“Price coordination must not be confused with plan coordination, a concept originally formulated by Friedrich von Hayek. In his article ‘Economics and Knowledge,’ which has heavily influenced modern Austrian writers, Hayek suggested a concept of equilibrium based on ‘coordination of plans’ as a substitute for the concept of equilibrium based on ‘constancy of the data.’ In contrast, price coordination, as I elaborate the concept below, is the indispensable complement to the concept of an evenly rotating economy based on constant data. As Ludwig von Mises has repeatedly emphasized, the evenly rotating economy, although an imaginary state which can never be realized in the unfolding of the historical market process, is yet indispensable to the identification and analysis of the entrepreneurial function of the real world.The absurdity of this passage takes one’s breath away.
Entrepreneurs, however, can formulate and execute production plans only in a world in which economic calculation is possible, that is, in which catallactic competition generates market-clearing prices which, at every moment of calendar time and without fail, reflect, promote, and coordinate those uses of the available scarce resources that are expected to be the most highly valued by consumers. Price coordination, therefore, is not a phenomenon associated with an unrealizable state of equilibrium, however the latter is conceived; rather, price coordination is the essential characteristic of the plain state of rest, which, as Mises tells us, ‘… is not an imaginary construction but the adequate description of what happens again and again on every market.’” (Salerno 2010: 182–183).
First, although there is sometimes confusion about whether Austrian price theory is meant to be merely an ideal or prescriptive vision of economic coordination, here it seems that flexible prices moving towards their market clearing values is meant to be a descriptive theory describing how real world markets actually function (although of course it can be a prescriptive and ideal vision at the same time, as, for example, when Austrian think governments or unions are supposed to interfere with the system of flexible prices).
Secondly, can entrepreneurs “formulate and execute production plans only in a world in which economic calculation is possible, that is, in which catallactic competition generates market-clearing prices”? Of course, Salerno’s phrase “generates market-clearing prices” can be understood to mean prices that move towards their market-clearing values (or the “equilibrium prices” at which demand and supply are equal), and not that all prices do indeed reach such equilibrium values, since he rejects the real world existence of equilibrium states (such as Walrasian general equilibrium or the Misesian final state of rest).
But is successful capitalist production only possible in a world generating and moving towards market-clearing prices? The answer is, of course, no.
So much of any real world capitalist economy consists of fixprice markets with administered prices, where private businesses shun flexible prices in the conventional sense. Yet production continues, economies can have strong and indeed historically unprecedented real GDP growth, employment can be high, living standards and real wages can rise significantly, and productivity growth can be strong. We need only think of the golden age of capitalism from the 1946–1970s period.
The Austrian notion that capitalist economies can only work successfully with flexible prices and a tendency to market clearing prices is wrong, absurd and contrary to empirical reality.
BIBLIOGRAPHY
Salerno, Joseph T. 2010. Money, Sound and Unsound. Ludwig von Mises Institute, Auburn, Ala.
While I disagree with Salerno's overall views in the article from which you quote I think you are wrong to say "The absurdity of this passage takes one’s breath away."
ReplyDeleteAll he is really saying is that day-to-day market processes even in an economy out of equilibrium will generate signals to businesses that will drive optimum use of resources in the economy. Perhaps this would seem absurd to someone committed to the idea that only central planners can allocate resources efficiently.
You like to talk a lot about fix-price. Even is the so-called fix-price model market signals are what drives resource usage.
Suppose consumer demand shifts from good A to good B. The manufacturer of good A observes sales falling and has a business model that means he will leave the price unchanged, while he allows stocks to build up in the short-term and production to be reduced to match the new demand. The producers of good B will take the opposite set of actions to increase production.
In both cases prices never deviate from their market clearing levels (the sellers are choosing not to sell) and the net result is the transfer of resources from producing good A to producing good B.
So even in a "fix-price" model market-signals will be used to allocate resources optimally in the economy.
This is a very misleading comment and indicative of confusion on the part of the author. Salerno and the Austrians focus on VERY specific "market signals" -- namely, prices. What you've said in the above is that fix-price markets generate market signals -- i.e. quantity adjustment. Great. But that has nothing to do with Salerno. He's talking about price adjustment.
DeleteWhat you're saying is completely vacuous. You say "Ha! Markets generate signals, therefore you are wrong!". But no one ever said that markets don't generate signals. We say that markets don't generally generate PRICE signals. You need to work on your debating, Rob. Seriously. And spinning off a load on tangential comments in response to this one isn't working on your debating skills. Just think before you type.
Businesses will use both price and quantity signals.
DeleteMy point was the even if some markets were what LK calls fix-price
then
1) prices would still be market-clearing prices
2) the market would still generate signals that encourage optimum use of resources with no intervention needed.
I do not believe that fix-price is as prevalent as you guys seem to think and in the real-world price signals (more than quantity signals) are the dominant factor in the economy.
"My point was the even if some markets were what LK calls fix-price
Deletethen
1) prices would still be market-clearing prices
That is a non sequitur.
In the vast majority of cases, administered prices most probably will not be market-clearing prices.
Indeed, given that demand changes are quite normal, yet the administered price of the said product remains the same, how could such a price possibly be a market clearing price?
I don't think that Rawlings even realises that what he says is completely incoherent. But then again, I don't think most Austrians do.
DeleteI would be interested to see if he could get his ideas about quantity adjustments leading to "optimum use of resources" published in an Austrian journal. THAT would be an interesting experiment.
Well, its something to be called incoherent by someone who can write "markets don't generally generate PRICE signals" !
Delete"...only in a world in which economic calculation is possible..."
ReplyDeleteNo Knightian uncertainty then, no? I recall a previous Salerno quote:
http://socialdemocracy21stcentury.blogspot.com/2013/03/salerno-on-misess-view-of-coordination.html
"However, despite their [i.e. market prices] character as market-clearing prices, these are also disequilibrium prices. Thus as a consequence of the unavoidable errors of entrepreneurial forecasting and price appraisement under uncertainty, most goods are sold at prices that do not conform to their monetary costs of production, thereby generating realized profits and losses for producers."
Weirdly, I don't think that Salerno views this as an either/or argument. But that's because Salerno is not a very deep thinker and, like most Austrians, is perfectly content to let contradictory ideas sit in different corners of his rather impenetrable mind.
Because the "market clearing prices" is the price at which all participants are content to hold the available stock not the price at which all stock actually gets sold.
DeleteIf demand falls and suppliers decide they would rather increase stock holding than lower prices then that does mean that the market didn't clear, but only that the supply curve is probably rather flat.
"Because the "market clearing prices" is the price at which all participants are content to hold the available stock not the price at which all stock actually gets sold."
DeleteNo, you're just assuming that the business does not want to sell the excess stock and its addition to inventory was its first choice.
"A market clearing price is the price of goods or a service at which quantity supplied is equal to quantity demanded, also called the equilibrium price. "
http://en.wikipedia.org/wiki/Market_clearing
In fact, the goods added to inventory are generally what a business does want to sell and are still to eb considered part of supply, that is, a stock of goods with excess supply.
Also, in most neoclassical and Austrian theories, general market clearing implies rapid adjustment to full employment, which is what does not happen with quantity adjustment!
For some reason when i run into those Austrian arguments, i come to think on this epic scene:
Deletehttps://www.youtube.com/watch?v=DNC3OciAF3w
"No, you're just assuming that the business does not want to sell the excess stock and its addition to inventory was its first choice."
ReplyDeleteIt presumably could sell if it lowered the price sufficiently, but chooses not to because it thinks it will be more beneficial to temporarily increase stocks and reduce production than to sell cheaper.
"A market clearing price is the price of goods or a service at which quantity supplied is equal to quantity demanded, also called the equilibrium price."
Think about it for a second. If I try and sell my car for $1000 and only get offered $900 and I decide not to sell because I think I can get the full $1000 next week does this mean the market for cars has not cleared? I don't think so. A firm who doesn't lower the price when demand falls is in exactly the same situation of choosing to hold.
"Also, in most neoclassical and Austrian theories, general market clearing implies rapid adjustment to full employment, which is what does not happen with quantity adjustment!"
Correct: That's where monetary disequilibrium theory come in :)
Don't these Austrian economists who believe in flexible prices make fixprice payments on loans or for rents on leased properties? Don't they receive fixprice wages written into employment contracts? You'd think they would know about the pervasiveness of fixprices based on their own experiences.
ReplyDeleteMark Plus:
Delete"You'd think they would know about the pervasiveness of fixprices based on their own experiences. "
Not when they believe nonsense like this:
“Praxeology is a theoretical and systematic, not a historical, science. .... Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts” (Mises, L. 1998. Human Action: A Treatise on Economics, Ludwig von Mises Institute, Auburn, Ala. p. 32).
hilarious quote.
Delete