Means (1972) was a study of the empirical evidence on administered prices written towards the end of his career.
Means (1972: 292) first noted that the simultaneous occurrence of recession and inflation in the early 1970s (the beginning of stagflation) presented a problem to neoclassical price theory based on marginal cost or marginal revenue, but presented no such problem to administered price theory.
Administered price theory was developed in the early 1930s, and noted how many industrial prices are deliberately set by private businesses, tend to be relatively inflexible with respect to demand changes, and during recessions tend not to fall to the same extent as flexprices (Means 1972: 292).
In fact, during a business expansion or recession, it is entirely possible for an administered price to
(1) remain unchanged;The crucial point is that administered prices generally show relative inflexibility with respect to flexprices (Means 1972: 294).
(2) move cyclically but to a far lesser extent than flexprices, and
(3) move counter-cyclically.
Means drew on the data compiled by a US National Bureau of Economic Research report on price movements during a number of business cycles called The Behavior of Industrial Prices (Stigler and Kindahl 1970).
After correcting the misunderstanding of administered price theory contained in the report, Means demonstrated how its data provided a strong empirical confirmation of the administered price thesis.
Means’ conclusions are worth quoting:
“... the actual behavior of administration-dominated prices … tends to differ so sharply from the behaviour to be expected from classical theory as to challenge the basic conclusions of that theory. However well the theory may apply to market-dominated prices, it would not seem to apply to the bulk of the administration-dominated prices in the sample or to that part of the industrial world which they typify. Until economic theory can explain and take into account the implications of this nonclassical behavior of administered prices, it provides a poor basis for public policy. The challenge which administered prices make to classical economics is as fundamental as that made by the quantum to classical physics.” (Means 1972: 304).Administered price behaviour in real world economies really does lead to revolutionary conclusions for economic theory: so much of neoclassical economics and Austrian economic theory simply collapses and must be abandoned once one understands its implications.
Disequilibrium prices are deliberately created and maintained by fixprice enterprises in a vast swathe of the economy, simply because they prefer it that way. Such businesses are not generally in the habit of using flexible prices as their normal method of clearing supply, or equating demand with supply.
Even if many markets were deregulated or government interventions ended, with administered prices dominating modern economies, the private sector itself would no doubt still overwhelmingly shun the flexible price system required in the ideal and almost utopian vision of neoclassical price theory and Austrian economics.
For example, massive coercion and force would be needed to make private businesses conform to flexible price setting based on supply and demand curves, but how could Austrian ideologues accept this as a policy when they demand laissez faire as the solution to everything? Of course, they could not, and they would have to face the reality that market price setting largely does not work in the way they think it does.
Means, G. C. 1972. “The Administered Price Thesis Reconfirmed,” American Economic Review 62: 292–306.
Stigler, G. J. and J. K. Kindahl. 1970. The Behavior of Industrial Prices. New York.
A couple of things here don't seem to make sense to me:ReplyDelete
1. '"Means (1972: 292) first noted that the simultaneous occurrence of recession and inflation in the early 1970s (the beginning of stagflation) presented a problem to neoclassical price theory'
Why ? Surely even a very simple model using no more than supply and demand combined with the quantity theory of money can show how demand can decline while nominal prices increases ?
2. "Disequilibrium prices are deliberately created and maintained by fixprice enterprises in a vast swathe of the economy, simply because they prefer it that way"
Isn't this the same as saying that the supply curve is relatively vertical ? Why does that make prices derived from it dis-equilibrium prices rather than equilibrium prices that just happen to be relatively inelastic to changes in demand ?
"relatively HORIZONTAL" not "relatively vertical"Delete
You shameless lying bastard. No one with an I.Q above 62 believes this crap. You only make up these stupid and desperate claims because you've lost the argument and have nothing else left. Give up.ReplyDelete
lol... how eloquently and persuasively argued! I am sure that must settle the question for unbiased readers!Delete
Methink´s i hear The Ballad of Little Little Lord Roddis:Delete
I hear the threstlecock, methinks I hear the jay; Methinks I hear Lord Barnard's horn blow:. "Away Roddis! Away! You already been,defeated, run to your Castle!Heal your wounds"
Bob Roddis,when you refer to calculation it would be of interest for the public if you specify exactly what you mean.As we know "Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.Delete
Aggregate supply is made up of current output, the value of which equals income i.e.consumption + saving (according to the above definitions). Aggregate demand is the sum of aggregate demand for consumer goods (consumption) and aggregate demand for capital goods (investment). So, the equation aggregate supply = aggregate demand is equivalent to the equation saving = investment. This i basic.Then,if focusing attention on the relation between saving and investment,as Gunnar Myrdal argued that one may without any contradiction consider that, as they are made by separate agents, ex ante saving and investment decisions are not at parity in general while ex post saving and investment recorded in bookkeeping balance exactly:
"There is in fact no contradiction at all between the statement of an exact bookkeeping balance ex post and the obvious inference that in a situation when
saving is increasing without a corresponding increase of investment,or perhaps with an adverse movement in investment, there must be a tendency ex ante to a
disparity. (Myrdal G. 1939: Monetary Equilibrium, London : p 46)
This analysis has become a standard tool in macroeconomics. Then, the principle of effective demand is not challenged by the overlapping of individual production processes and the related
impossibility of dividing time into ex ante and ex post phases: the ex ante and ex post
analysis is irrelevant to it anyway.
A brief reference to Myrdal's Monetary Equilibrium shows that the economist also dealt with the question of the unit of time, which he proposed to solve by reducing the actual time-dimension of macroeconomic variables such as income, saving and investment to a point of time:
"Some of these quantities refer directly to a point of time. That is true of "capital value" as also of such quantities as demand and supply prices. Other terms - ase.g. "income", "revenue", "return", "expenses", "savings", "investments" - imply, however, a time period for which they are reckoned. But in order to be
unambiguous they must also refer to a point of time at which they are calculated."
(Myrdal 1939: 45).
Prices are quantities that directly refer to a point of time: they are determined at a point of time, after an ex ante adjustment process has taken place. As for the macroeconomic quantities, Myrdal proposed to refer to the point of time at which they are calculated.
Nonetheless, how are macroeconomic quantities determined? Myrdal explained that ex ante disparity and ex post balance are made consistent through prices changes, which result from the behaviour of economic agents which is based on ex ante
"For these anticipations determine the behaviour of the economic subjects and consequently those changes in the whole price system which during a period actually occur as a result of the actions of individuals." (Myrdal 1939: 121)
Prices are quantities that directly refer to a point of time: they are determined at a point of time, after an ex ante adjustment process has taken place. As for the macroeconomic quantities, Myrdal proposed to refer to the point of time at which they are calculated. Nonetheless, how are macroeconomic quantities determined? Myrdal explained that ex ante disparity and ex post balance are made consistent through prices changes, which result from the behaviour of economic agents which is based on ex ante anticipations:
"For these anticipations determine the behaviour of the economic subjects and consequently those changes in the whole price system which during a period actually occur as a result of the actions of individuals. (Myrdal 1939: 121)
I don´t know if this brief expouse is what you mean by Calculation,or if i get you wrong Bob?
Bob Roddis will never set aside his confirmation bias and learn anything new. Engaging this troll is frankly a waste of time. How long has it been since you have tried to argue with this fool before, LK?Delete
I have the feeling i missed it as the teacher was correcting my homework.
Administered prices or fixprices are only one of the many reasons why austrian economics is wrong, and inapplicable to the real world. However, it is a significant reason.ReplyDelete
Austrian trolls like roddis have no interest in reality.
Personally I would simply block comments by roddis, in the same way that I would block a particularly nasty, demented nutter from wandering into a lecture on economics and shouting insults at the audience.