Debunking Economics

ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú hliu at
Sun Jun 4 11:40:24 MDT 2000

This has been posted by me to Post Keynesian Thought (PKT) in response
to Steve Keen's upcoming book: Debunking Economics.  PKT is a list
frequented by professional economists. It may be of interest to some on
the Marxism list.


Steve Keen wrote:

> One of the many sources of error in the neoclassical picture is to start
> from the presumption that the market price is set by the intersection of
> supply and demand, work down to the firm which takes this price as given,
> and then aggregate up MC curves to derive the supply curve *whose existence
> they presumed in the first place*.

Steve, John and Alan , I have been following your discussions with
considerable interest.  In recent years I have had some exposure to
pricing policies of firms
as they were actually practiced in the real world, both by cartels such
as OPEC,
and by market leaders in pharmceuticals, software, communication and by
commodity producers.  One aspect that pricing policies across all these
different economic sectors have in common is that price is seldomn, if
ever, set by the intersection of supply and demand.  Shortly after the
oil crises of 1973, as part of a team from the PRC state oil
corporation, I was incidentally thrown into policy meetings with OPEC
heavyweights as well as US oil company top executives on the economics
of oil. None on our team knew much about oil economics and market
economy then, China was just emerging out of decades of isolation and
memorandum trade.  Both the Arabic ministers and US majors executives
were trying to give us friendly tutoring and advice, knowing that China
was destined to be both a major consumer and producer in the near
The one piece of advice that stuck with me came from the Saudi minister.
He said: "There is no, and will not be any, shortage of oil, but there
will be, for the foreseeable future, pricing problems."
The bottom line is that price is determined not by supply and demand but
by strategies that aim at optimizing the long-term value of assets and
maximizing political power.  We have discussed the OPEC pricing question
on PKT a few months back and there is no need to repeat them. Paul
Davidson is very knowledgable about it.
Throughout the history of oil, price has been set by highly complex
consideration and supply had always adjusted to maintian the price.
In pharmceuticals, price is neither set by cost or demand.  The pricing
model of any new drug aims at achieving maximum life time value of the
drug that had very little to do with supply and demand.

MSFT's pricing model for Windows has nothing to do with supply and
demand, or marginal cost which is close to zero.

Telephone charges are similarly disconnected to supply and demand, or

Even in the auto industry, the dynasaur of the old economy, where cost
input is high and discounted return on capital low, pricing is based
more on complex considerations than demand. With 80% of autos financed
or leased, subsidy of financing cost in the name of the game, not sicker

Farm commodities prices are definitely not set by the intersection of
supply and demand.  They are set artificially high by political
considerations by practically all producer governments; and both supply
and demand are artificially distorted to maintain the politically set

Price in fact is the most manipulated component in trade.  That is the
fundamental flaw of market fundamentalism.

Hayek's rejection of socialist thinking is based on his view that prices
are an instrument of communication and guidance, which embodies more
information than each market participant individually processes. To him,
it is impossible to bring about the same price-based order based on the
division of labor by any other means.  Similarly, the distributions of
incomes based on a vague concept of merit or need is impossible. Prices,
including the prices of labor, are needed to direct people to go where
they can do the most good. The only effective distribution is one
derived from market principles. On that basis, Hayek intellectually
rejects socialism.

The only trouble with this view is that Hayek's notion of price is a
romantic illusion and nowhere practiced.  That was how the native
Americans sold Manhattan for a handful of beads.

In Hayek's social philosophy, value and merit are, and ought to be, two
separate issues. Individuals should be remunerated purely on the basis
of value and not in accordance with any concept of justice, whether it
be the Puritan ethic or egalitarianism. Hayek went so far as to deny
that the concept of social justice has any meaning whatever, on the
basis that justice refers to rules of individual conduct.  Since no
rules of the conduct of individuals can determine how the good things of
life should be distributed, the question of justice is mute.  Since a
free market is the natural outcome of a multitude of individual
decisions, how the market decides is amoral.

Yet basic human needs, such as safe shelter, food, health care,
education, are not distributional issues.  The world's economy can suppy
every human being with adequate needs, but for the "market".

But according to Hayek, a spontaneously working market, where prices act
as guides to action, cannot take account of what people need or deserve,
because it operates according to a neutral distribution system which
nobody has designed. Such a distribution system cannot be just or
unjust. And the idea that things ought to be designed in a 'just' manner
means, in effect, that one must abandon the market and turn to a planned
economy in which somebody decides how much each ought to have.
And the price for that justice is the complete abolition of personal
So, in the name of liberty, the world is forced to go hungry while
economies suffer overcapacity.

Hayek's free market ideas have been applied to much of unregulated
globalization, the socio-economic damage is now very visible.  Not
withstanding Hayek's repugnant social philosphy, even his "scientific"
claims on the effectiveness of free markets has not been substantiated
by events.  A transaction requires a buyer and a seller at a price.  It
is easier for a camel to go through the eye of a needle than for both
buyer and seller to be satisfied with any given price.  One side of a
"win-win" transaction is an idiot.

All economies are planned.  Some are planned through "market" mechanism
in order to deny societal values, while others are planned according to
societal values.

Henry C.K. Liu

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