Economics as we
know it is all about human behaviour. It is about a human response to a
stimulus. Economic agents might be organizations or firms or families or
collection of individuals etc. but each of these are constituted by humans. In
fact, evidence from animal and plant kingdom too demonstrate economics at work
in their responses to various stimuli. The response revolves around the self-interest
of the economic agent, individual or aggregate. Yet the response manifested in self-interest
of the individual economic agent might not essentially translate into aggregate
self-interest. These responses to stimuli are studied across the various
contexts. An important discussion on this stimulus-response mechanism happens
in the context of the markets.
Markets are
basically the interaction between buyers and sellers. In economics terms, it is
about the interface between the supply and demand. Herein lies the question about the
determinants of supply and demand and their consequent interaction. In the
interaction that ensues, it is the price that plays the mediating the role.
Price simply put is the terms of exchange of goods between demand and supply. This
points us to the direction on whether the demand dictates supply or vice versa.
Economic analysis posits relations between quantity demanded and price as with
quantity supplied with price. Demand and supply are also influenced by several
other non-price factors. Yet, a question that has grappled economists for many
years is whether supply creates demand or vice versa. This is something which
shall be explored in the subsequent paragraphs.
Classical
economics was underlined by the belief that supply creates its own demand. Say’s
law as this came to be termed as posited that as producers push goods into the
market, the price mechanism works as an automatic stabiliser leading to the creation
of demand. There are many instances that support this contention. Indian
telecom revolution was essentially based on Say’s law. As the telecom service
providers expanded their service, reduced their price, more and more people
started to subscribe to mobile connections and thus the telecom density
increased exponentially. Jio’s modus operandi was basically push lot of
connections in the market. They made a connection very easy to obtain. Further,
their prices were virtually close to zero seeking to exploit the economies of
scale very inherent in the industry. An outcome was people rushing to Jio
stores to secure a connection. As more people began using Jio, the fixed costs
started getting apportioned to more and more users thus reducing the price and
attracting more customers. Meanwhile the economies of scale exploited at
high degrees enabled Reliance to recoup
its investment.
UDAAN, the
scheme to ensure the air connectivity reaches to the hinterland too is based on
Say’s Law. As the number of airliners serving the hinterland increase, as the
connectivity increases, more and more people will begin to afford flying and
use the service. The instances of Hubli, Allahabad (Prayag), Kannur, Jodhpur,
Surat among many other instances offer insights into this model. Routes were
suggested by the airliners themselves and they offered their services for
certain subsidies being provided by the government. These production linked
subsidies or rather service linked subsidies ensured prices declined and the
demand took off.
Among other
instances in the Indian include the Operation Flood that led to increase in
milk production and supply in the country. One more example is the Swacch
Bharat focusing on toilets. The increase in construction of toilets led to
changes in user behaviour resulting in a shift from open defecation to toilets
being used with its positive externalities in play. Yet while these instances
demonstrate Say’s law, there are equally other instances that prove otherwise.
The Great
Depression of 1929 proved the limitations of classical economics. Prices even
though declined heavily did not create the demand. As a response, John Keynes
came with his formulation where he suggested the lack of demand is the culprit
and hence the government should step in and create the demand. The role of
government expenditure in boosting the economy originated in this thesis.
Implied was demand creates its own supply. This became evident in the ongoing
corona pandemic crisis induced by the virus originating in Wuhan.
At the beginning
of March, India hardly produced any ventilators, personal protection equipment
(PPEs), N-95 masks of surgical variety among others. There were hardly any
laboratories that existed to test for the presence of the virus causing
COVID-19. India had to ban export of any material that was linked in preventive
measures for the Chinese virus as with the materials essential towards cure of
COVID-19. The latter included hydroxychloroquinine (HCQ), paracetamols among
others. In fact, within a few weeks, India began exporting HCQ, paracetamols
among other essential medicines to several countries. India virtually ensconced
itself as the pharmacist of the world. While this goodwill was being
demonstrated, the domestic supply too increased to meet up with the prospective
rise in demand. Indian pharmaceutical companies have also increased their
production of other anti-virals that seem to show some effect in mitigating the
effects of the coronavirus.
Masks of surgical
variety now are in surplus wherein India can export to the world as with the
non-surgical masks. The non-surgical mask production was diffused to the
individual level with many families stitching masks and distributing it to the
needy. The image of the first lady Savita Kovind stitching masks is too well
known to be recounted in its image for India’s response to coronavirus. India
perhaps is the largest producer of N-95 masks currently. In terms of
ventilators, India has produced more ventilators in the last few months than
all ventilators produced put together since Independence73 years ago. India is in a position to export ventilators.
Similarly, testing capacity has increased to test nearly a million per day.
India has surplus of reagents to allow for export for the government policy of
restriction on exports. The hospital and bed capacity too have shown a dramatic
increase catering to expected increases of COVID-19 cases across the country. The
increases in health preparedness is one of the significant factors that has
enabled India to pass the crisis relatively unscathed with one of the lowest
mortality rates in the world. Going further, India is already beefing up the
capacity to produce and distribute vaccines as and when they are approved. There
are many pharmaceutical firms that are creating capacity to produce the
vaccines for distribution to 130 crore + population of the country.
It is not just
in India, but almost all countries have expanded their capacity in terms of
production of medicines, production of masks, PPEs, ventilators and other
medical equipment necessary to mitigate the impact of the Chinese virus.
Industrialist philanthropists like Bill Gates or Elon Musk are creating
capacity in terms of plant building to produce vaccine once the current
candidates succeed. This is to ensure no delay happens between the approval of
the vaccine for use and the distribution of the vaccine in the general
population. These instances reflect classic instances of demand creating its
won supply.
It thus brings
us to the question on what works and what does not. One insight that can be
garnered is the trade-off on the consumer side but with an upside of utility
technical progress in the context of the application of Say’s law. In the case
of Keynesian formulation, it apparently entails a trade-off on the producer
side with the prescription following a line of switchover from less profitable
or essential to more profitable or essential goods on the part of the supplier.
This of course is in line with the conventional understanding of the supply
curve.
It however remains
disputed what comes first? Supply or demand? The advocates of classical school favour
the former while those advocating Keynesian school would favour the latter. Obviously,
differing conditions give rise to the importance of supply or demand. They cannot
exist independent of each other. Yet, the direction of the causal linkages
remain unresolved. There is obviously a latent demand that manifests itself at
the first signals of supply. Similarly, there is a latent supply infrastructure
that manifests itself at the first sign of demand. Without doubt, as mentioned earlier
there are trade-offs that are executed in the course of these manifestations.
Furthermore, there needs to be detailed engagement of these factors that propel
up the latent supply and demand. At this stage however, it would be suffice to
say, this is akin to the chicken egg problem on what came first.
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