First of all, I try to never user the words “supply” and “demand”, because those concepts depend on assumptions about counterfactuals: macroeconomic responses under different conditions . Only the market price can be observed in any way that is macro-economically relevant. Individual micro agents can and do observe price curves, but applying this to macro is a fallacy of composition, and should be avoided. The social function of prices is to conduct accounting according to social norms, under which the ethics of exchange and property are antecedents for emergent equilibrium prices, and are themselves in constant, if very gradual, flux. But if resource conditions change dramatically, these ethics can evolve very quickly as well. At best, supply and demand — applied to macro — makes apparently tautological assertions about counterfactual conditions.

My favorite phrase I use is “resources are local, information is global.” Prices exist in equilibrium, but resource allocations and programs — distributional determinations between people and groups, and the designed strategies for using resources to achieve goals locally, are not effectively described by the ideas of equilibrium. This one of many reasons why ideas such as the supposed equilibrium of interest rates are fallacious. Because information is global but resources are local, it is in fact adaptive uniformity that I expect to drive any convergences of variables like interest rates which we observe across groups.

What is adaptive uniformity? The example I use is that trees in a mature forest will tend to all have roughly the same height. Now, one could argue that gradients arising from competition for light compared to the cost of growth create the uniformity of tree height observed across a forest. But this is manifest more as an game theoretic equilibrium, where switching strategies is sub-optimal, and not a process equilibrium, where inflow and outflow are in balance. Unfortunately, economics presents the uniformity of interest rates as if trees flowed to the area of low forest height. Every double-entry based financial institution has the same long run constraint: non-negative profitability(while theoretically a sequence of constant losses that asymptotically converge to zero such that the net losses converge are also possible(assuming finite resource limits), any noise makes this strategy untennable). So long as such a financial entity has non-negative profits, it can be sustained, regardless of the rates of growth or exchanges agreed to by other firms.

Lending is not a simple price, it is actually only one part of inter-temporal accounting process through socialization. Money begins as a strictly quantitative dimensional unit, and takes on specific value through social normalization. But unlike other socially defined units, it does not have a fixed representation, but is a strictly self-referrential abstraction in itself. This means the process of inflation is more like using a ouija board than anything else, and setting an interest rate is like crafting mechanism of mechanical advantage for grasping at the ouija “planchette” as an inflation needle(think of a scaled polygraph, as made famous by Thomas Jefferson).

The “price” is in fact the full resolution of all social processes in the accounting effort. If you try to label one intermediate step or another as a price, you are in fact missing important contextual information. If your accounting norm is social reciprocation, then the price only fully desribed by all the actions of all participants, in the community over the duration of the accounting effort. How every specific action is quantified monetarily is actually relevant, and of course, the most accurate notion of “real” prices is your aesthetic or moral judgement about different outcomes, which are often quantified as opportunity costs by comparing it to other results. It’s not unlike setting an achievement score for different paths you can take in a play through of a video game.

In general price is the social conditions for cooperation. Lending and borrowing are only one part of a more heavily integrated system of socialization to create cooperation. Only once you lay out many rules and specificities for what money and debt and interest are and how they work, does even talking about setting interest rates become meaningful. But in general I have seen very few economists able to grasp the notion that these notions are in constant tectonic shift, and a whole host of integrated adaptive responses, and not merely the problematic attempt at a tautology that is “supply and demand”, are responsible for the evolution of quantified accounting communications which we refer to as prices.

I know that’s a pretty abstract and very loose way to view things that are often represented as fixed concrete ideas, but that is really the starting point you need to have to talk about this robustly.

I like your writing a lot, and you do a very good job of it in general, so if you do have a counterargument, I anticipate something very good.

Edit: Instead of supply and demand, I use the words “provisioning” and “utilization”