Demand is a key consideration in economics. Demand is important at the aggregate level, but recent literature has focused on the need for better microfoundations. This article will add to the understanding of microeconomic demand by developing the concept called true demand.
In economics demand can either refer to aggregate or market demand, or it can refer to an individual’s demand, which is the microfoundation of the former. An individual’s demand is inferred from, in fact it is defined as, the individual’s willingness to pay. This idea of demand can be improved in at least two ways. One way it can be improved is through the removal of the financial paradigm. Another way it can be improved is through the separation of potential and actual willingness to pay.
The financial paradigm in economics is less exercised every day, except when it’s not. Economics can be used as a general sociological and noncognizant systems approach. Money is not involved in most transactions. Social transactions, for example, can be measured through economic analysis using dollar equivalents, but this translation into a dollar equivalent comes with certain problems:
- Practically, translating to and from dollar value information can be problematic.
- The financial paradigm is unnecessary, so why do it?
- Application or theory involving the financial paradigm often leads to situations which don’t make clear sense.
True demand is the solution. The concept of true demand refers to an individual’s willingness to expend effort toward some goal. There are three key differences between demand and true demand:
- One might object that true demand amounts to unconstrained demand, which is infinite. I would respond that unconstrained demand is infinite only by assumption, and it is an assumption proved false time after time. I propose that unconstrained demand amounts to infinite demand for good. Not some or all economic goods, but whatever action agent perceives as morally good. A verb rather than a noun.
- True demand ignores ability. Two agents may have different actual demand but equal true demand. This can occur due to ability, or the heterogeneous stock of capitals including financial, social, human, and other capitals. Summarily, actual demand is a function of true demand and ability. Put another way, observed willingness to act is a function of willingness to act and effectiveness.
- Notice that I defined demand here as willingness to act rather than willingness to pay. This is because true demand allows us to generalize outside of financial analysis. This is the next point. True demand is an explains all sorts of action. True demand explains transactions, single-agent actions, behaviors, thoughts, and choices, whether the agent is intelligent or not. Consider the click through rate of an email, for example. Experimental evidence demonstrates that economic analysis of behavior applies to click rate optimization. Yet there is no financial consideration involved in the entire process. This is because the thing being called and treated as ‘demand’ is in fact true demand. It is a measure of willingness to act, combined with effectiveness, where effectiveness is treated as constant across the population exhibiting the demand.
- True demand may be measured in abnormal units, or inferred in regular units, but it’s not clear that it can be directly measured. Abnormal units are units in arbitrary scales, such as utils.
Potential willingness to pay is essentially the willingness of an actor to pay in an unconstrained environment. As I previously mentioned, in contrast to standard neoclassical assumptions, real actors do not exhibit non-satiation. With this consideration is becomes useful to talk about their potential willingness to pay. The thing which precludes that potential is called effectiveness, and it can move between 0 and 1. If effectiveness is 1 then the agent is making the optimal unconstrained choice.
The separation of effectiveness and unconstrained demand is useful because it helps explain why demand is occurring at some level. Is it a matter of technical power or of social preference? Are there no apples because we cannot produce apples or because we simply don’t want to even though we can? These questions are traditionally hard, but they can become easy under a new framework.