11
Feb
2014
Supply & Demand
For my Mises Academy class I got stuck on a runway in Little Rock, and missed the live lecture, which was to be on Supply & Demand. Since it’s such a timeless topic, I decided to make the lecture publicly available by hosting them at my YouTube channel. For convenience I’ve broken the lecture up into 6 digestible chunks. Note that the discussion closely follows Chapter 11 from my textbook, Lessons for the Young Economist.
Hey your demand curve is pointing the wrong way.
Jon Stewart told me so.
Just learned you wrote a study guide to Theory of Money and Credit. Where do you get the time to produce all this stuff?
MF I wrote those books before I joined Facebook.
In part 4, you’d better explain the “market clearing price” to Bob Roddis. He has severe comprehension difficulties:
“I do not like the term “market clearing prices”. I don’t use it and I do not think it is particularly helpful in understanding reality. When I see the term used, my reaction is always “WTF are you actually trying to say”?”
http://mikenormaneconomics.blogspot.com/2013/05/daniel-little-what-about-marx.html?showComment=1369144674917#c9135395
How about you watch the cotton picking videos and then make such demands.
No no no. Not demands. At any one point LK has only one demand. Watch the first video; Bob explains it clearly.
Funny guy
Thanks again to LK and Ken B for providing us with Rudy Giuliani moments. Also, thanks to LK for the link where I said:
Regarding Salerno: The pricing process is essential, indispensable and irreplaceable. It is obliterated by socialism and distorted by Keynesianism. But human beings are not robots and have limited knowledge (while Keynesian bureaucratic bullies are human beings too and suffer the same infirmities in spades). Thus, claiming that ALL MARKETS will ALWAYS clear seems a little overstated to me, although this will happen most of the time and laissez faire is the only cure for the impediments to this process caused by socialism and Keynesianism. I will agree to this amended version:
This means that the structure of realized (disequilibrium) prices, which continually emerges in the course of the market process and whose elements are employed for monetary calculation, PROVIDES the indispensable AND IRREPLACEABLE INFORMATION, (UNAVAILABLE UNDER SOCIALISM AND FATALLY DISTORTED UNDER KEYNESIANISM, MONETARISM AND MOST FORMS OF FRB) OF INDUCING THE TENDENCY FOR THE CLEARING ALL MARKETS and, in the process, PROVIDING THE INFORMATION NECESSARY FOR THE COORDINATION OF the productive employments and combinations of all resources with one another and with the anticipated preferences of consumers.
http://mikenormaneconomics.blogspot.com/2013/05/daniel-little-what-about-marx.html?showComment=1369057069033#c6787146806802801551
I’m not starting a new debate, just clarifying the old one.
That’s it.
I see! So now you:
(1) do use the term “market clearing prices” (yet you say “I do not like the term “market clearing prices”. I don’t use it.”)
(2) now it is a fundamental concept in Austrian economics? (yet you have said “I do not think it is particularly helpful in understanding reality. When I see the term used, my reaction is always “WTF are you actually trying to say”?”)
(3) now you seem to admit that Austrian economics holds that flexible prices and wages moved in human trades do have a fundamental role in creating a tendency towards supply and demand equilibrium in markets.
(4) yet you continue to deny that Hayek is talking about **that very concept in (3)** below in this quote:
“The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.
The theory which asserts that unemployment is an effect of a deviation of the actual price structure from the equilibrium structure is thus a theory that cannot be confirmed by statistics. “
Hayek, Friedrich A. von. 1975. A Discussion with Friedrich A Von Hayek. American Enterprise Institute, Washington. pp.6-7.
Can you guys explain in a little more detail just what you are disagreeing about?
You need only read this passage from Hayek that Roddis recycles endlessly:
http://socialdemocracy21stcentury.blogspot.com/2014/02/hayek-on-market-clearing-prices-and.html
For years, he’s claimed that nobody but Austrians understand the “basic concepts” in this passage.
When I pointed out that one of the fundamental ideas there is a set of market clearing wages and prices, and that ALL schools of economic thought understand this concept — indeed it is also a fundamental idea in mainstream neoclassical/Walrasian economics — Roddis denied that Hayek was talking about flexible wage and prices adjusting towards a set of market clearing values, and indeed that such a concept is held by Austrians at all
LK you have already conceded the debate. You did so by voicing your impatience with how fast prices and wage rates do adjust in a free market towards the direction of unemployment elimination.
Austrian theory does not predict exactly how fast prices and wages rates adjust towards market clearing. Sure, Austrian economists have made passing mentions of how much time they believe it would take, but that isn’t Austrian economics per se.
The key is that you don’t have to rely on any ability to predict how long it will take. Future human knowledge and actions based on that knowledge cannot be scientifically predicted anyway.
You need to rely on the irrefutable fact that humans are goal seeking, and seek to make gains and avoid losses. That puts constant and relentless pressure on prices to adjust in accordance with individual human ends. If an individual’s labor is worth only $2 an hour, then there is no reason why they and someone needing the floors cleaned cannot come to a mutually beneficial arrangement. You have no argument against the argument about employment specifically. All you have is displeasure, resentment, and hostility towards the motion of voluntary employment according to OTHER people’s preferences for themselves.
The debate is over LK. You have already accepted the Austrian argument. Now all you’re doing is figuring out how it is to be integrated with the rest of your convictions that presuppose you haven’t accepted it. So you’re presently trying to rewrite your own understanding of non-Austrian theory, and trying to convince yourself that those schools somehow always held the Austrian argument about prices as a “fundamental concept.”
“Austrian theory does not predict exactly how fast prices and wages rates adjust towards market clearing.”
No, MF, the debate with Roddis was never about “exactly how fast prices and wages rates adjust towards market clearing”.
Roddis for a long time denied that flexible prices and wages rates adjusting towards market clearing levels was even a fundamental theory in Austrian economics.
No he didn’t, he only said he doesn’t like using that phraseology, and that your inaccurate descriptions and characterizations of Austrian theory on prices is not fundamental to Austrianism.
To Roddis, the market keeps going. There is no final state of rest. This is what Mises stressed. Cleared markets is but a mental tool, used to understand how the real world differs from that, so as to understand more clearly what it is we are dealing with.
I may have said something about “flexible prices and wages rates” as being a corollary of other more fundamental concepts and thus not exactly “fundamental”.
I’m going to be 63 next month and I’ve lost much of my former stamina for and interest in hair-splitting.
Let’s not forget that the gist of LK’s refutation of the Austrian School was his finding of alleged evidence that companies may have cut production in lieu of prices in response to bad times. And his insistence that the FUNDAMENTAL nature of “flexible prices” (vs. flexible humans and their flexible plans) in Austrian theory is that humans will and must always always always cut prices as a solution to all problems of living and that evidence of the cutting of production instead refutes that allegedly FUNDAMENTAL concept.
“And his insistence that the FUNDAMENTAL nature of “flexible prices” (vs. flexible humans and their flexible plans) in Austrian theory is that humans will and must always always always cut prices as a solution to all problems of living”
Another laughable lie from an individual who’s been forced to retreat from his previous nonsense:
“I do not like the term “market clearing prices”. I don’t use it and I do not think it is particularly helpful in understanding reality. When I see the term used, my reaction is always “WTF are you actually trying to say”?”
http://mikenormaneconomics.blogspot.com/2013/05/daniel-little-what-about-marx.html?showComment=1369144674917#c9135395
Full points to you for catching Roddis out using the confusing term “market clearing prices”. Roddis must now learn patience under a rock like King Monkey.
However (getting beyond personal petty squabbles) you seem to have some difficulty catching Hayek out in the same way as you caught Roddis.
Hayek does talk about “equilibrium”, and maybe this equilibrium is not a unique point, maybe it is several points, or worse, a strange attractor. All non-linear dynamic systems at least face the risk of chaos. Does that invalidate what Hayek says?
How do you reliably isolate internal instability from exogenous shocks, when all you can measure is the system itself? By what means do you attempt to identify an applied distortion?
I don’t see you even attempting to answer Hayek’s questions here. Your distraction as to the nature of equilibrium is an academic curio, and worthy of further study, but Hayek’s point remains.
Absolutely right. Modern economics is based on pseudo-empiricism — a scientific pretender, just like evolutionary biology and climate science, and probably others.
When life gets too complex we make up stories, because it gets us through the day. Helps us concentrate on what matters: sex and profit.
Oh boy, another innocuous post that will end up with 200+ comments that consist of LK and Roddis saying the same things that they’ve said a million times.
I’m outta here. I’ve moved on to reruns of “Sabrina The Teenage Witch”.
They’re not the same each time. There is a distinct lowering of quality from LKs posts.
Not without help.
Is economic calculation THE or just A fundamental idea Bob?
Does it really matter Ken B? I know you’re not putting a horse in the race here, but seriously, whether something is “fundamental” or “subsidiary” to a particular school of thought, is nowhere close to the importance of whether it is TRUE.
LK, what difference does it make whether or not prices changing in response to demand and supply changes is “fundamental” or something else in Austrian theory? If you say it’s “fundamental” and Roddis says otherwise, or if Roddis says it’s “fundamental” and you say otherwise, you’re not even addressing whether it is true or not, and why.
No, MF, your ramblings show no knowledge of the absurdities of what Roddis has said over the years:
Bob Roddis@November 4, 2012 at 8:34 PM
As I have stated over and over, Hayek uses the term “equilibrium structure” to refer to the price structure that would have existed but for GOVERNMENT intervention, especially granting banks the right to create fiat funny money loans out of thin air, thereby distorting the price, investment and capital structure. Hayek stated:
These discrepancies of demand and supply in different industries, discrepancies between the distribution of demand and the allocation of the factors of production, are in the last analysis due to some distortion in the price system that has directed resources to false uses. It can be corrected only by making sure, first, that prices achieve what, somewhat misleadingly, we call an equilibrium structure, and second, that labor is reallocated according to these new prices. ****
The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured. ****
In contrast, the modern fashion demands that a theoretical assertion which cannot be statistically tested must not be taken seriously and has to be discarded. As a result of this belief, a theory which, in my opinion, is the true explanation has been discarded as not adequately confirmed, and a false theory has been generally accepted merely because it happens to be the only one for which statistical evidence, even though very inadequate evidence, is available.”
This analysis has nothing to do with “market-clearing Walrasian price vectors”.
http://mikenormaneconomics.blogspot.com/2012/11/matias-vernengo-on-austrian-business.html?showComment=1352079298519#c7617435052728682495
Yes, it does: the core idea is the same.
Thanks, LK. I was just going to hunt for that prior discussion. What I said was right then and it’s still right today. And it again shows that you do not understand intervention vs. non-intervention, prices as essential information, distorted prices and/or the concept of economic calculation/mis-calculation.
Why don’t you go off somewhere and debate my old quotes?
LK, I am SO SORRY! You are already off somewhere still debating my old quotes.
This passage is one that is grossly misunderstood by vulgar Austrians, or, to be specific, one astonishingly ignorant one.
http://socialdemocracy21stcentury.blogspot.com/2014/02/hayek-on-market-clearing-prices-and.html
Here is a straightforward
question:
Do you deny that this Hayek passage contains any reference to flexible wages and prices moving by human action towards market clearing levels?
Yes or no?
1. Voluntary transactions provide better information for making plans and such good information provides better and quicker feedback as to the success or failure of one’s plans. The lack of violent intervention also allows for better and quicker modification of one’s plans which would be based upon the better information.
2. The historical problems of allegedly “inflexible wages” were the result of prior violent interventions which artificially raised wage rates above what they would have been without the prior violent interventions and were further compounded by open or implied threats of violence against those who might attempt to compete by working for lower wages.
Yes, Roddis, in other words: you can’t give a clear yes/no answer.
You’re evading the question — most probably because you’re terrified to give a clear answer because you know it will destroy you.
LK, what is the definition of hyperinflation?
You’re evading the question — most probably because you’re terrified to give a clear answer because you know it will destroy you.
I’m not evading anything. Flexible prices and wages can be and often are a part of one’s plans. I’m satisfied with the state of our dispute. Now go away and trumpet your victory to the other statists.
One last chance to prove you’re not an intellectual coward and fraud.
Is Hayek thinking of a tendency towards supply and demand equilibrium in goods and labour markets by flexible prices and wages, moved by market agents in their transactions, in your Hayek passage?
Yes or no?
Hypothetical. I buy a hammer for $2 and a pound of sand for $1 (I am preparing a gift pack for MF).
What were the prices involved? So what was a price vector here? I ask because I am not sure Roddis and LK will agree.
Ken B. wrote:
Hypothetical. I buy a hammer for $2 and a pound of sand for $1 (I am preparing a gift pack for MF).
Shoot, it’s difficult for me to maintain my Wall of Ambivalence in light of such quips.
Sort of a coincidence here. The Mike Norman post (shield your eyes, MF!) to which LK linked was about Daniel Little, chancellor of the University of Michigan-Dearborn.
http://www.umd.umich.edu/aboutchancellor/
After reading his writings, it would appear that Chancellor Little attended the same master writing program in academese twaddle and critical thinking as Walter Block’s university president.
I’m still learning some basics in economics so this definitely helped. Thanks for uploading
There’s not an audiobook version of “Lessons for the Young Economist”, is there?
I’m not sure; I don’t think so. I certainly didn’t narrate it!
Have you considered singing the book karaoke style?
I can make an audiobook from any PDF.
Using a robot voice? Yuck!
I’ll stick my hand up and read it out, I have an elegant, educated and plummy voice, very much in demand for corporate answering machines.
Is it legal to read it out? I’m scrupulous about obeying Copyright law, but with written consent by the current holders I’m happy to donate some time to the project.
Microsoft Sam is 20 years behind today’s text to speech technologies. My software sounds real.
I was in radio for a while myself.
Bob’s writing could be confusing to narrators though who are trying to get the tone right. The funny parts are never the jokes.
Only an economist would consider breaking a simple lecture into six separate videos “convenient”…
You overrate the attention span of my fans.
The first 15 seconds of each video was awesome!
If you play them backwards there’s a secret message.
Btw, what’s with the nose twitching?
It’s how my witchcraft works…
I’m not sure I think I had a tickle or something (for real). That’s not normal.
I’ve never noticed it before.
:):)
Murphy: So, do you want one hour long video? Or six ten-minute videos?
Fan: Better make it six, I feel like learning a whole lot of economics today!
Matt M: Splitting up videos by topic is stupid!! It’s the same as if you watch one long video.
Murphy: Some people don’t sit there for an hour and watch all 6 videos back to back.
Matt M: ______________
Doesn’t Youtube automatically save your place in videos nowadays?
I guess my argument is that it takes MORE attention/dedication to bother to remember to bring up Youtube/Free Advice and watch Murphy’s videos on six separate occasions than to just do it once for an hour.
Personally, I’ve gotten in the habit of saving long Woods/Murphy videos for whenever I’m having work done on my car and have a couple hours to kill sitting in a waiting room. In those cases, one long video is far preferable.
I guess what I’m saying is you should design all of your outputs based on MY preferences? Consumer sovereignty!
Bob,
There is one issue with your Opec announcement example which I think you could have addressed. The announcement could very well be triggered by a shift in the demand curve to the left as well, which means the supply curve isn’t moving, but you are moving along the supply curve. So you don’t know what really happened. At best you can make an educated (entrepreneurial) guess by observing price movements and Opec announcements over time. If Opec reacts very slowly to the demand shift then you would first see falling prices, and after the Opec announcement an increase in price but it would be lower than initially. If Opec changes their output gradually (and with the adequate amount!) to the shift in falling demand then you would not see any price increases but just a gradually falling price. And finally of course both curves can move for all sorts of reasons, so after an Opec announcement the price might not change at all.
Maybe you want to avoid that people walk away after your lecture thinking “Oh great since I know supply and demand curves now it should become easy to bet on falling and increasing prices based on Opec announcements”, because you don’t know if the Opec announcement itself is the trigger, or if it was triggered.
Skylien fair enough.