Free Liberal

Coordinating towards higher values

The Natural Laws of Economics

By Fred Foldvary

A natural law is a proposition that is universal to a subject matter. In science, a natural law consists of propositions describing and explaining observed regularities. There are in economics some basic regularities which have been designated as natural laws of economics. These include:

1. The law of demand. When the price of a good falls, the quantity demanded does not fall. Usually, the quantity demanded rises with a fall in price. Strictly, the law of demand applies to the substitution of cheaper goods for more expensive goods due to a relative change in price. The law of demand also applies to the whole economy: when the whole price level falls, with the amount of money remaining constant, a greater amount of goods will be purchased.

2. The law of supply. When the price of a good rises, the quantity produced does not fall. Usually, a higher price for a produced good results in a greater quantity produced.

3. The law of diminishing returns (law of decreasing marginal productivity). Given a fixed amount of some input, when ever more amounts of the variable input are added, eventually, the marginal product (the last unit's contribution to output) declines.

4. The law of one price. In an efficient market, a financial asset will tend to have one equilibrium price, because of arbitrage.

5. Gresham's law. Bad money drives out good money when the bad money is legal tender.

6. The law of reflux. In competitive free-market banking, there cannot be a permanent over issue of banknotes, since any issued in excess of the quantity demanded will be redeemed.

7. Law of supply and demand. In a free market, the equilibrium price of a good is that at which the quantity supplied equals the quantity demanded.

8. The law of diminishing marginal utility. As one obtains more and more of a particular good, eventually the marginal utility (value from one more unit) declines.

9. The law of unintended consequences. Human actions, and especially governmental acts, have consequences which were not intended and not anticipated by the actors.

10. The law of iterated expectations. One cannot use the limited information at some previous time in order to predict the forecast error one would make if one had better information later.

11. Engel's law. The proportion of income spent on food in an economy is inversely proportional to the general welfare of the society in that economy.

12. Wagner's law. As an economy grows, government spending has increased by a greater proportion.

13. Foldvary's law of inequality. Inequality equals the concentration of a distribution times the number of units (I=CN).

14. Say's law of markets. The supply of goods will pay the factors of production such that the payments are equal to the value of the product, and therefore aggregate quantity supplied equals aggregate quantity demanded.

15. Law of time preference. People tend to prefer to obtain goods sooner rather than later, and will pay a premium (i.e. interest) to shift buying from the future to the present.

16. Law of the market. Statements made by market participants are assumed to be truthful, and products are presumed to be safe and effective unless stated otherwise.

17. Pareto's law of distribution. There is a general tendency for 80 percent of the consequences to result from 20 percent of the causes, which often applies to property, 80 percent of the wealth owned by 20 percent of the population.

18. Law of cost. All costs are opportunity costs, the true cost being what is given up to get something.

19. Law of comparative advantage. Trade takes place because parties specialize in the products which have a lower opportunity cost, rather than merely a lower physical cost.

20. The law of wages. The wage level of an economy, where labor is mobile and competitive, is determined by the marginal productivity of labor at the margin of production, i.e. the least productive land in use.

21. The law of rent. The economic rent of a plot of land equals the difference between its output and the output at the margin of production, i.e. the least productive land in use, using the same quality of labor and capital goods.

22. The law of capital goods. Investment in capital goods and human capital expand until the expected return on investment, adjusted for risk, equals that of the long-term real interest rate.

23. Walras' law. If there is an excess quantity supplied in one market, there must be a matching excess quantity demanded in another market.

24. The law of economizing. People tend to economize, maximizing gains for a given cost, and minimizing costs for a given gain.

25. The law of economic rationality. Human action is economically rational if one's preferences are consistent and if one economizes.

26. The Gaffney effect. The public collection of rent equalizes the discount rate for land usage, since otherwise people would have different credit costs for purchasing land.

This article first appeared in the Progress Report, www.progress.org.
Dr. Fred Foldvary teaches economics at Santa Clara University and is the author of several books: The Soul of Liberty, Public Goods and Private Communities, and the Dictionary of Free-Market Economics.