Sunday, October 6, 2013

Lee’s Post Keynesian Price Theory: Chapter 6

Chapter 6 of Frederic S. Lee’s Post Keynesian Price Theory (Cambridge, 1998) examines developments in the doctrine of administered prices.

Lee looks at the work of Harry Edwards, Paolo Sylos-Labini, Wilford John Eiteman (1949), and John Williams (1967), Jack Downie, George Richardson, and Romney Robinson on the idea of the costing margin and sequential production (Lee 1998: 120–125).

I will merely focus below on Wilford Eiteman and George Richardson, since there are some interesting points to be noted.

The experience of Wilford Eiteman is worth quoting:
“Around 1940, Eiteman was teaching marginalism in principles of economics classes at Duke University when it occurred to him that as treasurer of a construction company he had set prices and talked with others who set prices and yet had never heard of any price-setter mentioning marginal costs. He quickly came to the conclusion that a price-setting based on equating marginal costs to marginal revenue was nonsense. Eiteman then began to piece together a critique of marginalism aimed at its production and cost foundations.” (Lee 1998: 125).
Thus Eiteman’s book Price Determination: Business Practice versus Economic Theory (1949) was born. In this, Eiteman argued that a firm that wishes to survive and engage in continued production will aim at generating revenue that covers their cost of production. This is generally achieved by creating a price based on costs of production and a markup for profit (Lee 1998: 126–127).

George Richardson produced a critique of Hayek’s paper “Economics and Knowledge” (1937). Richardson argued that flexible prices, as in neoclassical and Hayekian theory, convey considerably less information than conventional theory thinks precisely because the continually changing nature of such prices severely impairs long-term business investment decisions (Lee 1998: 135). By contrast, a relatively stable administered price in the medium term allows business to calculate better estimates of future profits and sales trends, which allows far better planning in investment decisions (Lee 1998: 136; Richardson 1960 and 1965). Thus administered prices are very much part of business and corporate planning that actively gives stability to markets: in this sense, administered prices are a private sector way to reduce the degree of uncertainty they face in the market economy.

Finally, an important point made by Sylos-Labini is that variations in normal cost prices through an economy require careful empirical investigation of each particular market (Lee 1998: 139), since many factors are involved.

Eiteman, Wilford John. 1949. Price Determination: Business Practice versus Economic Theory. Bureau of Business Research, Ann Arbor.

Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.

Richardson, G. B. 1960. Information and Investment: A Study in the Working of the Competitive Economy. Oxford University Press, London and New York.

Richardson, G. B. 1965. “The Theory of Restrictive Trade Practices,” Oxford Economic Papers 17: 432–449.

Williams, John Burr. 1967. “The Path to Equilibrium,” The Quarterly Journal of Economics 81.2: 241–255.

1 comment:

  1. It makes much more sense for a company to set prices and measure the cost inputs versus the rate of sales for a product at a given price and then adjust production to create a steady profit rather than waiting for a non-existent clearing price to created magically by a market to determine your mode production.

    Why would anyone think otherwise unless your actually believe that always market set prices at equilibrium?

    Market the sets nothing.

    The guy with price labeling machine sets the price based on corporate policy which is based on GOD knows what they hell they were thinking if Corporate is capable of of thinking at all.

    I know because that's what I do. There's no Fing market. There are inventories and quotas. Nobody give a flying F about the some other guys prices at some other store. . .

    You get a budget to buy from fixed supplier a fixed price. If corporate has problem moving inventory at a given price they typically find another supplier or reduce the inventory quota for that item. Corporate doesn't take shit from suppliers trying to monkey with the pricing. Prices are simply set by power relations based on someone's personal opinion of the sales figures. No science or mechanical supply and demand response to the "market." It does not exist.

    Anyone who says otherwise has never worked for a major company and needs to shut about economics or admit that their economics has nothing to with any actual business practice on the planet. .