In my last post I briefly discussed the Austrian approach. One interesting point, discussed in more detail in the comments, is that several Austrians do not understand that they are neoclassical. Note that the core of neoclassical economics is the determination of prices, initially at least it was long-term prices, by the interaction of supply and demand.
I find a bit surprised that several neoclassical or marginalist economists do not understand the basics of their own theory. This confusion is compounded by the fact that several heterodox economists do not understand it either, and tend to be confused, as a result, on how they depart (when they do) from the mainstream.Naked Keynesianism
Confusion and the Failure of Marginalism
Matias Vernengo | Professor of Economics, University of Utah
33 comments:
The only confusion is about what is the modern Austrian view of prices. The modern Austrian view is that the cost of making a product actually has nothing to do with the ultimate sale price which is based upon the subjective values of the buyer.
The fact that he would not have engaged in the labor at all if he had known in advance of the present price might indicate a deplorable instance of poor judgment, but it does not affect the present situation. At present, with all the labor already exerted and the product finished, the original—subjective—cost has already been incurred and vanished with the original making of the decision. At present, there is no alternative to the sale of the good at the market price, and therefore the sale is costless. It is evident, therefore, that once the product has been made, “cost” has no influence on the price of the product. Past costs, being ephemeral, are irrelevant to present determination of prices.
Rothbard “Man Economy and State pp. 341-342.
Except that is not what actually happens in today's markets. Sellers do a lot of things to control price through artificial scarcity. For example, they just destroy excess inventory or sell it below cost to liquidators with provisos, like not selling it within the sellers' market. e.g., only for export.
As I have said before,much economics is theoretical, written by people that have little experience with actual institutions, so they just make stuff up that sounds logical without checking to see what's happening in the world.
Whatever sellers do to shrink inventory or sell below cost to liquidators with provisos, like not selling it within the sellers' market. e.g., only for export, the buyers will only pay what the buyers will pay. When someone has a house built for $3 million and sells it for $10 million to a buyer flush with a funny money loan, the house still sells for $750,000 after the Keynesian housing bust begins. Cost is ultimately irrelevant at the point of sale.
Nice try again at changing the subject. When that's all you have, that's all you have.
Ever since Mike Norman's post on the price-controlled anti-gouging regime being the free market, the analytical style of the other posts on this blog are beginning to make more sense and be more predictable.
One definition of insanity is doing the same thing over-and-over again expecting a different result.
With Bob I rest my case…
Quite a substantive response there Paul. As always.
Bob, if you follow Dr.Housing Bubble you will learn how the housing market is manipulated and how bubbles are beginning to from in some areas by keeping inventory off the market and other ploys.
If cost determines price then a deflationary spiral is impossible. Nothing can possibly sell for less than it cost to make.
What happens in a deflationary spiral is that asset values collapse and with it the house of cards of credit built on those asset values.
The housing bubble is a good example, where house prices fell drastically destroying a lot of credit based on those values but goods prices held up fairly well. Fron what I could see the goods prices that collapsed were on imported goods where the mark up is 20 to 50 times cost. Really. One my late friends that owned a chain of stores and considered himself a good guy who railed at the greedy bastards had a rule no more 20 X cost mark up rule. He was constantly after the pricing department when he found stuff marked up over that. They answered that a lower price was just not credible for that positioning considering the competition.
Bob,
There was no electricity get over it.... rsp
"When someone has a house built for $3 million (...) the house still sells for $750,000 after the Keynesian housing bust begins. Cost is ultimately irrelevant at the point of sale."
November 5, 2012 4:43 PM
"Nothing can possibly sell for less than it cost to make."
November 5, 2012 5:15 PM
Whaaaaaat?
"Nothing can possibly sell for less than it cost to make."
I'm being snarky here. As in not serious.
Bob,
On the bright side at least you do not believe we are borrowing the 'funny money' from the Chinese... rsp,
I do indeed believe we are borrowing money from the Chinese. You MMTers are certifiably insane. Mike Norman proved that when he claimed that the anti-gouging price controls were "the free market". (Of course, whether the price controls are a good or bad thing is a different topic). MMT and Mike Norman will never live that down.
And you will never live down this statement, roddis:
>The primary cause of the
> appearance of extensive
> unemployment, however, is a
> deviation of the actual
> structure of prices and wages
> from its equilibrium structure.
> Remember, please: that is the
> crucial concept.
This analysis has nothing to do with 'market-clearing Walrasian price vectors'."
Really? So this has zero relationship to Walraisan GE theory? Is that correct? Nothing at all? As in no relationship whatsoever?
Nobody really needs to refute bob roddis anymore: he does it so well when left to himself.
"Bob Roddis said...
If cost determines price then a deflationary spiral is impossible. Nothing can possibly sell for less than it cost to make."
No, because markets are divided into flexprice markets and fixprice markets. That has always been the view of Post Keynesians, and even the Austrian Ludwig Lachmann.
Assets selling on secondary financial markets are precisely those where the price can rise or fall rapidly because here their cost is disconnected from original costs of production.
As usual, Roddis has no idea what he's talking about.
Bob Roddis said...
The only confusion is about what is the modern Austrian view of prices. The modern Austrian view is that the cost of making a product actually has nothing to do with the ultimate sale price"
And Roddis can't even get that right: he's ignorant of basic Austrian concepts.
The modern Austrians are divided between the marginalist view and the profit markup view.
Ludwig Lachmann took the costs of production plus profit markup view of prices, and according to Jonathan Finegold Catalan, even Böhm-Bawerk - an early Austrian - developed a theory of “cost plus markup” pricing:
http://www.economicthought.net/blog/?p=2987
Catalan also cites Reisman’s "Capitalism" as another source for “cost plus markup” pricing.
Oh, and you never answered my question on the last thread, bob.
You have now admitted on multiple occasions that this is what you means by alleged "economic calculation" problems:
(1) the alleged miscalculation problems caused in the Austrian business cycle theory (ABCT).
(2) alleged price distortions caused by government spending, deficit spending, central bank fiat money creation, price controls, subsidies, income policies, and so on.
(3) Cantillon effects
(4) impediments to a price vector that will clear all markets (with flexible wages clearing the labour market)in this quotation of Hayek:
The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept.” (Hayek 1975: 6–7).
Let us assume you are interested in serious debate: if one can demonstrate that markets have no tendency to any wage and price vector with market-clearing equilibrium prices, it follows that there are no price *distortions* away from something non-existent, doesn't it?
Are you willing to admit that on a theoretical level?
Or are you just a loud mouth, intellectually dishonest, laughable Austrian troll, who will cowardly avoid any serious debate?
You eloquent, persuasive response last time was!:
"LK, you lying bastard. Give up. You've lost.
November 4, 2012 12:54 PM "
http://mikenormaneconomics.blogspot.com/2012/11/matias-vernengo-on-austrian-business.html?showComment=1352051658190#c8863530003418801823
Let us assume you are interested in serious debate: if one can demonstrate that markets have no tendency to any wage and price vector with market-clearing equilibrium prices, it follows that there are no price *distortions* away from something non-existent, doesn't it?
Why don't you try and prove that for once in your miserable life? Make sure you meticulously identify the "market" as voluntary and your beloved statism as coercion by third party humans. Since there are no omniscient and benevolent Martians or Kanamits to act as the third parties, make sure you note that too.
So in other words... you're just a loud mouth, intellectually dishonest, laughable Austrian troll, who will cowardly avoid any serious debate?
As for the non-existence of any tendency to a price vector with market-clearing equilibrium prices, before we even get to technical objections based on Knightian uncertainty and the nature of demand curves (easily available in, say, Steve Keen's Debunking Economics), the existence of large-scale price administration by businesses in fixmarkets already demonstrates that private sector activity is sufficient to impede any adjustment to such an imaginary price vector, even if it did exist.
LK: I'm turning purple holding my breath waiting for your "proof".
"I do indeed believe we are borrowing money from the Chinese."
Oops sorry Bob... thought you were making progress for a while... rsp,
"I'm being snarky here. As in not serious.
"November 5, 2012 8:10 PM"
So that's how they call this now?
I am being humorous here, as in amused and skeptic.
A sufficient argument to refute the idea of the existence of a set of market-clearing prices in a real world economy is the fact that the law of demand is simply not universally true, and does not apply to market demand curves: it can only be true if an economy has only one commodity and only one consumer.
Keen:
[sc. the law of demand] … is an essential element of the neoclassical model of how prices are set, which says that in competitive markets, supply will equal demand at the equilibrium price. For this model to work, it’s vital that there is only one price at which that happens, so it’s vital for the model that demand always increases as price falls (and similarly that supply always rises as price rises).” (S. Keen, 2011. Debunking Economics: The Naked Emperor Dethroned? [rev. and expanded edn], Zed Books, London and New York. pp. 48–49).
The equilibrium price is the price at which the quantity of a product supplied will equal the quantity demanded, and there will be market clearing. There is “market equilibrium” when the price attains the equilibrium price. A “structure of equilibrium prices” is a set of equilibrium prices that will clear all markets.
But, as Steve Keen shows (Keen, 2011. Debunking Economics: The Naked Emperor Dethroned?, pp. 38–73), the law of demand is a myth, in the sense that it is not universally valid, because market demand curves can have virtually any shape, a finding of even higher-level neoclassical research literature.
Yet equilibrium prices have to be determined by means of a universally true law of demand: yet once the necessarily and universally true law of demand collapses many product markets cannot have “equilibrium prices” and the whole notion of a set of market-clearing “equilibrium prices” is logically impossible.
And that is before we get to the problem of Knightian uncertainty that all market agents face, the unique nature of labour markets (cutting wages cuts income and with high private debt causes debt deflation), the fact of administered pricing, and all the real world impediments to equilibrium prices even if they existed, and so on.
In economics, the law of demand is an economic law, which states that consumers buy more of a good when its price is lower and less when its price is higher (ceteris paribus).
http://en.wikipedia.org/wiki/Law_of_demand
I don't necessarily believe that. It's true for me because I'm rational and a cheapskate. I know many status seekers who love paying high prices because they think it gives them some sort of status. I think those people are nuts.
Yet equilibrium prices have to be determined by means of a universally true law of demand
No they don't. What a bunch of nonsense. Prices are determined by whatever the knucklehead parties decide is the price however irrational and dumb that price might be.
I told you that you don't understand economic calculation. Or "equilibrium structure" as Hayek used it in 1975.
It is astonishing how you continue to prove your incredible ignorance.
So now a “structure of equilibrium prices” is not a set of equilibrium prices that will clear all markets?
Is that correct?
Equilibrium prices have nothing to do with the law of demand as well!
So now a “structure of equilibrium prices” is not a set of equilibrium prices that will clear all markets?
That's been your contention, not mine. The "structure of equilibrium prices" is simply the prices that would have obtained without the government interference. There would probably be goods, services and people here and there who cannot find buyers at any price.
"The "structure of equilibrium prices" is simply the prices that would have obtained without the government interference"
No, they are not:
"The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept.” (Hayek 1975: 6–7).
By definition, all markets must clear for any such equilibrium structure of prices and wages, certainly the labour market must clear, and yet the labour market is undoubtedly one of those markets not subject to the law of demand.
Your stupidity is truly breathtaking.
"SINCE YOU ARE NOT CONVERSANT IN THOSE BASIC TOPICS, WHY DON'T YOU SHUT UP?"
Love the capitals there, bob.
No doubt your eloquent, reasoned and persuasive response will convince any unbiased reader!
Oh, and you've still not answered the question:
if one can demonstrate that markets have no tendency to any wage and price vector with market-clearing equilibrium prices, and indeed that for many markets there are no such equilibrium prices, it follows that there are no price *distortions* away from something non-existent, doesn't it?
Are you willing to admit that on a theoretical level?
if one can demonstrate that markets have no tendency to any wage and price vector with market-clearing equilibrium prices, and indeed that for many markets there are no such equilibrium prices, it follows that there are no price *distortions* away from something non-existent, doesn't it?
Are you willing to admit that on a theoretical level?
No. Because there would a distinct set of prices absent government interference. IT IS THE PURPOSE OF KEYENSIAN POLICIES TO CHANGE THOSE PRICES! Thus, the entire edifice of Keynesian thought is to change the prices that you say are "non-existent". You think those prices would be bad, I say they'd be good.
Further,you cannot prove there is no "tendency" toward "market clearing prices" under laissez faire in any event.
The form of your stupid question is simply to avoid the essential concepts of Austrian theory.
Because you are a liar and a buffoon.
"No. Because there would a distinct set of prices absent government interference. IT IS THE PURPOSE OF KEYENSIAN POLICIES TO CHANGE THOSE PRICES!"
Finally an answer!
And your answer shows how confused you are: if you have admitted that there is no tendency to a set of market-clearing prices, and indeed that many such markets have no such equilibrium price, the price set that would result from zero government has nothing intrinsically "right" or "correct" about it in economic terms at all - it would be a set of disequilibrium prices.
It would just as "wrong" and "distorted" (from the perspective of equilibrium theory) as any price set in the presence of a government sector.
In the very absence of the set of market-clearing prices, the whole argument about alleged economic calculation falls like a house of cards, demonstrating why your position is intellectually bankrupt.
Well done!
Bob's reasoning is completely circular: 1) whatever outcome 'the market' creates in the absence of government is as perfect as it's possible to be, therefore 2) there must be no government interference.
He has no way of proving 1. His whole argument is just an ideological assertion.
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