced such a conflict, and it is not the first time that our theoreticians and our practitioners have failed to notice it. That inattention is perhaps the most disturbing aspect of the situation, for it suggests that we do not really believe, possibly do not understand, and evidently do not care about the words with which we so regularly celebrate the virtues of our society.

There is, in short, a hollowness at the core of our society. A hollowness almost destroyed us in 1861, and another nearly did us in 68 years ago just when perpetual prosperity seemed assured. A similar hollowness did in fact destroy the Soviet Union at the height of its power, as the national slogan, “From each according to his abilities, to each according to his needs,” though embodied in the Constitution, became routinely and carelessly honored in the breach.

I am not saying that we are on the brink of disaster. I am saying that the brink is never far away, and that we’d better set about revising our theory or our practice or, if we are up to it, both.

The New Leader

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