Earlier this year, I gave a short course on Carl Menger’s Principles of Economics for scientists and engineers at my institute. The course was brief, and I focused only on ideas that were relevant for researchers in engineering and the natural sciences. One of the ideas we talked about was supply and demand, in order to link it to the supply and demand of research-related things: the labor of researchers, research articles on specific topics, and so on.
What I told them was that supply and demand were not as simple as one would expect upon first encounter. We usually imagine the price of a commodity increasing if people “demanded” it more. What actually happens relates not to the prices of the items as they stand but their prices in a situation where all other things are held equal. Just as in a scientific experiment, we try to hold all things constant to the degree that we are allowed, and to our best estimations, we do the same in analyzing the price of a good or service. There are many other factors affecting the price of an item besides how many people are willing to purchase it, but for the sake of simplicity, we introduced them as we progressed.
When I asked those attending the course whether they had any questions, someone commented: “These theories are abstract and might not hold in Kuwait.” I asked the engineer, “How come?” He invoked the classical case of the falafel sandwich.
The Curious Case of the Falafel Sandwich
During the reign of Emir Jaber Al-Ahmad Al-Sabah, as the story goes, he issued by decree that a falafel sandwich was not to be sold above the price of a hundred fils (approximately thirty-three cents). His rationale was that these sandwiches were staples of the Arabic cuisine, eaten every day by thousands, and they were very cheap to produce, so no restaurant should charge more per sandwich than 100 fils. The price was held by fiat, and that is the reason why falafel sandwiches were so cheap in Kuwait.
Most of the restaurants that serve falafel sandwiches serve many other cheap items, such as potato and eggplant sandwiches, hot dogs, and halloumi cheese and tomato sandwiches. That is one thing the reader should keep in mind. Another thing is that decree 10 of 1979 also lists the prices of many other items that restaurants have to abide by. There are also many qualifiers, one of which is that restaurants are free to charge higher prices for “special” falafel sandwiches, which come in saj bread or with other condiments. The decree specifically says falafel and salad sandwiches, and any addition might be a completely different matter. In 2013, a revision of the law was issued with more details and qualifications, giving the minister of trade and industry all manners of controls over all goods and services—for the common good, of course.
Price Decrees, Duress, and Causality
How does any retailer price his items? He can’t put any price arbitrarily. He has to look at three things in general: (1) the balance of his accounting equation so as to pay off his liabilities and equities; (2) as Menger calls it, the different degrees of salableness of the commodities in question; and (3) his entrepreneurial outlook.
The retailer can only lose money to liabilities so long before he becomes bankrupt, and if he does not yield enough revenue after paying his liabilities to put back into his retained earnings, he will not be able to repair his depreciated assets and will not pay his shareholders enough. Moreover, the retailer has to consider the marketability of his merchandise; if he is selling his items above the market price, it is important that he adds sufficient value to the items in order for the consumers to accept them at their above-market-price condition. Finally, the retailer may choose to price some items lower than their market prices based on the entrepreneurial outlook he holds. Let us consider this further.
By fiat, the price of a standard falafel sandwich cannot exceed a hundred fils. However, the decree does not force any restaurant to sell falafel sandwiches. The restaurant could very well lose money on each sandwich but understands that consumers may buy their sandwiches along with other items that make the whole bargain lucrative. The restaurant may also decrease the quantity or quality of the ingredients of the sandwiches—which is what economists call shrinkflation. If ultimately the restaurant cannot make a profit, or serve a cause worthy in its owners’ estimation, selling falafel sandwiches, it doesn’t matter what the decreed price is—the restaurant will discontinue its sales of these items.
It is important to note here that the decree does not cause the price of the sandwich to be a hundred fils; the owners’ actions are based on the three points detailed earlier. To consider causality, we have to consider the philosophical concept of liberty of spontaneity. The owner, qua entrepreneur, has many choices to make while still retaining his culinary and economic activities. He will only be forced into one choice when he has no more choices to make save for abiding by the decree. Even still, he can choose to close his restaurant, sell it to a buyer, or liquidate his assets—albeit for a reduced price. However, given his initial choice of having a restaurant and choosing to sell falafels, libertarians still hold that he should not be subject to the arbitrary whims and controls of politicians and bureaucrats. He also should not be subjected to duress, as in the many cases where retailers are forced to continue selling their items at the same prices as they used to do.
Economics and Falafel Sandwiches
Can economics alone explain the prices of falafel sandwiches? Of course. Although an official decree is relevant here, it may not cause the price of the item to be set at any specific numerical value—for many other paths may be taken.
Menger claims that the price of an item at the market is dependent upon “the number and nature of the limitations imposed politically and socially upon exchange and consumption with respect to the commodity in question.” Furthermore, he claims that the marketability of the items is conditioned by “the differences in the restrictions imposed upon commercial inter-communication with respect to different goods, to interlocal and, in particular, in international trade” and the “restrictions imposed politically and socially on their being transferred from one period of time to another.” These things indeed do affect the price and marketability of a sandwich, but neither are they the sole cause nor are they the most important determining factor. Therefore, the decree alone is insufficient to be the direct cause of the current price of the falafel sandwich; indeed, the sandwich’s price can be clearly understood by sound economic analysis.
