“… prices set by [sc. fixprice] firms in the short run are not market-clearing prices, and are not even intended to be so. According to Lee …, this was the most striking lesson to be drawn both from Mean’s administered prices and from the surveys conducted by Hall and Hitch (1939). The novel and radical feature of the classic article of the latter was that prices are not designed to clear markets. Prices are not such that they equate supply and demand schedules. In a context where supply is flexible, firms do not necessarily attempt to equate demand to the normal use of capacity when they set prices.” (Lavoie 1992: 95).It is also clear that administered prices are not simply a phenomenon confined to monopolistic or oligopolistic markets, but are widespread in modern market economies and found throughout many other markets where competition exists amongst numerous small or medium-sized firms (Lavoie 1992: 95–96).
The consequences of this are the following:
(1) one of the major (alleged) mechanisms driving an economy to Walrasian full employment equilibrium collapses and the whole notion that market economies have a strong tendency to general equilibrium must be abandoned, and
(2) the Austrian (or Misesian) notion that market economies have a strong tendency to economic coordination effected by firms’ adjusting their prices towards market clearing values is fundamentally flawed and wrong.
BIBLIOGRAPHY
Hall, R. L. and C. J. Hitch. 1939. “Price Theory and Business Behaviour,” Oxford Economic Papers 2: 12–45.
Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot.
It should be noted that mainstreamers consider these things to be evidence of sticky prices. I think this is nonsense, of course. But that is what the likes of Alan Blinder argue.
ReplyDelete"(1) one of the major (alleged) mechanisms driving an economy to Walrasian full employment equilibrium collapses and the whole notion that market economies have a strong tendency to general equilibrium must be abandoned,"
ReplyDeleteLets assume that all firms practice cost+markup pricing.
AD drops 20% and so firms all cut back on production and reduce employment by 20% and leave prices unchanged.
We now have a large pool of unemployed workers.
What is stop new firms (who also practice cost+markup pricing) from hiring some of these new workers at lower wages and selling these new goods at reduced prices (that reflects the lower wage)?
As long as the consumption of these workers at the new lower wage , plus the consumption of the people who receive the profits from the firms who employ them is sufficiently high then (even within a Post-Keynsian framework) I see no reason why an economy would not move back to a full employment equilibrium even if prices are set by cost+markup,
To draw your conclusion conclusion it seems you need some additional assumption about wage rigidity preventing costs from falling.
"the Austrian (or Misesian) notion that market economies have a strong tendency to economic coordination effected by firms’ adjusting their prices towards market clearing values is fundamentally flawed and wrong."
ReplyDeleteWrong. Economic coordination is achieved by freely determined market prices and the profit-loss mechanism. The elimination of profits and losses is achieved by arbitrage action, which is the broader term encompassing the concept of flexible prices (as in prices that are open to being changed by the very people who, as acting men, set them).
(1) So you actually deny that Mises ever thought that a tendency for flexible prices to be adjusted in trades towards their market clearing values is one fundamental part of economic coordination?
DeleteIf so, your understanding of Mises is severely flawed.
(2) Your chief problem is you assume that just because I have not mentioned it specifically above, I am unaware of the profit and loss mechanism in Mises's theory.
I am perfectly aware of it:
http://socialdemocracy21stcentury.blogspot.com/2013/03/salerno-on-misess-view-of-coordination.html
But with widespread administered prices --- where prices are set on costs of production plus profit markup -- the tendency for profits to be driven to zero is also an untenable view of fixprice markets.
(3) "Economic coordination is achieved by freely determined market prices "
You're just conceding my point about flexible prices.
"Economic coordination is achieved by freely determined market prices and the profit-loss mechanism." It´s not what happen in the real market and ,even economists of the freemarket flavor noticed this since long way back.Take a look at: http://en.wikipedia.org/wiki/Theory_of_Second_Best#cite_note-Lipsey-1
Delete(1) Economic coordination is about aligning producers' decisions with consumers' preferences. That is achieved primarily by the profit-loss mechanism. It is the quality of entrepreneurial forecasting and the correctness of the identification of mismatches between DMVP and factor prices that determines whether profits or losses are made. It is the profit-loss mechanism that decides whose capital is preserved and whose wiped out. It is the possession of capital that decides who stays in business and who doesn't since business is run out of capital, not out of revenue. The role of flexible prices is limited to reducing profits and losses to zero and exacerbating the effects of good and bad decisions by entrepreneurs. The culling out just becomes faster on account of flexible prices. It is, however, not critical.
ReplyDeleteMy understanding of Mises does not become severly flawed simply because YOU say so.
(2) If wishes were horses, beggars would ride. Your wishing for a profit mark-up does not mean the market allows you to have it. If you can't sell at the price you have set, you have no option but to reset your price.
(3) No. Freely determined market prices only means prices that reflect the valuations of buyers and sellers of ALL goods, consumers' and producers'.
(1) Misesian economic coordination is also about clearing factor and consumer goods markets, through flexible prices that converge towards market clearing levels.
DeleteIf you're now denying this, you clearly have flawed understand of the Austrian theory you peddle.
(2) your statement reduces to the idea that sellers cannot sell a good unless buyers wish to buy it.
Not only is that obviously true and I have never denied it, but it refutes NOTHING I have said about the widespread existence of administered prices.
The widespread existence of administered prices does not refute the point that people can and do change the prices at which they sell the goods they sell.
DeleteThat all prices are administered is a trivial truth. A price is by nature quoted by an individual and is hence administered. But that does NOTHING to refute the simple point that the people who administer these prices may change their minds and change the prices the administer along with that.
ReplyDeleteWith this simple point, your entire objection to Austrian analysis falls to pieces.
All prices are not administered.
DeleteAnd the sheer idiocy of your comments suggests you've long since ceased to have anything of any significance to say on this topic.
This is mighty hilarious. EVERY price is SET by a human being. No price exists on its own without a human being to SET it. Hence every price is administered. I challenge you to show me a price that is not set by a human being. Answering this question should make it clear as to who the idiot is.
DeleteYou are doing nothing but using a fallacy of equivocation.
DeleteAll prices are not set in the sense I am using the term: i.e., set based on costs of production plus a profit markup. Flexprices markets exist: e.g., markets for secondary real and financial assets. I assume you're not such a fool that you deny this.
You, by contrast, are simply redefining the words I am using. You're saying "set" just means created in some sense by human beings.
Yes, if you define "set" in such a trivial manner, then all prices are set.
But you still refute NOTHING above about administered prices in the sense I am using it.
Once again, the widespread existence of administered prices does not refute the point that people can and do change the prices at which they sell the goods they sell.
ReplyDeleteSo administered prices do not
Delete(1) "refute" the existence of flexprice markets, where people "can and do change the prices at which they sell" goods, and
(2) "refute" the idea that even in administered price markets, prices "can and do change", chiefly when factor input bills change.
----
Yes, all true, but NEVER denied by your opponents in the first place.
You straw man idiocies show us the low level of your intelligence, bala.
Now show us how you refute some actual substantial and real point above: e.g., that, in administered price markets, market clearing by flexible adjustment of prices towards market clearing levels does not happen, and so, say, an important part of Misesian economic coordination where full use of resources is made by flexible price adjustment does not happen.
It's clear that Bala doesn't even get the idea. What Lord Keynes is trying to disprove is the idea that price flexibility leads to full employment of resources. No one ever denies that people and firms do change prices whenever they want, as they want.
ReplyDeleteI'll try to say it as simple as I can. Even in a free market, some prices are not flexible (call them fixprices, administered prices, price stickiness, whatever) because they operate on the simple "cost + markup" pricing strategy. So in many cases, this firms will control other variables than the prices, for example, costs and quantities, which lead to unemployment.
How can someone "get" an idea as asinine as full-employment? You can only delude yourself into believing that it is meaningful. I know whatever-Keynesians do it all the time, but no one with their head screwed on right can really find it meaningful.
ReplyDeleteI imagine you're so stupid you do not even know what "full employment" means to a Keynesian.
DeleteIt does not mean zero unemployment or no frictional or no seasonal unemployment. It means low unemployment below 4%.
It means somewhat more than that. It means all those that want a job can find one.
DeleteEssentially zero long term unemployment, underemployment or any of the other pathologies of employment.
There will be a liquidity buffer, as there always is, of people in flux between projects, but that is it.
Essentially the end of unemployment as a capitalist threat to the worker class.
Talking of idiocies (which you seem to like), this one takes the cake
ReplyDelete"The novel and radical feature of the classic article of the latter was that prices are not designed to clear markets."
The Austrian position (which you are using this silly [piece to criticise) is NOT that prices are designed to clear markets. It is not even that prices clear markets. It is simply that every buyer seeks to pay as little as he can with an upper limit on how much he is ready to pay and every seller tries to obtain as much as he can with floor on how much he is ready to accept in exchange for his good. Beyond this, it is bidding within the limits of their individual subjective valuations that clears markets, not prices in themselves. The market clearing price is only a price at which markets are cleared. It is not a price that clears the market.
And then there is this further idiocy....
"In a context where supply is flexible, firms do not necessarily attempt to equate demand to the normal use of capacity when they set prices."
Firms that have already produced goods only try to get as much as they can given that the floor price for goods already produced in the past is zero.
LK,
Ever thought of this simple point that to say that prices are fixed cost-plus-mark-up, you need to say that prices are determined by prices, therefore getting into a "it's turtles all the way down" kind of argument?
I guess it doesn't bother you. I still thought it would be worth the while pointing it out.
(1) "The Austrian position (which you are using this silly [piece to criticise) is NOT that prices are designed to clear markets. It is not even that prices clear markets. It is simply that every buyer seeks to pay as little as he can with an upper limit on how much he is ready to pay and every seller tries to obtain as much as he can with floor on how much he is ready to accept in exchange for his good. Beyond this, it is bidding within the limits of their individual subjective valuations that clears markets, not prices in themselves. The market clearing price is only a price at which markets are cleared. It is not a price that clears the market."
DeleteThe first sentence would suggest breathtaking ignorance.
Bala is saying Austrians do not think market clearing by flexible prices is important.
But then that is flatly contradicted when bala says "The market clearing price is only a price at which markets are cleared", which, if nothing else, shows us that bala cannot argue without violating the law of non-contradiction:
http://socialdemocracy21stcentury.blogspot.com/2013/09/the-laws-of-thought.html
If the whole point of the comment above is that prices do not magically move by themselves (but require human beings to set or negotiate them), that is just another idiotic straw man bala invents and throws at his opponents.
(2) "Firms that have already produced goods only try to get as much as they can given that the floor price for goods already produced in the past is zero."
They try and get as much as they can and ensure that they get profits by administered.
(3) "Ever thought of this simple point that to say that prices are fixed cost-plus-mark-up, you need to say that prices are determined by prices,"
No, bala, nobody has said that.
Administered prices are determined
(1) by the desire to avoid losses, make a profit and stabilise profits, and
(2) average cost of production plus a profit markup.
"Bala is saying Austrians do not think market clearing by flexible prices is important."
ReplyDeleteFalse. I am just saying that prices do not clear markets. It is bidding by market participants and the choices they make in the process that clears markets. This bidding is in turn driven by the ultimate irreducible cause - individual value scales. The freedom to change price is all it takes for clearing to happen.
"But then that is flatly contradicted"
There is no contradiction and you have pointed none out. When I say that the market clearing price is a price at which markets are cleared, I am not by any stretch of imagination implying that the price has cleared the market. I am saying that it is the price at which valuations of market participants lead to quantity supplied being equal to quantity demanded.
And, once again, the "cost" of a produced good is zero. Average cost of production of a good that has been brought for sale has no role and can never have any role to play in the pricing of that good. That cost was incurred in the past and is sunk. The only role of costs is to enable the producer to decide whether to produce or not given the forecasts he is able to make on prices.
I know that these are too difficult for a whatever-Keynesian to grasp, but then that's how things are.
What we have here is (1) logic thrown to the wind and (2) a war against empirical reality:
Delete(1) "I am not by any stretch of imagination implying that the price has cleared the market. I am saying that it is the price at which valuations of market participants lead to quantity supplied being equal to quantity demanded."
Behold the violation of the law of non-contradiction, p ^ ~p asserted as true simultaneously.
(2) "And, once again, the "cost" of a produced good is zero. Average cost of production of a good that has been brought for sale has no role and can never have any role to play in the pricing of that good."
The empirical evidence that many businesses create prices based on average cost of production plus profit markup is so vast it is staggering.
E.g., surveys of business people since the 1930s:
"An overwhelming majority of the entrepreneurs thought that a price based on full average cost (including a conventional allowance for profit) was the 'right' price, the one which 'ought' to be charged...
R. L. Hall and C. J. Hitch. 1939. "Price Theory and Business Behavior," Oxford Economic Papers (May): 12-45.
Moreover, the internet is filled with sites helping businesses calculate their profit markup on top of cost of production:
http://bizfinance.about.com/od/pricingyourproduct/a/Pricing-Your-Product-Using-Markup.htm
https://www.knowledge.hsbc.co.uk/plan/your+finances/pricing+your+product+or+service
http://office.microsoft.com/en-us/support/3-keys-to-profitability-cost-of-goods-sold-markup-and-margin-HA010132955.aspx
The evidence of surveys and direct research into cost of production pricing is provided in Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.
But then none of this matters when you're waging a desperate war against reality, like our friend bala.
To clarify it further for someone who seems to suffer from a serious inability to think,
Delete"it is the price at which valuations of market participants lead to quantity supplied being equal to quantity demanded"
only means that valuations are the cause of market clearing (they are the ultimate cause of all economic phenomena) and that the clearing happens at a particular price that we call the market clearing price. I am amazed that you think this contradicts the statement that price is not what clears the market.
Someone seems to have forgotten what it is to read and comprehend.
Again, you can do nothing but invent feeble straw man arguments.
DeleteIf all that you're saying is that human minds are required to create and give meaning to prices, not only true, but NEVER denied by your opponents, and it certainly does not refute anything said above.
"Behold the violation of the law of non-contradiction, p ^ ~p asserted as true simultaneously."
ReplyDeleteThe 2 statements you have highlighted are NOT p and ~p. So, do show the contradiction.
"The empirical evidence that.....,"
First, there is the role of empirical evidence in economic theorising. A chronicler like you will never get that part. Second, there is the important point that what people say is irrelevant to an economic theorist. It may be to an accountant (which you seem to be) but not to a person dabbling in Economics.
It's not me waging a war against reality. It is you deluding yourself that your chronicling is indeed economic theorising.
http://socialdemocracy21stcentury.blogspot.com/2013/10/when-austrians-throw-reality-to-wind.html
Delete