Tuesday, July 31, 2012

More on Prices in the Real World

One can see many ways in which prices are set in the real world, from volatile prices on speculative, secondary financial asset markets and primary commodity markets, to auction markets, and to the haggling that can occur in bazaars and street markets, especially for second hand goods.

But a fundamental empirical observation about many markets for newly produced goods and services, especially in industrial markets, is that prices are administered or set by corporations and businesses, according to normal production costs plus a profit markup.

Some observations on this follow:
(1) often business leave their prices unchanged for significant periods of time, from three months to a year, despite changes in demand (Gu and Lee 2012: 462). When prices are adjusted this is the result of changes in factor input costs, including raw materials and labour. Changes in the profit markup result from competition and need for profit.

(2) The profit markup is itself often stable as well, which leads to some degree of stability of profits that results from price administration (Gu and Lee 2012: 461). Stable profits in turn allow stable margins for internal financing of investment (Melmiès 2012).

(3) the advantages of price setting to businesses include the reduction of the occurrence of price wars, goodwill relationships with customers, and stable selling costs (Gu and Lee 2012: 461).

(4) empirical studies show that, outside given limits, businesses find that variations in their set prices produce no significant change in sales volume, and, above all, when prices are cut, this does not necessarily lead to changes in short term market sales (Gu and Lee 2012: 462). And experiments with prices adjusted downwards to a significant extent show that this causes a severe blow to profits, so severe indeed that enterprises quickly abandon all such experiments (Gu and Lee 2012: 461).


Gu, G. C. and F. S. Lee. 2012. “Prices and Pricing,” in J. E. King, The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 456–463.

Melmiès, J. 2012. “Price Rigidity,” in J. E. King, The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 452–456.


  1. Have you seen Dr. Michael Emmett Brady's review of The Elgar Companion to Post Keynesian Economics, Lord Keynes? He has some harsh criticisms.


    1. From the review:

      "The purpose of the Post Keynesian school is to correct the many technical errors they claim (with no supporting evidence) were committed by John Maynard Keynes in 1936 when he wrote the General Theory(GT)."

      Frankly, I have not seen Post Keynesians who say this at all. They say that PK economics corrects the mistaken neoclassical interpretation of the Keynes.

      The only specific criticisms of the articles I can see relate to those on "effective demand" (M. Setterfield),
      "Treatise on Probability" (O'Donnell), "non-ergodicity," "uncertainty," and "liquidity,"

      Given that there are 79 articles in the book, these criticisms appear to constitute relatively minor theoretical points.

    2. Joan Robinson claimed to Paul Samuelson that there were major errors in the General Theory.

  2. I should have worded my statement better: I did not mean to imply that Post Keynesianians thought that the GT is completely perfect.

    Of course, the General Theory does have errors from the PK perspective - such as his particular liquidity preference theory of interest, Keynes's assumption of an exogenous money supply, and most probably the marginal efficiency of capital concept - but it is quite another thing to characterise Post Keynesianism in general as a school that asserts "many technical errors they claim (with no supporting evidence) were committed by John Maynard Keynes in 1936 when he wrote the General Theory(GT)." I mean really, this is the school that, if anything, has paid close attention to what Keynes did say in the GT, when neoclassical theory has misinterpreted it or ignored it.

    My impression of Post Keynesianism is that it sees Keynes's GT as essentially right, but with some criticisms.

  3. Furthermore, if one really thinks that PKism does such a bad job of interpreting the GT, is anyone really going to say that neoclassical synthesis Keynesianism, New Keynesianism or neoclassicals in general do a BETTER job of interpreting it?

  4. Dr. Michael Emmett Brady doesn't deny that Paul Samuelson and Sir John Hicks provided models of the General Theory that were limited in capturing the technical points of Keynes. However, it was Joan Robinson who told Samuelson that there were lots of mathematical errors in the GT. I seriously doubt that Joan Robinson understood the GT itself. Dr. Michael Emmett Brady has a number papers demonstrating that the technical details of the General Theory are in fact, correct.

    Yes, it may use the standard marginal productivity theory and it may have the assumption of perfect competition, as other neoclassical models do. But what it does demonstrate, is that there are multiple equilibria in the commodities market of an economy, and that causes disequilibrium in the labour market.

    BTW, Dr. Brady has criticized the Post Keynesians for attacking the marginal efficiency of capital concept in Chapter 11 of the General Theory. Keynes considers both cases in Chapters 11 and Chapter 12 to be important. Dr. Brady has not entered the debate on endogenous and exogenous money, for he considers the money supply as a whole to be PARTIALLY endogenous and PARTIALLY exogenous.

    See Dr. Brady's papers in the History of Economics Review, the International Journal of Applied Economics and Econometrics, History of Economic Ideas, and History of Political Economy.

    I can't speak for Dr. Brady, and I have given you his e-mail address before. Perhaps you ought to correspond with him and ask him for explanations as to why the Post Keynesians get it wrong.

    Dr. Brady doesn't deny that the Post Keynesians have a verbal understanding of Keynes's works. He criticises them for not understanding the D-Z model or A Treatise on Probability. Both are technical works that Dr. Brady has a good understanding of.

    And I don't agree with everything Dr. Brady says or does. I do think that Post Keynesian economics has made some interesting contributions - Nicholas Kaldor and Hyman Minsky seem somewhat interesting to me.

  5. A couple of things to note... Joan Robinson was not a Post Keynesian, she was a Neo-Ricardian. While some ideas may overlap between the two schools, I think the distinction between Neo Ricardian and post Keynesian should be made to avoid misrepresentation.

    Also, George Shackle, arguably a Pk, does label Keynes' ideas as muddled and incomplete. Indeed, if Brady's interpretation of ToP is right, then Shackle does ignore this work, but might have said that this an example of Keynes' incompleteness. Brady criticizes Shackle for interpreting Keynes' uncertainty as not having certainty, but according to Shackle's interpretation of Keynes, absolute certainty is an illusion. The fact that our expectations about something can totally be wrong is proof enough that we live in an ontological world, according to Shackle. *

    *I would also like to note though that PKs do not really think of uncertainty like that of Shackle, though they are heavily influenced by it. From what I read, PKs generally attribute Shackleian uncertainty when talking about unfettered markets, though Shackle not only applied Shackleian uncertainty unfettered markets, but to reality as a whole

    1. "A couple of things to note... Joan Robinson was not a Post Keynesian, she was a Neo-Ricardian."

      I'm coming to the conclusion that economists are like cats and completely individual in their own right.

      It seems easier to assume that each economist is their own 'school' until proven otherwise.

    2. Two points:

      (1) Neo-Ricardianism is usually included within "broad tent" Post Keynesianism (that is, Post Keynesianism in the broadest sense).

      (2) Joan Robinson went through several stages in her career, being influenced by Keynes, Sraffa and Michał Kalecki.

    3. I would like to note that ALL truly scientific ideas are incomplete. Completeness is a sign of *hubris*, not of quality.

      As for muddled? Really? Keynes seems quite clear.