Did I ruffle a few feathers? :)

Doug Henwood dhenwood at panix.com
Thu Sep 21 08:08:05 MDT 1995

At 10:02 PM 9/20/95, Chris M. Sciabarra wrote:

>When I refer to "central planning," I mean the kind of planning that
>takes place in the absence of markets.  What we've seen is that once
>markets and private property are obliterated, the delicate structure of
>prices, providing people with information on relative scarcities, is
>completely distorted.  Shadow prices in socialist societies simply don't
>reflect real relative scarcity; they are administrative parameters for
>political decisions.

We hear a lot about prices as "signalling" mechanisms now, a matter based
more on faith than empirical research. Are they really? How flexible are
prices in reality? For most manufactured goods, they're pretty sticky - and
a lot of Keynesians would argue that that stickiness is a stabilizing
thing. When GM negotiates with its suppliers, is it using the Walrasian
price mechanism, or its raw buying power in setting the terms?

Two other points.

One, what have the gyrations in the oil price over the last 20-odd years
accomplished? The price was too low in 1971, too high in 1979-80 (too low &
high relative to underlying market fundamentals - we can quibble on
details, but I think the generalization is pretty hard to argue with), and
then too low all over again in the mid-1980s. Did the underlying situation
change that much to justify a range of $3-30 a barrel? No doubt a pure free
marketeer would argue that the market price was distorted by the Seven
Sisters and OPEC, but their power to set prices has largely been eliminated
since the oil futures market was established. Still, we've seen ranges from
under $10 to over $20, despite relatively minor changes in supply-demand
fundamentals. And, perhaps most importantly for the long term, the price
mechanism signals *nothing* about how we will kill ourselves if we continue
burning hydrocarbons at this rate.

Second, and related point. A lot of interesting work (Shiller, Summers, &
Co.) since the early 1980s has demonstrated that traditional notions of
market efficiency in financial asset pricing are a lot of hoodoo. Financial
market prices, which are the freest of all - free to change minute to
minute, with no single player able to gain appreciable market power -
gyrate all over the damn place, overshooting a rational price on both the
upside and the downside. This suggest that there's at least as much noise
as there is signal in the prices.

Obviously, total central planning is absurd. But a price is one signal
among many. Sometimes rational humans, those who care about planning for
the next 10 or 100 years, should ignore their message.



Doug Henwood
[dhenwood at panix.com]
Left Business Observer
250 W 85 St
New York NY 10024-3217
+1-212-874-4020 voice
+1-212-874-3137 fax

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