New Blog 2: Japan Real Estate Bubble

Thursday 8 November 2012

Japan Real Estate Bubble

The price of an asset in a competitive market, economists tell us, occurs at the equilibrium level where the supply curve intersects the demand curve on a graph where price level lies on the y axis and quantity demanded lies on the x axis. This pricing theory, so elegant and simple, is the foundation of every course in economics, and is accepted as a universal economic truth that concisely explains consumer behavior in all corners of the free market. It is said that this model can be used to explain and predict changes in the price and quantity of goods sold, but unfortunately the usefulness of this model is limited by our ability to accurately ascertain the necessary inputs. The model has failed miserably in the past because we have no accurate method of drawing the supply and demand lines on the graph with any degree of scientific accuracy. Mathematical modeling does not determine where the demand (and supply) lines are to be drawn. Consumer (and supplier) behavior determine location and slope of any line, and unfortunately for economists, human behavior is not influenced by graphs, equilibrium models, and demand theories.