First, what do “economic laws” even mean? Economic “laws” are certainly not like laws of nature. No person can simply jump into the air (unaided by technology) and violate the law of gravitation. Yet it is possible in both theory and practice for people to violate the law of demand.
If this were not so, then how do speculative bubbles ever emerge and develop in economies? If the price of houses is rising sharply, the law of demand tells us that demand should fall. People will substitute some other good for expensive houses. But that is not what happens during speculative bubbles: the demand for houses increases, and increases sharply, even as prices soar. In fact, the rising prices are clearly a causal factor in the increased demand, because the increase in value, and the desire make money, is what attracts people.
Already we see that the “law of demand” has little or no explanatory power with respect to the prices of, and demand for, durable goods or assets bought and sold on markets where there are vast secondary stocks (consisting of “used” or “second hand” goods) of such goods/assets, in addition to the newly produced versions of the same good/asset.
Secondly, the expression “economic law” is misleading. Most economic laws – as in “laws” in the social sciences generally – are observed regularities in phenomena and human behaviour. But “regularities” are not necessarily universal. This is perfectly clear in social relations. It is an observed regularity that parents look after their biological children in human societies. One might even describe this as a type of “social law” of human society. But everyone knows there are exceptions: grossly negligent, irresponsible or immoral parents who do not care properly for their offspring. Some parents may even abandon their children or put them up for adoption. The “social law” is not like a hard law of nature at all. It is an empirical observation, and a human behaviour that has both biological/genetic and environmental/cultural causes, which there can be exceptions to.
I doubt whether most “economic laws” are much different from “social laws.” Although one might be able to point to a core of economic laws that are truisms – e.g., you can’t have consumption without prior production – these are usually trivially true propositions that do not take us very far.
Since economic behaviour is governed not only by human impulses, nature and psychological traits (caused by “nature,” as it were), but also by institutions, culture and social structures (environmental or general cultural factors), we should not expect absolute universality of all currently observed economic “regularities” in the past or in societies with different institutions and cultural practices (but note that I am most decidedly not endorsing fashionable postmodernism or cultural relativism by these remarks). No doubt there are some “regularities” that do hold true in almost all human societies in all times, but there is no a priori reason to expect all such “economic laws” do, even in a modern society.
So what about the law of demand? Certainly there must be many commodity markets where prices and demand do indeed behave like supply and demand curves: that is, demand will rise as the price falls (Keen 2011: 72–73). But it is likely that there are a significant number of markets where the law of demand does not apply.
Anyone who has done even an undergraduate degree in economics knows that the law of demand cannot really be universal, e.g., the possibility of Giffen goods already invalidates its claim to universality.
In fact, we can draw attention to these exceptions to the law of demand already well known in economics textbooks:
(1) Giffen goods/inferior goodsBut even more radical criticisms of the law of demand can be made.
(2) Veblen goods/”snob” goods
(3) goods/assets on speculative markets
(4) psychological bias relating to relationship between price and quality
Some consumers evaluate the quality of a good from its price. That means that some consumers could in theory prefer higher priced goods to lower priced goods and shun cheaper goods under the impression that cheaper goods are inferior (even when they are not).
(5) Demand during times of scarcity or fear of scarcity
Fear of expectation of shortages or scarcity during abnormal times (disaster or war) can cause people to buy more of a good even as their price rises, to stock up in the expectation of insufficient supply in the future.
The basic staples of everyday life often have a stable demand even when prices rise.
One can see a good critique of the law of demand in Keen (2011), but I will leave this for another post.
Keen, Steve. 2011. Debunking Economics: The Naked Emperor Dethroned? (rev. and expanded edn). Zed Books, London and New York.