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Dogma Premise # 16

 Better products or lower prices will lead to greater unit sales, and therefore more profits.

The Capitalism Myths embody a very simple model of economics, where if supply goes down or demand goes up, then price goes up.  That’s true under the right circumstances, but it’s not a fair summary of economics.

Physicists who have memorized the Perfect Gas Law (PV=nRT), know something analogous about the relationship between pressure, temperature, and volume.  But that’s not all there is to thermodynamics. The Perfect Gas law is inadequate to describe many complex real-world phenomena, and cannot by itself predict whether a steam engine will move forwards, backwards, or explode.

And so it is with the general idea that better products or lower prices will lead to greater unit sales, and therefore more profits.  It might sometimes be true, but there are so many other real-world factors to consider that the principle doesn’t describe very much real-world activity.

For example, sales volume is also affected by marketing, competitive conditions, and the state of the economy.  A CEO wishing to drive up profits might improve product quality, or might instead spend more on advertising, hire a more aggressive sales force, buy up a competitor, gut the quality of the product in invisible ways, or “milk” a product or "harvest" a business for short-term profits by simultaneously raising price and cutting costs and then invest the profits in a different product or industry with greater profit potential.

There are many circumstances in which better products or lower prices do NOT result in much greater unit sales, such as when product demand is highly inelastic.  In this circumstance, creating better products or lowering price leads to lower profits.

The purpose of Dogma Premise #16 is to oversimplify the economic dynamics so that it seems like profit-seeking firms in a free market without supervision will naturally behave in a constructive manner.  The opposite is more often observed, and the more clearly we understand that better products or lower prices may NOT lead to greater unit sales, and may not generate greater profits, except in occasional circumstances which are not particularly likely to be present in any given case, the sooner we come to regard with proper suspicion the assumption that the free market, left to its own devices, will generate socially desirable results.

Dogma Premise 17

All Dogma Premises

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