In a discussion in the Enviromental Forum, it has been suggested that Economics is nearly inaplicable to real life. Economic laws, such as the Law of Demand, are simply text-book fictions that have almost no real life implications or use.

My position on this argument has been mis-cast by my co-respondants. They cast me as Keynesian or a Monetarist (or any other school of thought) who believes that he can predict the exact behaviour of any human being. I have never claimed to be able to do this. I align myself with the Austrian School of Thought. The Austrian School uses deductive logic to describe the behaviour of rational beings. Austrians do not collect data, they create theories that are couched in logic. Austrians do not claim that they can predict the exact correct price of a good. They know that the market will tend to the market-clearing price, and this is the correct price.

All valuations of anything are done subjectivly. There is no such thing as an objective value. Interestingly, Smith aruged that goods had objective values in Wealth of Nations, and this opened the door for Marx's Communist Manifesto. So, here is a situation in which one of the most famous Marxists (Marx) got the foundation of his ideas from the "original capitalist" (Smith.) Very odd.

The Law of Demand is the law that was debated, so I will talk about that here. The Law of Demand says that people will buy more of a homogenous good when the price is lower, and less when the price is higher. To refute this law is to say that people will buy less of a homogenous good when the price is low, and more when the price is high. This is shear insanity.

The Law of Demand is in economics textbooks, and it is also describe reality. Now, I don't agree with many things in economic textbook, especially in Macro books.

Well, hopefully this is enough to generate a small discussion. If I was unclear in this post, I hope that I can clear in questions in subsequent debate.

As for now, I am going to eat some Mexican food. Happy Father's Day.

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"Sometimes it is said that man cannot be trusted with the government of himself. Can he, then, be trusted with the government of others? Or have we found angels in the form of kings to govern him? Let history answer this question."
-Thomas Jefferson in his first inauguration address

You were applying the law and supply and demand and assuming perfect competition in a market where that does not occur. Water companies have a natural monopoly, for the simple reason that the fixed costs required to start up a water firm (lines to the house, treatment, etc.) make so that it is impossible to have two competing water firms.

Instead a private firm, seeking to maximize profit would supply where the Marginal Cost equals Demand, not where supply equals demand. This results in a less then optimal result. To address your other problems...

No actually the Law of Demand states

What you are talking about is elasticity of demand, and it should be noted that some products will have the same quantity purchased even if the price fluctuates (perfectly elastic) and in some products even the slightest raise will result in no products being purchased (perfectly inelastic). Most products lie somewhere in the middle.

Further there is the case of Giffen Goods, these are the goods which will increase in demand if their price goes up.

Giffen good - Wikipedia, the free encyclopedia

Whats more, Adam Smith argued for the creation of certain public institutions and quite validly. It is just as naive to think that the private sector will provide for everything and do so legally as it is to think that the government can manage the economy. Both are wrong, and both have disastrous results.

I would think that availablity comes into play at some point.

If something costs little, but is abundant, people will not necessarily buy it up. Restrict the availability of the product, though, and raise the price, and stores won't be able to keep the product on their shelves...

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I agree.
Economic theories only explain the most probable behaviour of people. Irrational behavior is always possible, and this explains, why rational economic modells could fail.

But i assume, that theories have little sense, when there aren`t any experiments, to prove them right or wrong. Therefore, the collection of data is necessary

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Government is the great fiction through which everybody endeavors to live at the expense of everybody else

Claude Frédéric Bastiat

Economics is applicable to everything in life. That fact that over-simplified theories do not fully describe most situations doesn't mean we should throw the baby out with the bathwater. Just about every decision we make is an economic one.

Most people incorrectly assume that economics must involve some sort of financial transaction, that it's all about money. But that is the furthest thing from the truth. As Lionel Robbins put it, economics is "the science which studies human behavior as a relationship between scarce means which have alternative uses." If you have two sticks of gum to split among three people, you are faced with an economic decision. Money can be scare resource with alternative uses, but it's far from the only one.

I was not, in any way, assuming perfect competition. I argued that, as a result of the decreased supply, the price of water (on the free market) will increase. In my analysis, I simply said (un written) Mutatis Mutandis and the price went to equlibrium. If you want me to describe how this happens, I can.

Your primary contention seems to be that "text-book theories" don't apply to real life. And I agree to a certaine extent. Many models, specifically in Macro books, ignore people and do all sorts of crazy equations to predict the future. This does not mean that every economic theory is invalid. If this were so, Economics would be of absolutly no use. If we are going to assume that humans do not behave according to the Law of Supply and Demand, we have nothing.

So, we have two alternitives.

1) People are not rational, that is, they do not behave according to the Law of Demand. In a case where people do irrational things, there is absolutly no use in having government or anyone else allocate resources because everyone is behaving according to a different logic.

2) People are rational and the Law of Demand desricbes their behavior. In this case, I have made arguments against government regulation.

So, either way, government regulation is needless and even harmful.

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"Sometimes it is said that man cannot be trusted with the government of himself. Can he, then, be trusted with the government of others? Or have we found angels in the form of kings to govern him? Let history answer this question."
-Thomas Jefferson in his first inauguration address

Not really that odd. Have you read any of Marx's economic work? Very interesting. He is informed by Smith and Ricardo in particular. What Marx did - I think - was to critique the theories underpinning capitalism and to do that he had to have a very good understanding of them. To really understand capitalism you have to read Marx.

Going back to reading the thread. I like reading about economics because I know bugger-all about it and it's good to learn as I go along.

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"There were no D-Day Heroes in 1973" - Cold Chisel Khe Sanh

That's interesting. I'm one of those people who favours a great deal of government regulation of the economy. I was just reading some points by other posters concerning monopolies, in particular T-D's point about water. I don't want to take the thread off to la-la land but water supply is one of those situations where (in my country) the government should take total control of the resource and keep out any private interests.

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"There were no D-Day Heroes in 1973" - Cold Chisel Khe Sanh

From what I understand, Marx invented the word capitalsim as an incuslt. And, as frequently happens in history, those who were the capitalists took the name and called themselves that with great glee.

OK, help me with the Austrlian slang, "mate" (damn, I love that word), what does "bugger-all" mean?

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"Sometimes it is said that man cannot be trusted with the government of himself. Can he, then, be trusted with the government of others? Or have we found angels in the form of kings to govern him? Let history answer this question."
-Thomas Jefferson in his first inauguration address

Except we're facing a commodity which by its nature needs to be regulated due to an incredible inelasticity in the demand for it and an inherent monopoly.

No thats not my contention. My contention is that the idea that the market will solve everything is ludicrous, and is not proposed by any actual economists, or decent economic textbooks. The market does a lot, but there are many different cases of exceptions.

When it comes to water firms you quite literally have firms which, if unregulated, could enforce their monopoly with an iron fist, and raise prices in some areas of the nation, arbitrarily, to whatever they want because of the high inelasticity in demand.

Monopolies do not produce goods according to where demand equals supply. They never have, and the never will. They produce goods where Marginal Cost equals Demand. This creates a gap, and is a less then optimum equilibrium.

I don't know if Marx invented the term as an insult, from what I've read of him he wasn't really into insulting (except when it came to excoriating people on his side of politics, jeez he gave it to them!).

"Bugger-all" is a more polite way of saying "f***-all" and it means "nothing."
So if I say, "I know bugger-all about <something>" it's a complete admission of ignorance but a teeny bit defensive as well in the way it's used. There are shades to it. Some people say, "I know bugger-all about <something>" and you have to carefully listen to decide if they're being dismissive/disinterested or they're genuinely owning up to ignorance. Watch the body language - as always

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"There were no D-Day Heroes in 1973" - Cold Chisel Khe Sanh

I disagree. The demand for water utlites is more elsastic than you think. If a water utility starts to charge monoply prices, consumers have a few options. First, they could have a well dug. Or, they could buy bottled water. Or they could have a tank of water that is filled every week or so.

This is not true. There is a small cadre of economists that do believe that the market can solve everything. If you want, you can go to Ludwig von Mises Institute Home. My two favorite are Hans Hoppe and Walter Block. Both of these men are economists, both have tenured positions, and both are anarchists. These two men only scratch the surface.

Why must water be a monopoly? If water is charging high prices, competitiors will enter the market and fill the gap.

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"Sometimes it is said that man cannot be trusted with the government of himself. Can he, then, be trusted with the government of others? Or have we found angels in the form of kings to govern him? Let history answer this question."
-Thomas Jefferson in his first inauguration address

Just reflecting on the situation where I live...arid state and all that. Big state in area but very small in population and very, very arid. There is really no "market" in terms of water in this state, it is a natural monopoly in this specific situation.

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"There were no D-Day Heroes in 1973" - Cold Chisel Khe Sanh

Perhaps it is not a natural monopoly at all, but a state-granted monopoly.

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"Sometimes it is said that man cannot be trusted with the government of himself. Can he, then, be trusted with the government of others? Or have we found angels in the form of kings to govern him? Let history answer this question."
-Thomas Jefferson in his first inauguration address

No its a natural monopoly, there is no possible way to have two competing water firms. The capital costs are simply far too high. Government regulation doesn't create the monopoly, it regulates it.