Did I ruffle a few feathers? :)

Chris M. Sciabarra sciabrrc at is2.NYU.EDU
Thu Sep 21 08:47:55 MDT 1995


On Thu, 21 Sep 1995, Doug Henwood wrote:

> 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?

	Well, I'd venture to say that they'd be in big trouble if they
used Walrasian price mechanisms; there is no such thing as perfect
competition, or perfect knowledge, or equilibrium, and Austrians reject
such neoclassical notions as fantasy.  Prices are dynamic signals, and
they cannot be disconnected from the context within which EACH market
participant, with their own knowledge, judges and acts.  Prices mean
different things to different people, and entrepreneurs who are most
sensitive to these differences often take advantage in ways that propel
the dynamism of the system toward more and more innovation and change.
But....

> 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.

	I'm not an expert on the oil industry, still there are many
factors that distort price signals in this industry, and it isn't
entirely clear to me that the problem of long-term externalities is
something that can be solved by planning -- since it is probably a
technological problem, and technology is something that can't be easily
controlled or predicted.

> 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.
	There sure is... markets are dynamic, not static, and the web of
interconnections is so complex that no single theorist could possibly
understand its sophistication simply by analysis.  That's what separates
economists who analyze and entrepreneurs -- WHO MAKE MONEY!  :)

> 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

	It may be... except that I'm not in a position to say which
signals should be ignored and which shouldn't, and investing that
decision in the hands of people who may not know what they are doing
could be catastrophic.  Granted, you admit central planning is absurd,
but the more centralized the planning the worse it is, because error
cannot be localized under such a system; it is fully systemic and
problematic.
					- Chris
==================================================
Dr. Chris M. Sciabarra
Visiting Scholar, NYU Department of Politics
INTERNET:  sciabrrc at is2.nyu.edu
==================================================


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