Recently the world was confronted with the phenomenon that oil had a negative price due to the tremendous drop in demand for oil due to the worldwide Corona crisis lockdown, as widely reported in the media. From an economist’s perspective this should be quite shocking and worrying, since traditional market theory does not really allow for negative prices. Indeed, some economic journalists worried about the issue of a negative price, but strangely academic economists remain quite silent about this.
It reflects the problem that, in general, economists do not really think much about the very foundations of their theories and worldview. The notion of a “commodity” is given little thought in economics, as reflected in the standard textbooks on market theory. Essentially a commodity is introduced as any bearer of (consumption) properties for which there exists demand and supply. So, a commodity is a carrier of a market and, as long as demand and supply exist for it, it is subject to the market mechanism. No further thought is given to it.
Based on certain properties, traditional market theory distinguishes normal commodities from inferior commodities―commodities which demand decreases as income increases. An extremely inferior commodity is also known as a “Giffen good“, referring to observations during the Irish famine that decreasing potato prices resulted in decreasing demand for potatoes (rather than the normally expected increases in demand when prices decline). On the other end of the spectrum, one can distinguish “Veblen goods“, which are extreme luxury goods for which demand increases as its price increases.
The common feature of the conception of commodities in traditional market theory is that this conception is driven by the commodity’s market properties rather than the actual functionality or intrinsic properties of the commodity in question. This differentiates traditional market theory very much from Marx’s approach who postulates a commodity at the very beginning of his first volume of Capital as a bearer of “use value”. Later Lancaster (1966) expended in this and developed a complete linear algebraic theory of commodity bundles founded on the intrinsic consumption properties of bundles of commodities. Both approaches are fully founded on the hypothesis that commodities are always consumable and they are subject to traditional demand forces in the market.
Furthermore, economic consumption goods can be identified through properties related to their consumptive use, referred to as complementarities and substitutions.
- Commodities are complementary if they have to be used together, like a vehicle propelled by a Diesel engine and diesel oil, or Internet service, an Internet router and a device to access the Internet such as a smart phone or a laptop. If demand for one increases, this usually implies that there is increasing demand for the other commodities as well.
- Two commodities are substitutes if one commodity can be used instead of the other, such as an electric vehicle and a vehicle with a Diesel engine.
Economic market theory has embraced both concepts and devised theories to determine appropriate market demand theories. This implied that consumptive use properties were translated into market demand properties, mostly through the introduction of mathematical properties of consumptive preferences and the resulting market demand functions. Note that this approach implies that consumptive properties of commodities are usually expressed as properties of market demand functions.
Would it not be more appropriate to have a true property-based conception of economic commodities? In Part II of this post I will present some thoughts on the further development of this idea to make the global economy more accessible and understandable.