Chinese Officials Are Backing Off Dollar Purchases
From Bloomberg:
The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.
“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes.
If Scooby Doo were a blogger, I think he would say, “Ruh roh.”
What China Says != What China Does
FTR…
I definitely agree that a shift in rhetoric indicates a shift elsewhere.
Thanks WP for deleting not just an entire comment, which would be detectable rather easily, but instead just slurping a piece of some abominable text.
It’s slurped it because it was delectable.
🙂
That’s awesome. Good for them. China sucks right now but they’re really moving in the right direction.
Bob Murphy,
On pp. 133–134 of your Study Guide to Human Action you summarise Mises’ view of prices:
“The modern, subjectivist theory of prices does not assume that people have “perfect knowledge” of the market. On the contrary, catallactics can explain the formation of actual prices in the real world. Indeed, those mainstream economists who study static “equilibrium” outcomes ignore the crucial process in which speculative entrepreneurs drive the market toward equilibrium. By spotting disequilibrium (but real-world) prices and acting to seize the profit opportunities that they entail, it is the entrepreneurs who move the whole system toward the equilibrium state that the mathematical economists take for granted as the starting point of analysis. By buying “underpriced” goods or factors of production, and selling “overpriced” ones, the entrepreneurs push up the former and push down the latter prices, earning profits and equilibrating the economy.”
Murphy, Robert P. and Amadeus Gabriel. 2008. Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala. p. 133–134.
Does the equilibration of the economy you refer to in the last sentence include (without being limited to) a strong tendency for prices to move towards their market clearing levels in the unhampered market? (even if the economy never reaches an equilibrium state).
It that how you interpret Mises?
LK I don’t know why you are asking me this; my guess is that you are going to use it in your never-ending disputes with Roddis et al. You will say, “Aha Murphy agrees with me!” then they will ask me for clarification etc. etc.
I don’t know why you are putting “strong” in there; if the disagreement is strong vs. weak, then I have no idea what Mises would say. Kirzner and Lachmann disagreed on this point, for example; Kirzner thought entrepreneurship was equilibrating, while Lachmann thought it was disequilibrating.
Both Mises and Rothbard agreed that if “the data” don’t change, then the economy converges to final prices and ultimately an ERE. But obviously the data do change. I don’t know that I ever saw them make an empirical claim about the speed of disruption versus equilibration, if that’s what you guys are arguing about.
Not really. I think his approach is that the market clearing price is a mythical concept that exists only in a fairy tale land, that prices are fixed by producers based on a mark-up on production costs and therefore that the Austrian explanation of price is nonsense and has nothing to do with the real world.
That’s it in a nutshell. I’m still at a loss that people can believe that.
LOL
I have already said I know perfectly well that Austrians do not think the economy will actually reach a ERE or equilibrium state.
I am asking you
(1) whether flexible prices and wages that at least have a **tendency** to converge towards market clearing levels is an important idea in the Misesian/Rothbardian branch of Austrian economics as an important “equilibrating” mechanism (yes, I know Austrians say the data and economic reality change so that even when *some* prices reach market clearing levels for certain periods they will be driven back into false disequilibrium levels).
Can you confirm this?
Bob Murphy,
You’re constantly complaining about endless debates about this on your blog. Well, why not give us your view and nip it in the bud?
Certain of your fans are repeatedly dismissing the idea that flexible prices and their tendency to move towards market clearing values is even an important concept in Austrian economics.
Well, do you agree?
LK,
It’s funny to me that you assume that defenders of Austrian economics on this blog “only” are here because they are fans of Bob Murphy and/or that they only adhere to Austrian concepts because of Bob Murphy. Maybe this assumption on your part gives us some psychological insight into your own intellectual views. I mean, your name IS Lord Keynes and all. But simply because you have strong emotional ties to Keynes doesn’t necessarily mean that followers of another school of thought are emotionally involved with the main proponents of that school.
Ben B,
I can’t help it. Your tone and style sound eerily familiar.
Oh, so the people that debate you only do so because they are incapable of critical independent thought?
This comes from a person whose claim to fame is basically quoting passages from books and parroting what his heroes wrote. No critical or original thinking from him.
He’s an ass.
“You’re constantly complaining about endless debates about this on your blog. Well, why not give us your view and nip it in the bud?”
Since when was this an endless debate? Sure, you’ve been nipping at the ankles of Murphy for sure, but debate is too strong a word. That would imply some sort of equitable playing field.
LK,
Would you not say that the degree of flexibility in prices isn’t itself an expression of subjective values and expectations?
I honestly think that Bob’s answer should be “yes I confirm” to your question but with the qualification that you need to understand “flexibility” in prices correctly. However if you understand flexibility differently, which is kind of obvious as Keynesian, I guess he should say no, because you obviously think that prices are not flexible (enough), so this changes the meaning of your question. Austrians (again I say I guess) think, that they are as flexible as the subjective valuations of market participants determine them to be if the market is not hampered by certain government interventions, and therefore there is no issue with the degree of flexibility, no matter how high or low that might be.
E.g. see this quote of Rothbard about the issue of what you might call “price rigidity” and an Austrian just the expression of subjective preferences/expectations:
“There is another way of treating supply and demand schedules, which, for some problems of analysis, is more useful than the schedules presented above. At any point on the market, sup-pliers are engaged in offering some of their stock of the good and withholding their offer of the remainder. Thus, at a price of 86, suppliers supply three horses on the market and withhold the other five in their stock. This withholding is caused by one of the factors mentioned above as possible costs of the exchange: either the direct use of the good (say the horse) has greater utility than the receipt of the fish in direct use; or else the horse could be exchanged for some other good; or, finally, the seller expects the final price to be higher, so that he can profitably delay the sale. The amount that sellers will withhold on the market is termed their reservation demand. This is not, like the demand studied above, a demand for a good in exchange; this is a demand to hold stock. Thus, the concept of a “demand to hold a stock of goods” will always include both demand-factors; it will include the demand for the good in exchange by nonpossessors, plus the demand to hold the stock by the possessors.”
http://mises.org/rothbard/mes/chap2c.asp#8._Stock_andthe_Total
LK,
I want to clarify why I say it changes the meaning of your question. Prices that an Austrian already would consider to be equilibrium prices (is a price at which total demand equals total supply), would not be equilibrium prices for you because you do not consider reservation demand.
And I think you might be mixing two different “equilibrium” concepts.
1: One is the equilibrium price at which total supply equals total demand of a certain good at a specific point in time to clear the market at this point in time.
2: The other is the final equilibration of the economy in which there are no more profits and losses to be made anymore, the ERE. Of course those two concepts are connected with each other in that the former is the driver to reach the second, which of course never can be reached since the data always changes…
I am not confusing these two ideas. If you had bothered to read my original comment properly, you would see I do understand them and differentiate them.
I have, I wasn’t sure so I brought it up. If you say there is no problem, fine.
“I want to clarify why I say it changes the meaning of your question. Prices that an Austrian already would consider to be equilibrium prices (is a price at which total demand equals total supply), would not be equilibrium prices for you because you do not consider reservation demand.”
Not true: if one excludes quantities held as reservation demand as quantities NOT offered for sale at the time period in question, then the concept of market clearing price as I have defined it is not affected.
“quantities held as reservation demand as quantities NOT offered for sale”
Right, this is exactly what I mean. If a supplier offers a goods for a price which is not accepted by anyone, and the supplier refuses to lower the price(*1) far enough to be able to sell it now and rather holds the good on stock, then you don’t consider that as reservation demand although an Austrian would.
*1 Reasons for this refusal might be the ones stated by Rothbard above, all of which are perfectly fine.
At least for me the way you look at it is clearer now. Thanks!
“If a supplier offers a goods for a price which is not accepted by anyone, and the supplier refuses to lower the price(*1) far enough to be able to sell it now and rather holds the good on stock, then you don’t consider that as reservation demand although an Austrian would.”
I’ve just told you that I can understand it as reservation demand, and that this does not affect my use of market clearing as a concept.
Now you have confused me. Why does it matter then if the goods were offered for sale or not?
Maybe an example would be helpful.
Mark-up prices do not prevent prices from adjusting to new monetary conditions as they occur over time.
If the money supply and volume of spending goes up, then ceteris paribus mark-up prices will go up.
If the money supply and volume of spending goes down, then ceteris paribus mark-up prices will go down.
The fact that mark-up price changes takes time, just like everything else in economic life, it doesn’t mean Austrian theory of “flexible prices” is wrong. Austrians have never claimed that flexible prices adjust instantly to every change in monetary conditions. But that is what would have to take place IF your “criticism” is to be what you believe it to be.
“Austrians have never claimed that flexible prices adjust instantly to every change in monetary conditions.”
And I did not state or imply they did.
“Not true: if one excludes quantities held as reservation demand as quantities NOT offered for sale at the time period in question, then the concept of market clearing price as I have defined it is not affected.”
Actually, if you excluded reservation demand and reservation supply, then the implication of this is that the only relevant demand and supply for analysis would be the demand and supply that is actually encompassed in exchanges. In other words, quantity demanded would equal quantity supplied at all times and at all places.
Every good held by a seller, and every dollar held by a buyer, that is not at this very moment exchanging hands, would be a part of reservation demand and reservation supply, and excluded as per the initial assumption.
The concept of marketing clearing prices would indeed by affected. It would be affected in such a way that you yourself would be talking about perfect equilibrium between quantity supplied and quantity demanded.
“Why does it matter then if the goods were offered for sale or not?”
Do you even understand the concept of a market clearing price?
“The day-to-day tendency in the market is toward the establishment of an equilibrium price for each particular consumer good. Prevailing prices tend toward that price at which quantity supplied and quantity demanded are equal, a movement that attests to the price system’s capacity to coordinate the actions of persons engaged in different activities. The typical depiction of this tendency on a graph shows the equilibrium price at the point at which the market supply-and-demand curves intersect. Any price above or below the equilibrium price cannot persist because such a price will result, respectively, in either frustrated sellers or frustrated buyers. Prices are reduced by sellers if the market price is too high to clear the quantity offered; prices are bid upward by buyers if the price is too low to induce sellers to offer a quantity ample enough to satisfy the buyers’ demand.”
Taylor, Thomas C. 1980. An Introduction to Austrian Economics. Ludwig von Mises Institute, Auburn, Ala. p. 56.
Prices are set so as to ‘clear the market’ by equating supply and demand; at the market price the supply of a good will exactly equal the amount of the good that people are willing to buy or hold
(Rothbard 2006: 390).
“Private business prices its goods and services to ‘clear the market,’ so that supply equals demand, and there are neither shortages nor goods going unsold.” (Rothbard 2006a: 259).
“The market interaction brings about a price at which demand and supply tend to coincide. The number of potential buyers willing to pay the market price is large enough for the whole market supply to be sold.” (Mises 2011: 101).
Even when reservation demand is factored into this analysis, the desire to sell the goods by offering them for sale is crucial to the whole concept.
“Actually, if you excluded reservation demand and reservation supply, then the implication of this is that the only relevant demand and supply for analysis would be the demand and supply that is actually encompassed in exchanges. In other words, quantity demanded would equal quantity supplied at all times and at all places.”
That implies that nobody at any moment in time has any goods they are offering for sale that are unsold.
That is ridiculous. You are simply inventing definitions of market clearing price.
“And I did not state or imply they did.”
I know. You’ve said that before. My point is that your “criticism” can only apply IF that statement were true.
If you admit that price flexibility is permitted to be “allocated” across time, then your whole “criticism” collapses, because over time, prices do indeed adjust to new monetary conditions.
Wage earners will eventually accept a lower or higher wage rate than their initial asking price, if the new monetary conditions persist in compelling him or her to do so. No individual wage earning actor will choose death over holding out for a higher wage rate, and no individual wage earning actor will choose sacrificing a new car over holding out for a lower wage rate.
Sellers of goods will eventually accept a higher or lower price than their initial asking price, if the new monetary conditions persist in compelling him or her to do so. No individual goods seller of goods actor will choose continuous losses over holding out for a higher selling price, and no individual seller of goods actor will choose sacrificing a new car over holding out for a lower selling price.
LK, if you understand that prices take time to adjust in the face of new monetary conditions, then you have completely conceded the entire “debate” to the Austrians.
For over a long enough periods of time of little to no inflation of the money supply after decades of high inflation, even mark-up prices will eventually be pushed lower, as the initial investment spending can no longer be supported by prevailing nominal demand. Investment spending will fall.
And, if investment spending falls to a new lower trend, then sellers of factors (capital goods sellers and wage earners) will have no choice but to accept a lower price if they want to sell anything at all. They won’t hold out for a higher price forever.
You are trying to have it both ways. On the one side, your “criticism” of Austrian “flexible price” theory REQUIRES prices to NOT change…PERIOD. On the other hand, you keep repeating that you’re not accusing Austrians of believing that prices change instantly.
The implication of prices not having to change instantly, and prices not staying rigid forever, IS FLEXIBLE PRICE THEORY NUMNUTS.
LK:
“That implies that nobody at any moment in time has any goods they are offering for sale that are unsold.”
No, it implies that the only times people have a supply to SELL, is when they actually sell a good, and the only times people have a quantity demanded, is when they buy a good.
That is what is implied in excluding reservation quantities demanded and supplied. I am not arguing we must do so. I am just telling you the implication of doing so. The implication is that yes it does very much “affect” your confusions about market clearing.
“That is ridiculous. You are simply inventing definitions of market clearing price.”
You’re confused again.
The fact that it leads to a particular conclusion does not imply I am utilizing “wrong” definitions.
“If you admit that price flexibility is permitted to be “allocated” across time, then your whole “criticism” collapses, because over time, prices do indeed adjust to new monetary conditions. “
I am speaking of mark-up prices in the REAL WORLD. You are speaking of an imaginary world where businesses have abandoned mark-up pricing.
“For over a long enough periods of time of little to no inflation of the money supply after decades of high inflation, even mark-up prices will eventually be pushed lower”
You have completely confirmed that you are speaking of hypothetical worlds unrepeated to the real world.
“On the one side, your “criticism” of Austrian “flexible price” theory REQUIRES prices to NOT change…PERIOD”
It requires no such thing.
My criticism relates to the mark-up pricing sector, but does not deny the existence of flexprice markets in the real world.
Even mark-up prices change but generally in response to average total unit costs, and even though individual mark-up prices can fall, they tend to have relative downwards rigidity and have tendency to go upwards even during recessions.
In short, your whole argument of nothing but dishonest distortion.
“Even when reservation demand is factored into this analysis, the desire to sell the goods by offering them for sale is crucial to the whole concept.”
Can you elaborate why this is important with an actual easy example that makes clear what is different if someone actually offers his goods for sale or not?
“I am speaking of mark-up prices in the REAL WORLD. You are speaking of an imaginary world where businesses have abandoned mark-up pricing.”
False.
1. In the REAL WORLD, mark-up prices are indeed “flexible”. They continually rise over time as the quantity of money and volume of spending continually rises on account of the central bank. If instead inflation was more modest, as it is in a free market as compared to a central bank economy, and the quantity of money and volume of spending rose more modestly as well, then mark-up prices would still adjust: they would adjust upwards more slowly than otherwise. Similarly, if there is outright deflation, then prices would tend to adjust down, ceteris paribus, over time.
2. Even in a laissez-faire economy, where money is produced privately, mark-up pricing would still almost certainly exist.
“For over a long enough periods of time of little to no inflation of the money supply after decades of high inflation, even mark-up prices will eventually be pushed lower”
“You have completely confirmed that you are speaking of hypothetical worlds unrepeated to the real world.”
False. What I said applies to the real world, and a free market economy. In our world, mark-up prices are indeed adjusting…upwards, over time, as the supply of money is increased over time.
Flexible prices exist in a world of exchanges, whether the supply of money arises from a central bank, or private minters.
“On the one side, your “criticism” of Austrian “flexible price” theory REQUIRES prices to NOT change…PERIOD”
“It requires no such thing.”
Yes, it does.
“My criticism relates to the mark-up pricing sector, but does not deny the existence of flexprice markets in the real world.”
The mark-up price sector is OBSERVED to have generally rising prices over time, in response to the quantity of money rising over time.
Same thing would be the case with any other trend in money production. Prices will adjust to it.
“Even mark-up prices change but generally in response to average total unit costs”
Unit costs change in response to nominal demand as well. Flexible costs exists.
“and even though individual mark-up prices can fall, they tend to have relative downwards rigidity and have tendency to go upwards even during recessions.”
That’s because of the REAL WORLD INFLATION. If the real world were a free market, prices would more readily fall because prices would be falling as a general trend due to the more modest rate of money inflation.
“In short, your whole argument of nothing but dishonest distortion.”
Non sequitur. My argument DEMOLISHES your entire “criticism.” You just conceded to the Austrians once again.
Austrians hold that prices generally rise over time because of a general inflation. During recessions, people still expect long run inflation, because they are LIVING in an inflationary world.
If instead people were not living in an inflationary world, then mark-up prices would ALSO adjust over time, they would just adjust to a new trend over time.
Are you denying the fact that prices are rising over time because of an increase in the quantity of money over time?
LK:
BTW, your nonsense that prices rise during recessions is contradicted by the evidence:
http://research.stlouisfed.org/fredgraph.png?g=p0B
Every single recession since 1970 has been accompanied by a falling CPI.
Slight modication:
Falling TREND
(1) “In the REAL WORLD, mark-up prices are indeed “flexible”. “
True, but because businesses they raise them when factor input costs rise or because business wish to increase their profits.
(2) “That’s because of the REAL WORLD INFLATION. If the real world were a free market, prices would more readily fall because prices would be falling as a general trend due to the more modest rate of money inflation.”
lol… you have totally confirmed my points.
You’re speaking of a purely hypothetical world where you assume that mark-up pricing has essentially ceased or become minimal.
My point is proven.
“BTW, your nonsense that prices rise during recessions is contradicted by the evidence:
http://research.stlouisfed.org/fredgraph.png?g=p0B
Every single recession since 1970 has been accompanied by a falling CPI.”
lol.. look at the graph again: deflation is when the line goes BELOW 0.
Every recession except the bad one from 2008-2009 has been disinflationary: disinflation is a type of inflation, just inflation at a lower rate than in the previous year.
“Slight modication:
Falling TREND
“
Yes, you quickly realised your mistake.
Why not admit your mistake graciously?
But then I don’t expect we can expect one iota of honesty from you, can we.
“BTW, your nonsense that prices rise during recessions is contradicted by the evidence:”
Are you going to retract that false statement?
And moreover, what I said was:
“Even mark-up prices change but generally in response to average total unit costs, and even though individual mark-up prices can fall, they tend to have relative downwards rigidity and have tendency to go upwards even during recessions.”
Virtually every recession since 1945 has been inflationary: the only exceptions are 1949-early 1950, 1954-1955, and 2009.
I am correct. Your statement above is wrong.
“True, but because businesses they raise them when factor input costs rise or because business wish to increase their profits.”
True, but that is because persistent inflation is making flex price FACTORS of production increase in price over time.
If inflation came to an end, and flex price factor prices gradually fell over time instead, then flex price output prices would fall over time as well. They cannot persistently rise in the face of unchanged nominal demand.
My point is proven.
“(2) “That’s because of the REAL WORLD INFLATION. If the real world were a free market, prices would more readily fall because prices would be falling as a general trend due to the more modest rate of money inflation.”
“lol… you have totally confirmed my points.”
LOL, you have totally confirmed MY point about flexible prices.
“You’re speaking of a purely hypothetical world where you assume that mark-up pricing has essentially ceased or become minimal.”
False. I am speaking of the real world of EITHER persistent inflation, or no inflation. Mark-up prices do not come to an end when inflation comes to an end. Mark-up prices will still exist, they will just gradually fall on the basis of gradually falling costs on account of a lower inflation.
My point is proven.
“BTW, your nonsense that prices rise during recessions is contradicted by the evidence:
http://research.stlouisfed.org/fredgraph.png?g=p0B
Every single recession since 1970 has been accompanied by a falling CPI.”
“lol.. look at the graph again: deflation is when the line goes BELOW 0.”
Nobody claimed that prices have to actually fall during recessions. It is only necessary that the trend changes, which is indeed what occurs.
If the Fed did not reinflate the economy, then the falling trend would likely keep falling “below zero”, as it did in 2008 when the economy was so messed up that the Fed “failed” to reinflate despite its massive intervention.
Just because prices did not actually dip below zero, does not in any way refute my point that prices adjust to new monetary conditions.
““BTW, your nonsense that prices rise during recessions is contradicted by the evidence:”
“Are you going to retract that false statement?”
I forgot to mention trend, because we have been discussing trends the whole time.
Prices tended upwards, but at a lower upward pace, which is the result of priced adjusting to the new monetary conditions.
If those new monetary conditions persisted, and if the Fed did not reinflate the economy as it did in every recession since the 1970s (excluding 2008), then every single recession since 1970 would have resembled 2008 with outright deflation.
“And moreover, what I said was:”
“Even mark-up prices change but generally in response to average total unit costs, and even though individual mark-up prices can fall, they tend to have relative downwards rigidity and have tendency to go upwards even during recessions.”
Mark-up prices responding to costs rising IS ITSELF a consequence of prices adjusting to monetary conditions, namely, factor prices. Factor prices go up during an inflation, and that is what leads to rising mark-up prices.
You have proved my point.
“Virtually every recession since 1945 has been inflationary: the only exceptions are 1949-early 1950, 1954-1955, and 2009.”
That’s because virtually every recession was responded to with reinflation from the Fed.
I am correct. Your statement above is wrong.
ANother amendment:
“Just because price trends did not actually dip below zero…”
LK:
Prices have a tendency to keep going up during recessions not because of mark-up pricing preventing prices from falling, but because during recessions the central bank tend to respond with reinflation, which itself increases factor prices and thus increases mark-up prices.
If the Fed did not reinflate, and let nominal demand keep falling, then at some point flex factor prices will fall, which will make mark-up prices fall if sellers want to earn some profits instead of no profits.
You keep agreeing with my argument.
MF:
“I am correct. Your statement above is wrong.”
Ken B, do read the exchange above: MF’s not even honest enough to admit a blatant mistake — one that he actually corrected immediately afterwards!.
And my lord, and check this out:
“Nobody claimed that prices have to actually fall during recessions (!!!). It is only necessary that the trend changes, which is indeed what occurs.”
So MF has been arguing all along that mark-up prices will eventually fall to market clearing levels during recessions (if only the evil Fed would disappear), but now — suddenly — “Nobody claimed that prices have to actually fall during recessions”!
I rest my case: MF is utterly incapable of consistent or coherent argument.
“Ken B, do read the exchange above: MF’s not even honest enough to admit a blatant mistake — one that he actually corrected immediately afterwards!.”
I meant to say trend. Yes, I made a mistake in not writing what I intended to write.
LK, you’ve never admitted to any of the mistakes I have corrected you about, so you’re really in no position to criticize.
“And my lord, and check this out:
“Nobody claimed that prices have to actually fall during recessions (!!!). It is only necessary that the trend changes, which is indeed what occurs.”
Do you deny this?
“So MF has been arguing all along that mark-up prices will eventually fall to market clearing levels during recessions (if only the evil Fed would disappear), but now — suddenly — “Nobody claimed that prices have to actually fall during recessions”!
It’s not controversial to claim that prices don’t follow a deterministic path. Prices do not HAVE to fall during recessions, because recessions are NOT periods of falling prices to begin with!
Recessions can have falling OR rising prices, depending on what is happening to the money supply and volume of spending.
“I rest my case: MF is utterly incapable of consistent or coherent argument”
Your case is still wrong.
You have not refuted the argument that prices are flexible in response to monetary changes, be it mark-up prices which adjust to changes in factor prices, or factor prices themselves.
You have not refuted the Austrian argument that prices tend towards market clearing.
You have not refuted the argument that mark-up prices changing in response to factor prices changing is itself flex pricing in action.
“You have not refuted the argument that prices are flexible in response to monetary changes, be it mark-up prices which adjust to changes in factor prices, or factor prices themselves.”
The movement of real world mark-up prices because of total average cost changes is not the type of price flexibility by which prices will adjust downwards to demand changes over time towards a market clearing level.
You of course will either
(1) make the totally false claim that mark-up prices are market clearing prices just because they might change in response to cost change, or
(2) evade the question by switching to a hypothetical world where you simply assume that they do not exist or have morphed into flexprices.
“The movement of real world mark-up prices because of total average cost changes is not the type of price flexibility by which prices will adjust downwards to demand changes over time towards a market clearing level.”
Yes, it is. The same reason why mark-up prices continually go up in general, is because of a continuous, general rise in the quantity of money and volume of spending.
Costs going up leading to rising mark-up prices is the same mechanism, but in reverse, of costs going down leading to falling mark-up prices.
It’s not so much whether prices go up or down, or this or that, in and of themselves. What matters is whether they are changing in response to monetary conditions changing. The answer is of course yes, they do.
Electronics, which are mark-up priced goods, those prices fall over time because unit cost prices fall over time. It is not the case that electronics prices keep rising to earn higher and higher profits as costs fall. No, those prices are falling because electronic factor prices keep falling.
The reason this happens is because not even crazy Bernanke (and Greenspan) could inflate enough to counter-act the high productivity and innovation in electronics manufacturing.
The same thing can be true for all goods, if inflation were lower, such that productivity in everything else is able to outstrip the pace of money production, such that factor prices in such things as clothes, housing, cars, food, utilities, and other goods and services, would fall over time as well, as cost prices fall due to supply of factors outpacing inflation.
This is what economists call “good deflation”.
“You of course will either”
1. Not refuse to stay on point, or
2.Continue to show you how you are conceding the Austrian position on pricing.
“make the totally false claim that mark-up prices are market clearing prices just because they might change in response to cost change”
That is an example of prices changing towards clearing the market. That is NOT a “false claim.” That is a true claim.
Cost prices rising or falling in response to inflation or deflation, which results in mark-up prices rising or falling, is flex price theory in action.
“(2) evade the question by switching to a hypothetical world where you simply assume that they do not exist or have morphed into flexprices.”
False. In the real world flex pricing is what is taking place with rising mark-up prices on account of rising units costs which is itself due to inflation.
I am right. You are wrong.
Even in that “hypothetical world” of laissez-faire, mark-up pricing will still exist.
Mark-up pricing does not necessarily mean rising prices over time.
In a free market, where production of goods would likely outpace inflation, it would be the case that costs fall due to productivity increases, which enables mark-up prices to fall.
You have not refuted this argument with a superior argument.
LK:
Even taking 2008-2009 period of outright price deflation, alone as a single event, is sufficient to prove that mark-up prices can and do fall in response to a large enough change in monetary conditions.
The reason prices actually fell during 2008-2009, is because the change in nominal demand was so steep. Aggregate spending growth rate fell below zero:
http://research.stlouisfed.org/fredgraph.png?g=p0H
And would you look at that. The periods you listed of outright price deflation, 1949, 1955, 2009, just so happen to line up with the time periods when nominal demand growth fell below zero.
My point, which is grounded a priori, is consistent with the data as well.
Prices aren’t flexible. People are flexible.
http://www.blueskiesfitness.co.uk/images/gal_gymnastics_16.jpg
MF and LK,
I’m not quite sure how I got dragged into this, but I’d like to reassure both of you that no error MF made on this thread, no matter how egregious, or any of his behavior and how he dealt with admitting or obfuscating it is likely to affect my opinion of him in any way.
Hello Lord Keynes,
You tell us what Mises and or Bob Murphy was trying to say and why he/they are wrong.
Lord Keynes wrote:
Bob Murphy,
On pp. 133–134 of your Study Guide to Human Action you summarise Mises’ view of prices:
“The modern, subjectivist theory of prices does not assume that people have “perfect knowledge” of the market. On the contrary, catallactics can explain the formation of actual prices in the real world. Indeed, those mainstream economists who study static “equilibrium” outcomes ignore the crucial process in which speculative entrepreneurs drive the market toward equilibrium. By spotting disequilibrium (but real-world) prices and acting to seize the profit opportunities that they entail, it is the entrepreneurs who move the whole system toward the equilibrium state that the mathematical economists take for granted as the starting point of analysis. By buying “underpriced” goods or factors of production, and selling “overpriced” ones, the entrepreneurs push up the former and push down the latter prices, earning profits and equilibrating the economy.”
Murphy, Robert P. and Amadeus Gabriel. 2008. Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala. p. 133–134.
Does the equilibration of the economy you refer to in the last sentence include (without being limited to) a strong tendency for prices to move towards their market clearing levels in the unhampered market? (even if the economy never reaches an equilibrium state).
It that how you interpret Mises?
So, how many days until Krugman blogs about how this is absolutely great news and any naysayers are just crazy nutjob extremists?
He will argue this means they are not looking to acquire (more) leverage over US policy.
Purchasing dollars has never given them leverage over US policy.
China has been sitting around the 1 trillion mark in Treasuries for several years now, neither increasing nor decreasing their position significantly.
what about o. twist – didn’t China swap long for short term US debt then?
I won’t comment at length, but this post of yours immediately reminded me of this post of Krugman’s: http://krugman.blogs.nytimes.com/2009/10/19/americas-chinese-disease-not-quite-what-you-think/?_r=0
The US has been trying for years to get China to decrease dollar purchases. This is a positive development. According to the Big Mac index, China’s currency is undervalued by 42%. They’ve achieved that undervaluation by printing and purchasing dollars, then using them to buy dollar denominated assets.
Joe,
“The US has been trying for years to get China to decrease dollar purchases.”
What evidence is there to suggest this is correct?
This move along with many others going on in the world is not Dollar positive. It’s inevitable, but not Dollar positive.
Professor Murphy
What is your take on Michael Pettis’ ideas in the book the Great Rebalancing? Regarding the interconnectivity of international accounts. He says the Chinese forced the U.S. to become a deficit spending country by buying U.S. treasury bonds.
Thank you
Bob,
Do you always serve crow and humble pie on Thanksgiving at your house or are you just planning to add that to the spread for 2014?