“I first met Ludwig M. Lachmann on February 4, 1982 at the first spring semester meeting of the Colloquium in Austrian Economics at New York University. … Though we had not been introduced, as soon as the goateed man with the twinkling eyes spoke I knew who he was. He started slowly, even haltingly. At first he appeared to ramble, but as he went on an argument unmistakably began to take form. The crucial juncture was signalled by a long, overtly dramatic pause. Then came the main point, spoken forcefully and rapidly, with all r’s rolled, his eyes scanning the seminar table, case established, who could disagree?While that story does in fact seem to tacitly accept that there is an equilibrium structure of prices and wages that would clear all markets (something that can be doubted), the point of the story is well taken: the belief in the market’s tendency to any such state in rapid price adjustments is mostly “a metaphysical assumption.”
During that first meeting I had an exchange with Mario Rizzo about the concept of market-clearing. I argued that though the speed of adjustment problem was an empirical issue, it was not something that could be tested as a general proposition. I drew the implication that one’s view of the rapidity of clearing was a matter of faith, nothing more than a metaphysical assumption, though obviously a crucial one. Lachmann nodded his head vigorously as I was finishing up, which pleased me immensely.” (Caldwell 1991: 140).
The lesson is also this: those Austrians who posit an equilibrium price structure (with flexible wages clearing the labour market) as the state towards which an economy naturally moves have much more in common with mainstream neoclassicals than they think they do.
BIBLIOGRAPHY
Caldwell, Bruce J. 1991. “Ludwig M. Lachmann: A Reminiscence,” Critical Review 5.1: 139–144.
Hahaha! And all the Austrians in the comments section told me that I was being an a-hole when I said that it was all a matter of faith!
ReplyDeletehttp://www.nakedcapitalism.com/2011/12/philip-pilkington-libertarianism-and-the-leap-of-faith-%E2%80%93-the-origins-of-a-political-cult.html
I wish I had this quote on hand when I wrote that... Still though, the metaphysics, as I pointed out, has now turned into a sort of existential mythology. I wonder if Lachmann would agree...
I think he would agree. This 'market clearing' talk is one highly appealing to libertarian philosophy, but Lachmann "was out of sympathy with the libertarian wing of the Austrians" (Mittermaier 1992: 20).
DeleteMittermaier, K.M.H. 1992. Ludwig Lachmann (1906-1990) A Biographical Sketch. South African Journal of Economics 60 (March): 7-21
I am curious to know whether you think there is in fact an underlying set of possible market-clearing equilibrium prices, or (alternatively) that any such set of equilibrium prices is really just another non-existent entity (fictitious like the ERE).
ReplyDeleteIf you think there is in fact a possible set, do you think the actual problem is that the real world imposes severe difficulties for agents in markets to ever set them at that level?
For the latter idea is in fact what even the neoclassical "New Keynesians" at heart think.
This is something I'm extremely interested in and due to this I'm going to give you a long and complex answer.
DeleteOkay, let's divide up the question first. Is there a *possible* set of underlying equilibrium prices? That all depends on what you mean by "possible". Certainly, if you make neoclassical assumptions about competition, information, preferences etc. there will be a set of *possible* prices.
But setting up such a model to prove the possible existence of such a set of prices is just a tautology. I mean, is there such thing as unicorns? In the sense that an abstract entity called a unicorn exists, then yes. But otherwise no.
That brings us to the more important question: can equilibrium prices exist in reality? I would say: categorically, no. The assumptions needed to ensure them are far too restrictive for any example beyond, maybe, three people trading three classes of items in a situation of absolute scarcity. And even here, unless some sort of strict "rules-of-the-game" are set out by an authority, I think that power-relations will play out according to cleverness etc. But again, even if not, a three person economy with minimum goods and absolute scarcity is just another abstraction -- another unicorn.
More importantly (for me) though is whether equilibrium concepts of price can tell us anything useful about the world. This is of particular interest to me right now as I'm trying to formulate a dissertation based on it. My hypothesis is that markets dictated by supply and demand actually tend toward disequilibrium due to speculation and it is only fix-price manufacturing markets that have stable prices. I sketched out my argument here but I have been trying to develop it in more formal terms since:
http://www.nakedcapitalism.com/2012/10/philip-pilkington-why-free-markets-accommodate-speculation-and-lead-to-disequilibrium.html
Once we introduce the simple fact that price rises in markets subject to scarcity may engender further price rises as speculators pile into the market, we must admit that your average neoclassical/Austrian-style market must actually have a tendency toward substantial and destructive disequilibria. I believe we see this across the board today. From the copper market to the housing market of yesteryear, those markets that operate according to supply and demand under conditions of scarcity seem prone to significant price instability.
Anyway, this is basically my area of research for the next year. If I can do something decent with it then that's another nail in the neoclassical coffin. Fingers crossed that I'm competent enough. Good results so far.
That is interesting and on the whole persuasive view of things.
DeleteI would try and separate (1) commodity markets for final goods and services from (2) secondary asset markets (for real assets or financial assets) in your analysis.
I think (2) are obviously especially vulnerable to asset bubbles and speculation, while (1) to a much smaller degree.
I disagree. I think dividing the markets is arbitrary. The reason why most finished goods are not subject to speculation is because they are generally fix-price markets.
DeleteWe have fix-price markets in asset markets too -- e.g. the Swiss franc -- and they are not subject to speculation.
Most finished goods are not subject to speculation because their supply is too elastic. There's no point hording BMWs if the manufacturer will just keep producing more of them to fill your warehouses. And then, when you try to sell them, the price will come shooting down. Storage costs are also a problem. I suggest you take Lords Keynes's advice!
Delete@Ivan Denisovich
DeleteEh... did you read what I wrote? That's my argument. Fix-price markets (i.e. supply-elastic markets) are basically immune from speculation.
My point is that you have supply-elastic/fix-price markets in financial markets too. The Swiss central bank guarantees to print francs in order to hold the price of the franc at 1.20 vis-a-vis the euro. This is one of many financial asset markets that is immune from speculation for the same reason that most manufacturing markets are. So, making a distinction between the two based on this is arbitrary.
Storage costs are an issue. But speculators get around this. They can create forward contracts or they just pay the storage costs because there's money to be made:
http://www.reuters.com/article/2011/07/29/us-lme-warehousing-idUSTRE76R3YZ20110729
I think my approach is the correct one. It's totally arbitrary distinguishing between markets for so-called consumer goods and so-called assets. All consumer goods are always already assets. If I go broke tomorrow I can sell my shoes. And if I become famous those same shoes will appreciate in price. Etc. Economists have been taking the wrong approach to this for years. And its blinded them to the truth of how markets function.
"All consumer goods are always already assets. "
DeleteThat is true - but many of our consumer goods are either perishable or, once they are consumed, they gone forever (e.g., think of food, drink, soap, toothpaste, shampoo etc.).
One can think of a limited number of consumer goods that will appreciate in value: good wine, certain cars, antiques, certain art objects, etc.
I think there is certainly something in the approach you're taking. The Swiss franc is an interesting example.
Yes. But financial assets are perishable too. Gold will wear down eventually and you can tear a bond in two. They are also subject to depreciation through inflation etc. Its all just a matter of degree.
DeleteThe distinction made here, when you really boil it down, is anthropomorphic resistance to equating bits of valuable paper with things we wear and eat.
The reality is that all my consumer goods are always already assets. And if I go broke I can pawn them or sell them on ebay. There is no ontological reason that is not superstition to not equate the things theoretically.
And yes, I believe there is a lot in this approach. I already think I've already succeeded in mathematically formalising a general non-equilirbium demand and supply function which does not need to distinguish between so-called assets and so-called goods and which can account for both stable prices and speculation.
"But financial assets are perishable too. Gold will wear down eventually and you can tear a bond in two. "
DeleteBut surely that is "perishable" in a quite different sense. You cannot eat a financial asset or gold. Some gold and silver coins or objects have lasted for thousands of years, well beyond a human lifetime.
Financial assets or gold simply do not "perish" in the way that milk perishes by going bad.
"The reality is that all my consumer goods are always already assets.
It is a minor point: but surely not all your goods! Can one really sell one's toothbrush?
On a more constructive note, I have no doubt that a financial asset can have utility in some sense, perhaps not as great as hard cash, but even bank deposits must be seen as having direct utility. In that respect, there is less difference between goods and financial assets than some economists think.
Whether something is 'investment' or 'consumption' is an accounting opinion.
DeleteIf I buy a car then it is a consumption good, but if I then decide afterwards to do a bit of couriering on the side it suddenly becomes an investment. (Which then magically generates some savings).
So it's all a matter of opinion really.
We produce and we distribute.
Of course you can eat gold. You could eat a bond too, if you really wanted.
DeleteAnd, similarly, you could take a sandwich to a bank and lock it in a vault for ten years.
It's all just a matter of degree. Trying to distinguish these things in such "materialistic" terms is not a scientific approach and yields nothing of interest.
And yes, you could conceivably sell your toothbrush if you became a famous movie star or whatever. For EVERY example there is a counterexample. They may be unlikely, but that's irrelevant. We just want coherent logical reasoning.
My question: is there an economic reason why we should distinguish between "consumption goods", on the one hand, and "assets" on the other. My answer: no. If you're doing HOME economics, then maybe. But when we're talking about how markets and prices function, then the distinction is useless, arbitrary and normative insofar as it sets up a mental blockage where we think that financial assets are subject to different dynamics as are consumption goods. They are not. The dynamics are the same. It's just a matter of degree.
Recognising this goes a long way to helping us understand why certain consumer products (petroleum, housing etc.) come under the sway of the same forces that most people only assume only are relevant to financial markets.
Even if you ate gold, it would pass through you (as it were) and still retain the same market value when cleaned. The same is not true of perishable foodstuffs. Gold does not "perish" in the same way that foods do. That is my point above.
Delete"And, similarly, you could take a sandwich to a bank and lock it in a vault for ten years."
And it would rot and be worthless.
"My question: is there an economic reason why we should distinguish between "consumption goods", on the one hand, and "assets" on the other. My answer: no."
Surely there is: most consumption goods depreciate rapidly, or when they are perishable goods they are usually destroyed (as it were) in the way that perishable food is destroyed when consumed.
Durable goods have a better claim to be assets, of course. Obviously there is overlap between the class of all consumer goods and the class of all assets.
The most important class of assets are those whose value you expect to appreciate. But, above all, the things which are the most important forms of assets have liquid secondary markets, sometimes centralised and deep markets, where you can buy and sell them second hand, e.g,
financial assets
real assets
- land
- houses
- cars
- antiques
- wine
- books
- durable household goods like machines
All these things have organised markets for reselling the goods, from higher to lesser degree of market size.
Obviously we are dealing with degrees here: yes, you can find a market for a used book, but can any normal person find a market for used toothbrushes? No.
I would conclude that the most important and useful assets are those that have liquid secondary markets. There is an order and degree to this liquidity.
Its all just a matter of degree. Dividing the assets based on this is pointless from the perspective of theorising price dynamics. In my approach we just build all these nuances into two interacting variables:
Deleteb.Ct+n
"Ct+n" is the expected change in price between time t and time t+n by the market as a whole -- investors or consumers (if there is a real discernible difference, which I doubt).
"b" is the propensity for the market as a whole to line-up with this future expected price. So, if the market aligned with the future expected price perfectly b would be unity (b=1). If they overshot the price b would be greater than 1. If they undershot the price b would be less than 1.
In such a framework people make decisions based on expectations of future price together with consumption decisions. So, none of the above matters. But by lumping together all buyable goods/assets, we see that speculation is natural and endogenous to all markets. It's only when we add elastic supply and a willing price-fixer that prices can be stabalised.
"And it would rot and be worthless."
DeleteCompost is very valuable.
In fact leftover sandwiches are worth a lot more once they have rotted.
Be careful of those pre-conceptions ;)
A relatively elastic supply does not mean "fixed price". The prices of consumer goods do respond to increases in demand, just not quickly enough to make speculation worthwhile. And your shoe example is a very rare exception to the rule that consumer goods depreciate in value when they're second hand. Consumer goods are "consumed", which makes them different from assets like gold which do not age with use.
ReplyDeleteI'm not engaging in a debate over nomenclature. That is a clear sign that the disagreements are irrelevant.
DeleteIt doesn't matter if (some) consumer goods depreciate. Some financial assets depreciate too. Some consumer goods appreciate (antiques etc.) too. And so on and so on.
Any distinction is arbitrary and ultimately based on some crude anthropomorphic desire to distinguish between things we put in our mouths and things we put in our pockets.
"Consumer goods are "consumed", which makes them different from assets like gold which do not age with use."
ReplyDeleteShoes can be recycled and gold can be moulded into different forms. All of those are transformation processes that are part of 'consumption'.
Gold bullion depreciates via its storage costs or via it being stolen.
By the way, thought experiment:
ReplyDeleteIs a lottery ticket a financial asset or a consumption good?
I think it walks the line. Most people buy the ticket to "simulate" in fantasy the experience of being a millionaire. And certainly it is not a speculative bet in the same sense as when I short the US dollar. Ditto for gambling.
The more you think about these things, the more the relationships blur and the categorical distinctions become meaningless and an impediment to clear thought.
"Is a lottery ticket a financial asset or a consumption good?"
DeleteThat is an interesting question.
It does seem to have some resemblance to a futures/forward contract, in the sense that I pay you money today for something that I hope will be worth much more in the future, but far more speculative.
But look at the consumption aspect.
DeleteOkay, I go on holidays to Las Vegas and spend $1,000 on roulette and slot machines. Consumption expenditure or losses on capital assets?
Supposedly what I'm doing is "investing" the money in the hope of future return. Yes, the risk-level is high and the potential payoff is dubious, but there's no real ontological distinction between this and playing with highly volatile stock or currency. So, does this mean when I go on holidays to Vegas I'm engaging in investment and that my losses are capital asset losses?
Maybe. But then most people would consider this a consumption expenditure, just as if I went on holiday to Spain and spent all my money on useless trinkets and sombreros. So, perhaps using a slot machine is consumption and "utility" is in the thrill I receive from playing. That's a perfectly coherent argument too -- if you accept the distinction.
I don't accept the distinction. It may be necessary for an accountant or, for that matter, a national accountant. But as an economist I need not distinguish between these things. They're both an act of consumption AND of investment. And we can abstract away from this and simply look at the prices. Much simpler. And yields far more interesting results.
The old investment adage is that accounts are a matter of opinion but cash is a matter of fact.
DeletePerhaps that should be adjusted for economics: consumption/investment is a matter of opinion, price is a matter of fact.
"Supposedly what I'm doing is "investing" the money in the hope of future return. Yes, the risk-level is high and the potential payoff is dubious, but there's no real ontological distinction between this and playing with highly volatile stock or currency. "
DeleteThat is an insightful perspective. I have often thought the same thing.
"So, does this mean when I go on holidays to Vegas I'm engaging in investment and that my losses are capital asset losses?"
I am not sure in what sense you are using "capital asset" here.
If you mean a durable "capital good" from which you might produce consumer goods for sale, it is not a capital asset loss.
If you mean "financial asset loss" by "capital asset loss", then, yes, I suppose it could be construed as like a loss from speculative gambling on stocks or shares or financial instruments.
Yes, call it a "financial asset" if you'd like. The terms are vague and they melt into one another:
Deletehttp://en.wikipedia.org/wiki/Capital_asset
It's all just accounting, at the end of the day, and when we're dealing with markets and supply and demand analysis we do not have to concern ourselves with accounting. Accounting only really makes an entry in macro-theory.
"Shoes can be recycled and gold can be moulded into different forms."
ReplyDeleteGold does not depreciate, shoes do. An asset being stolen is not the same as depreciation. The distinction between investment assets and operating assets is something that every accountant understands as meaningful, which is why they are put under separate headings in the the balance sheet.
Now it is true that the same asset could be an investment asset for one owner and an operating asset for another owner (e.g. real estate, commodities, etc). This is irrelevant, because what determines the nature of the asset, for accounting purpose, is the intention of the owner. If is it held for its potential to appreciate in value it is one type of asset. If it is held for use in the business, it is another.
Gold both appreciates and depreciates, just like any other asset:
Deletehttp://www.goldinmind.com/assets/images/300/20100721%2010%20Charts/20100706Economist_Gold%20at%202010%20prices%20s.gif
The only difference is that shoes GENERALLY tend to depreciate faster and chronically. Although gold will also eventually wear out too.
Now, if we have Elvis' blue-suede shoes. Well, that's a different story.
Ultimately, the differences are arbitrary and uninteresting, especially for a discussion about price-dynamics -- which is what we're actually talking about. If you want to talk about the difference between table salt and cash balances, take a course in Home Economics.
"Although gold will also eventually wear out too."
DeleteI am not sure what you mean by this.
Gold is a highly non-reactive metal, and does not rust or corrode.
Even on geological time scales gold does not "wear out" - it's incredibly durable.
If it is stored improperly, gold tarnish can happen, but can be easily fixed by polishing.
I've seen enough old jewellery to know that even almighty gold is subject to gradual erosion:
Deletehttp://www.jewelry-secrets.com/Jewelry/Chains/Do-Chains-Wear-Out/How-Chains-Wear-Out.html
Anyway, look, as I keep saying, comparing physical properties of goods and assets is terribly misleading when talking about prices and markets.
"Supposedly what I'm doing is "investing" the money in the hope of future return. Yes, the risk-level is high and the potential payoff is dubious, but there's no real ontological distinction between this and playing with highly volatile stock or currency. So, does this mean when I go on holidays to Vegas I'm engaging in investment and that my losses are capital asset losses? Maybe. But then most people would consider this a consumption expenditure, just as if I went on holiday to Spain and spent all my money on useless trinkets and sombreros. So, perhaps using a slot machine is consumption and "utility" is in the thrill I receive from playing. That's a perfectly coherent argument too -- if you accept the distinction."
ReplyDeleteThe answer to this conundrum lies in the mind of gambler. If he is gambling purely for pleasure, he is consuming. Given that most people realise that gambling in a casino is not a good investment because the odds are stacked against them, this is likely to be true in most cases.
However some professional gamblers may be able to count cards at blackjack and may therefore go to a casino with the intention to making a return on their capital.
The nature of an economic activity cannot be separated from the intention of the actor.
"The answer to this conundrum lies in the mind of gambler."
DeleteI'll be sure to consult a mind-reader when constructing my theory of prices! ;-)
Seriously though. People play asset markets for fun too.
But none of this interests me. Cut it all away with Occam's razor or otherwise entangle yourself in a web of human intention and desire -- and if so entangled you'll probably never get out.
I'm just lumping all the activity together and assuming uncertainty on the part of the actors. Their intentions don't interest me. Only the parameters upon which they can make their decisions.
"Their intentions don't interest me"
ReplyDeleteIf people's intentions don't interest you, economics doesn't interest you, because economics is about intentional behaviour. What is utility? Nothing more than a subjective condition of the human mind. Even food has no utility to someone intent on starving himself to death.
I don't believe in "utility" and I don't believe that the proper study of economics is based on discerning the determinates of human behavior -- that's a juvenile idea. Economics about the conditions which allow people to make certain decisions. The notion that economics is the study of the motivations of human behavior has doomed the discipline to the status of pseudo-science for years. You're better off trying to read goat entrails than studying game theory, indifference curves or any of that crap.
DeleteGame theory, of course, is the most "advanced" of the economic theories of the motivations of behavior and it's a desperate load of nonsense founded on psychotic reasoning:
http://www.nakedcapitalism.com/2012/02/philip-pilkington-the-delicate-balance-of-terror-%E2%80%93how-neoclassical-economics-deploys-psychotic-reasoning-to-explain-human-behavior.html
http://www.nakedcapitalism.com/2012/02/philip-pilkington-sexual-politics-and-child%E2%80%99s-play-%E2%80%93-the-absurdity-of-game-theory.html
Ludwig Von Mises adresses the proper scope of economic investigation in the first few chapters of Human Action. Even if you reject everything else he has to say, I think you might find his thoughts on this subject interesting.
DeleteHe also rejects utility as a measure of value.
"Their intentions don't interest me. Only the parameters upon which they can make their decisions."
ReplyDeleteI should have added that people's intentions are probably the most important factor influencing the decisions they make. They may not be a measurable factor, but unmeasurable factors are hugely important in economic behaviour.
Price as determined on the market is the clearing price. Prices are the exchange ratio of any economic good and money. They exist only on the market and are good only for a specific exchange at a certain location at a certain time. It then becomes a data point in history.
ReplyDeleteThe ERE is a thought construct used as a tool in economics. The ERE eliminates change and uncertainty from the picture clarifying certain aspects of the economy but was never intended as a model of reality.
"Price as determined on the market is the clearing price"
DeleteThen how do you explain price administration by many business and corporations?
Also, it was Mises's final state of rest that was the equilibrium state towards which Mises thought the economy tended - even if it never reached it.