What do we really know about economics?

I was writing comments on the Raising Kaine blog (RK).  For those of you who do no know this blog it is a site for "Virginia's Progressive Community".  You can get to it from my Blogroll.  I was troll rated twice for the following comment

Now show us how prices are locked to that yearly progression. (0.00 / 2)
You don't seem to understand do you?  What is the time lag for your supply/demand theory?  what do you do when things do not correlate?  They often do not.  Please try to be a little more scientific when you spout such theories.

 Here's the rationale for the troll ratings:

Comments like "you don't seem to understand do you" or "spout such theories" are not going to get you very far on this website.  FYI, I worked for 17 1/2 years as an international oil markets analyst, and I think over those years I picked up a few things. I've also explained how this all works numerous times here at RK, and am not going to keep repeating myself.  At this point, if you don't understand how supply and demand work, I'd suggest you take a few basic economics courses.

Look below to see why this is ridiculous!

Well, I can't get back on the site to answer that so I thought clarification of  such confusion about economics would be useful here. My field is the study of complex systems.  The idea that an economic system is a complex system has been around for some time.  Here's an example:What Should Policymakers Know About Economic Complexity?  Steven N. Durlauf Department of Economics, University of Wisconsin and Santa Fe Institute; September 13, 1997. This paper was prepared for The Washington Quarterly. Financial support from the National Science Foundation and Santa Fe Institute is gratefully acknowledged. The issue the pundit at RK was drumming on was the relationship between supply and demand and oil prices.  I agree with him that this is generally taught in beginning economics courses.  The problem is that it is rather idealistic and misleading an idea when used in the complex real world.

Durlauf's paper starts out with an introduction to the difference between a complex system and the notion that something is "complicated" or "hard to analyze or solve".  This is an important distinction.  However, anyone who has taken a beginning course in economics will probably agree that supply/demand pricing theory is neither complex nor complicated.

Complexity enters the picture for a variety of reasons.  Some of the reasons mentioned by Durlauf are:

Interactions and positive feedbacks

Increasing returns

Nonlinearity

Path dependence

Here's a typical example of how these features of a complex economic system can alter the simple supply/demand pricing theory.

High Technology
A consensus has developed among scholars that a number of forms of increasing returns are fundamental to the structure of high technology industries [ W. Brian Arthur is the originator of many of the important ideas concerning the implications of complexity for technological evolution. See especially his "Competing Technologies, Increasing Returns, and Lock-In By Small Historical Events," Economic Journal, 99, 116-131, 1989.]. Several reasons explain this consensus. First, high technology firms require, due to the interdependence of the demand for their products with the state of other products in the industry, continuous research and development so as to ensure that their products are competitive. Research and development is an activity that is subject to strong increasing returns as ideas and innovations are more likely generated by large and diverse workforces than in small ones.
Second, there is the presence of fixed costs in production. In many production contexts, a firm or company exhibits increasing returns because some part of its productive inputs must be used to begin production which is independent of the scale of activity. This creates a threshold effect in production as nothing can be produced unless these fixed requirements are met. Why is the presence of increasing returns in production important from the perspective of policy? One reason is that increasing returns make it especially likely that high technology sectors exhibit noncompetitive market conditions. Under increasing returns, the average cost per unit of production decreases with the level of production. Hence the cost advantages will accrue to those firms which are able to produce at high levels. Further, in the presence of substantial fixed costs to production, there is a minimum scale of production which is required for market entry. Taken together, increasing returns create conditions under which a single or small number of firms can dominate a market. Increasing returns to scale in the production of goods or in the development of new technologies is not the only reason to suppose that high technology industries are uniquely susceptible to noncompetitive market behavior. A distinct issue which is important in computer-based activities has to due with lock-in of demand. Demand lock-in can easily be seen in many contexts. For example, consider the demand for betamax versus VHS videotapes. Once a consumer has purchased a VCR which can only use one of the two types of videotapes, that consumer is, unless willing to buy a new machine, locked into using that type of videotape. This feature is, of course, commonplace to many goods. What is important in this case is the following. The desirability of a particular videotape standard will depend on the level of use of the same standard by others. One reason for this is that if one's friends use the same standard, it is then possible to share tapes. If such effects are strong enough, then independent of any increasing returns in the production of videotapes there will be forces which lead the economy to choose a single standard. Second, and more realistically, suppose that access to one type of videotape is facilitated by the level to which that type is used. An example of this interdependence is the percentage of videotapes of one type which are available in videostores. Once again, demand for a type of videotape machine therefore type of videotape will again depend on the level of demand by others. Computer operating systems are an example of how lock-in is especially likely in high technology contexts.

 I suspect that even if you have studied more than beginning economics, these ideas may be new for you.

What I want to do is to apply the "lock-in" idea to the subject of the diary I was commenting on.  The issue is the high gasoline prices everyone is talking about and suffering from.

Lock-in is very real.  As I type this diary I am experiencing one of its most widespread effects.  The keyboard I am using is the one we all are familiar with, the "qwerty" keyboard.  How many of you know that this keyboard was designed to slow the typist down?  That's right.  It was designed for early mechanical typewriters to slow the typist down because fast typing caused mechanical jamming of the machine!  

You may ask why someone did not design a faster keyboard.  They did.  You may then ask why we do not use it.  There is the crux of the influence of lock-in on economics.  So far, all attempts to replace the qwerty keyboard with a faster one on a large scale have failed.

Now let's get to lock-in and gasoline prices.   First of all, why doe we have cars powered by gasoline at all?  The answer is lock-in.  Early on the steam automobile was a competitor for the internal combustion engingine, but the latter was perfected and marketed faster.  By the time a competative steam automobile was designed it was too late.  

The next lock-in phenomenon came when the oil and truck manufacturing lobbies made sure we would develop a highway system rather than a rail system like the one Europe has.

I could go on but by now you should see my point.  If we are to discuss economic theory and public policy we should be discussing relevant economic theory, not what is taught in

a few basic economics courses

 So if RK is a blog for progressives in Virginia, we may be seeing one reason why Virginia is a red state that we hope to turn blue in November.

This is the second time in the last week or so that I have been censored by the democrats in Virginia.  The other time the controversy was around my strong position that not running a congressional candidate in VA-01 was the equivalent of supporting a Bush rubber stamp for congress.  Maybe it is me?  But then as the RK episode unfolded my diary here was put on the rec list.  It makes me think that what I have to say is not even close to being a troll.  You can look at what happened in the quotes above and judge for yourself.  Meanwhile I sure am thankful for Daily Kos!