Another thread on value

[Issaiah1332]

I am currently reading Economics Vol. 1: Money, banking, and finance.

In it it describes the US monetary system as token money (Money whose worth as currency far exceeds the value from which it is made, its intrinsic value). But how can the worth of the currency exceed its intrinsic value...(Its really hard to phrase what I wish to ask) when the very nature of money is to objectively determine value? <I hope that makes sense...haha

Also, this book seems to determine value by how much people want it...basically value is determined by the demand people have for it and money is basically an objective measuring device for that demand. How does the LTV account for this value...as well as the value placed upon money?

I know that the boards are littered with debates and questions on the LTV, but I was just curious and couldn't find answers in the past threads to my questions.

THanks

[ComradeRed]

I am currently reading Economics Vol. 1: Money, banking, and finance.

In it it describes the US monetary system as token money (Money whose worth as currency far exceeds the value from which it is made, its intrinsic value). But how can the worth of the currency exceed its intrinsic value...(Its really hard to phrase what I wish to ask) when the very nature of money is to objectively determine value? <I hope that makes sense...haha

Also, this book seems to determine value by how much people want it...basically value is determined by the demand people have for it and money is basically an objective measuring device for that demand. How does the LTV account for this value...as well as the value placed upon money?

I know that the boards are littered with debates and questions on the LTV, but I was just curious and couldn't find answers in the past threads to my questions.

THanks Ah now that is a question! I don't really have an answer so this is me thinking out loud for the most part.

Money, e.g. a $1 in my pocket, is made out of raw materials, but why is it the value of the $1 bill is more than the value of the labor contained in the bill?

Roughly put, the Federal Reserve determines the value of the dollar indirectly.

I'm sure Jacob Richter will hammer home a more elaborate answer (without a terrible pun in his name too).

The question to ask now is how does the Fed determine indirectly the value of the dollar?

My notes I have scribbled down a while back tell me that the Fed can really do three things:

1. Open market operations - purchases and sales of U.S. Treasury and federal agency securities.

(This is the most direct way to get money into or out of circulation.)

2. Discount rate - the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility.

3. Reserve requirements - the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.

All of these operations affect the amount of money in circulation but in no way (directly) affects the value of money it appears.

I don't have any hard statistics on me about interest rates, inflation rates, or money supply in any capitalist country in the past 50+ years so I can't employ math to see if certain a priori guesses are correct...but perhaps I could leave one guess:

Inflation = (Interest Rate) - (percent change in money supply)? Maybe?

Assuming that Interest Rate is indicative of the absolute value of the percent of growth? In the "Neo-Ricardian" sense of it...

So in short I can't help because I have no statistics at my disposal. Oh well, after next Friday (22 February) I can start looking at it a lot more rigorously.

[mikelepore]

When you sell commodity A for money, and then use the money to buy commodity B, you're really exchanging A for B. The money doesn't need to have value in the same sense that a commmodity does because it's a symbolic medium between A and B. Keeping the money supply relatively stable so that there will be some typical degree of difficulty in obtaining money, between the time you sold A and the time you bought B, is sufficient to protect its function as a medium placed between the other commodities.

[RebelDog]

When you sell commodity A for money, and then use the money to buy commodity B, you're really exchanging A for B. The money doesn't need to have value in the same sense that a commmodity does because it's a symbolic medium between A and B. Keeping the money supply relatively stable so that there will be some typical degree of difficulty in obtaining money, between the time you sold A and the time you bought B, is sufficient to protect its function as a medium placed between the other commodities.

I would say thats a fairly good analysis. The fundamental reason to have a $1 dollar bill or any money is to stop everybody having to carry all their commodities around and barter to trade. They are really 'notes' which take on the role of any commodity and so can be universally traded. Their actually material worth is clearly much less than their commodity purchasing power.

[ComradeRed]

When you sell commodity A for money, and then use the money to buy commodity B, you're really exchanging A for B. The money doesn't need to have value in the same sense that a commmodity does because it's a symbolic medium between A and B. Keeping the money supply relatively stable so that there will be some typical degree of difficulty in obtaining money, between the time you sold A and the time you bought B, is sufficient to protect its function as a medium placed between the other commodities. Well that's great but doesn't answer the question of how money's value is determined.

Yes, that is the role of money...which has been identified with nearly every economist for centuries.

But now that the capitalists are using a fiat system, how would one explain the value of money?

With your explanation...there is no explanation for it.

Most unsatisfactory :(

[Lynx]

The way I currently understand it:
The ratio between the amount of money in circulation and the amount of goods available for purchase determines its transaction value. If fewer dollars are chasing the same amount of goods, then money (as a medium of exchange) increases in 'value' (fewer notes can purchase more 'product'). This is called deflation.

If the medium of exchange is plentiful in relation to the amount of goods available for purchase, its transaction value drops (inflation). This effect is distinct from the effect of supply and demand, because we are looking at the availability of money. The other type of supply and demand relates to the availability of goods and services.

[blackstone]

I'm not sure, but is this what you asking about?


First, the value of money is determined historically by the pricing
decisions of capitalist firms themselves. At any moment a unit of
money expresses a certain amount of abstract social labor. If the
sale of commodities is very easy for firms, they will raise prices and
the value of money will decline. If the sale of commodities is
difficult, the value of money will decline less rapidly. Those factors
that influence the value of money must do so through changing the
conditions of realization of commodities on average.
Second, given the value of money, the monetary and credit
mechanisms face the problem of financing the flow of commodity
purchases and sales at that level of the value of money. In modern
capitalist economies this problem is solved primarily by the
expansion and contraction of credit. In the first instance this
expansion of credit is inherent in the private transactions of
capitalist firms, since they depend on private credit to finance most
transactions. Specific regulation of certain sectors of the credit
markets, like the reserve requirements imposed in the United States
on commercial banks, serve to determine the relative share of the
total credit transactions that pass through those sectors, and the
price the banks, for instance, can charge for their services in
facilitating credit.

http://cepa.newschool.edu/~foleyd/marxmon.pdf

[ComradeRed]

The way I currently understand it:
The ratio between the amount of money in circulation and the amount of goods available for purchase determines its transaction value. If fewer dollars are chasing the same amount of goods, then money (as a medium of exchange) increases in 'value' (fewer notes can purchase more 'product'). This is called deflation.

If the medium of exchange is plentiful in relation to the amount of goods available for purchase, its transaction value drops (inflation). This effect is distinct from the effect of supply and demand, because we are looking at the availability of money. The other type of supply and demand relates to the availability of goods and services. Well that's a neat, linear relationship.

But I have my doubts since the rate at which money would change its value would be instantaneous.

If we would have realistic nonlinear relations, then we would have unexpected inflation and deflation without reason.

On the other hand, perhaps we're approaching this the wrong way by assuming that money is a commodity? There are other approaches to monetary dynamics. (http://www.debunkingeconomics.com/Papers/Money/KeenDynamicsCircuitist.pdf)

[Lynx]

Well that's a neat, linear relationship.

But I have my doubts since the rate at which money would change its value would be instantaneous.That would require a certain level of infrastructure that is not yet in place, perhaps deliberately. The inflation indicator does not provide enough information, in real time, to individual participants, acting independently.

I have advocated a global, electronic payments system as one way to make money strictly a medium of exchange (non electronic forms of money would be abolished). A closed system.

[Lynx]

Consider the historical approach:
If you were born in 1909:
The average cost for the following was:
Car Price: $500.00
House Price: $4,500.00
Milk, 1 Gallon: $.33
Gas, 1 Gallon: $.06
Bread, 1 Loaf: $.05
Income, Yearly: $944.00

We can take these prices, adjust them for inflation and see what kind of 'bang for the buck' we are getting today.

[apathy maybe]

Money is worth something because people with guns says that it is.
Money is worth something because people generally think that it is less trouble to pretend that it is worth something, and hope that everyone else will continue to pretend that it is worth something, then it is to say it isn't worth anything and not be able to trade with those who think it is worth something. (And what a long a convoluted sentence that is.)

So, as soon as enough people start thinking and acting that a currency isn't worth anything, it quickly becomes worthless. (Often even the people with guns can't do anything about that.) An example is the German Mark during the depression.


On the second bit,
Also, this book seems to determine value by how much people want it...basically value is determined by the demand people have for it and money is basically an objective measuring device for that demand. How does the LTV account for this value...as well as the value placed upon money?
Well, you are reading a "bourgeois" book, one that is promoting the capitalist system, even if you (and even the author) realises it.
In a system such as we have now, "value" is determined by "demand". However, the Labour Theory of Value rests on a different set of assumptions, namely that value is determined by the amount of labour put into something. These two ideas are quite different, and thus directly comparing them could cause confusion.

(And vaguely off topic, but still "classical economics", I once asked why a friend inflation was apparently inevitable. The answer is simple, what is one thing that becomes less per capita as population increases? Land. Seeing as you can't make land, and seeing as there are more people wanting to have land, people are willing to pay for and, thus you get prices going up over time. Prices for everything else goes up to match.)

[ComradeRed]

That would require a certain level of infrastructure that is not yet in place, perhaps deliberately. The inflation indicator does not provide enough information, in real time, to individual participants, acting independently.

I have advocated a global, electronic payments system as one way to make money strictly a medium of exchange (non electronic forms of money would be abolished). A closed system. Uh, the economy is kind of a self-expanding closed system.

There is no outside "economy bath" which is being used to transfer commodities to capitalism.

It's all internally related (an "endogeneous system").


Consider the historical approach:
If you were born in 1909:
The average cost for the following was:
Car Price: $500.00
House Price: $4,500.00
Milk, 1 Gallon: $.33
Gas, 1 Gallon: $.06
Bread, 1 Loaf: $.05
Income, Yearly: $944.00

We can take these prices, adjust them for inflation and see what kind of 'bang for the buck' we are getting today. That was when money was the paper representation of a certain amount of bullion.

It was a commodity, or "equivalent" to a commodity at any rate.

Your approach wouldn't work very well to describe fiat monetary systems I'm afraid :(

I suspect you are more likely to say that money changes via what it's value was when it was changed from the gold standard to the fiat system and use inflation, etc., to figure out its current value.

But this is unsatisfactory to me.

There is too much missing in my opinion.

For example, what about the relations between the various money supplies and inflation? If we remove or add more money to circulation, would that really affect inflation?

I don't know and openly admit it.

I think it's fair to suggest that money is an emergent phenomena.

The paper I linked earlier seems to do well to describe it as such.


Money is worth something because people with guns says that it is. Uh...I don't think this is really a materialist analysis of the situation (or a scientific one for that matter, in my opinion).

How do you determine the value of a unit of money?


An example is the German Mark during the depression. Uh...no, not quite.

The German Mark became useless because Germany was still on the gold standard at the time, and they simply printed money to pay off the debts incurred on them from the treaty of Versailles.

They didn't have enough gold to back the value of the Mark. So the value of the Mark depreciated...


Well, you are reading a "bourgeois" book, one that is promoting the capitalist system, even if you (and even the author) realises it.
In a system such as we have now, "value" is determined by "demand". Excellent point...except that value is determined by "supply" and "demand"! :p

[Lynx]

Uh, the economy is kind of a self-expanding closed system.
There is no outside "economy bath" which is being used to transfer commodities to capitalism.I'm referring to the money supply as a closed system. Specifically, that all means of exchange are accounted for (nothing 'outside'); and that money cannot be created or destroyed.
I would describe the economy as a complex system.

It's all internally related (an "endogeneous system").If the money supply were closed, it was explained to me that two factors, namely population growth and increase in productivity - would result in deflation. Simply put, the means of exchange would s t r e t c h to accommodate the effect of fewer dollars chasing more commodities. Your 2008 dollar would tend towards the value (or purchasing power) of earlier dollars.

That was when money was the paper representation of a certain amount of bullion.
It was a commodity, or "equivalent" to a commodity at any rate.It was a representative means of exchange, accountable as far as gold reserves were accountable, but not immune to counterfeiting.


Your approach wouldn't work very well to describe fiat monetary systems I'm afraid

I suspect you are more likely to say that money changes via what it's value was when it was changed from the gold standard to the fiat system and use inflation, etc., to figure out its current value.I don't have statistics before me, I thought it might be interesting to revisit what happened, especially during the change from gold to fiat (to oil??)


But this is unsatisfactory to me.

There is too much missing in my opinion.You have prices and income from 1909. Compare with prices and income in 2007. Compare standard of living. Is there a relationship between price and standard of living? Is there a relationship between price and what people can afford?


For example, what about the relations between the various money supplies and inflation? If we remove or add more money to circulation, would that really affect inflation?

I don't know and openly admit it.If nobody knows how much money is circulating, then everyone is reduced to looking for 'signs' (or waiting for the next batch of economic indicators). Apart from inflation, one sign of excess liquidity is increased velocity of exchange. Business owners may detect this as increased sales. This is a sign that prices can be increased without affecting volume. And so the various feedback mechanisms begin.


The German Mark became useless because Germany was still on the gold standard at the time, and they simply printed money to pay off the debts incurred on them from the treaty of Versailles.

They didn't have enough gold to back the value of the Mark. So the value of the Mark depreciated...In that case, knowledge of gold reserves was a *****.
Skip forward to Zimbabwe - different knowledge, same tendency :(

Nowadays we have "generally accepted accounting practices" and other means of obfuscation.

[Lynx]

Money is worth something because people generally think that it is less trouble to pretend that it is worth something, and hope that everyone else will continue to pretend that it is worth something, then it is to say it isn't worth anything and not be able to trade with those who think it is worth something. (And what a long a convoluted sentence that is.)
There is a fuzzy logic that tells us how much something is worth, what is a bargain, what is a luxury, etc. We judge how hard we work for our money and how much money we have. Then we spend it, keeping those two factors in mind.

[ComradeRed]

I'm referring to the money supply as a closed system. Specifically, that all means of exchange are accounted for (nothing 'outside'); and that money cannot be created or destroyed. I am not certain I agree with this assessment either.

How would the money supply increase?

Start hypothetically with an economy with a finite amount of money. How would more money enter into circulation? :confused:

Money supply appears to be affected by loans, which means it is still a closed system but it can grow too...so it's not a conserved system.


I would describe the economy as a complex system. I would agree.


If the money supply were closed, it was explained to me that two factors, namely population growth and increase in productivity - would result in deflation. Simply put, the means of exchange would s t r e t c h to accommodate the effect of fewer dollars chasing more commodities. Your 2008 dollar would tend towards the value (or purchasing power) of earlier dollars. Those are two sources of deflation, but not the only sources.

What about loans? This would change the money supply in circulation, but leave the total amount of money in society "conserved".

Perhaps that is one way to look at it, perhaps the total amount of money "expands" too with the value per unit of money decreasing?

Loans need to be taken into account in your model is the short version.


I don't have statistics before me, I thought it might be interesting to revisit what happened, especially during the change from gold to fiat (to oil??) I don't have the statistics either, so I can't say anything definitively...but no one can without statistics :(

But I wouldn't go so far as to assert that any money system is on the "oil standard".

Money is independent of oil, so it's not really a good model :mellow:


You have prices and income from 1909. Compare with prices and income in 2007. Compare standard of living. Is there a relationship between price and standard of living? Is there a relationship between price and what people can afford? But you have two different standards, you'd be comparing apples and oranges...


If nobody knows how much money is circulating, then everyone is reduced to looking for 'signs' (or waiting for the next batch of economic indicators). But you can find out how much money is in circulation...even wikipedia recognizes the various forms of money supply:

* M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
* M1: M0 - those portions of M0 held as reserves or vault cash + the amount in demand accounts ("checking" or "current" accounts).
* M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
* M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.


Apart from inflation, one sign of excess liquidity is increased velocity of exchange. Business owners may detect this as increased sales. This is a sign that prices can be increased without affecting volume. And so the various feedback mechanisms begin. This is not necessarily so, empirically speaking. See England's monetary policies of Thatcher and what happened statistically for more details.

Monetarism has been, pretty much, "debunked"...who knew bourgeois economics would be wrong empirically?! :lol:

[Issaiah1332]

Well that's great but doesn't answer the question of how money's value is determined.

Yes, that is the role of money...which has been identified with nearly every economist for centuries.

But now that the capitalists are using a fiat system, how would one explain the value of money?

With your explanation...there is no explanation for it.

Most unsatisfactory :(

Yes...exactly. In a fiat system...where no physical commodity backs up and gives money its value, how can it be determined>? How does the LTV come into play?

Also, when it comes to token money, how can its worth be greater than its intrinsic value? How can its intrinsic value be determined as less than its worth...if money is the objective measurement of value...how can it measure itself? If that makes sense.

[Lynx]

I am not certain I agree with this assessment either.
How would the money supply increase?
Start hypothetically with an economy with a finite amount of money. How would more money enter into circulation? It wouldn't. With a fixed money supply, growth in the economy (population + productivity) leads to a scarcity of the means of exchange. Thus, prices must fall, resulting in deflation. I can link to the original thought experiment thread, where the explanation was offered, if that will help.

Money supply appears to be affected by loans, which means it is still a closed system but it can grow too...so it's not a conserved system.
~
Those are two sources of deflation, but not the only sources.
What about loans? This would change the money supply in circulation, but leave the total amount of money in society "conserved".I'm not sure I follow. Loans represent a conditional transfer of liquidity. Fractional reserve banking allows for credit expansion and that is the mechanism used by current monetary policy. It would be incompatible with our hypothetical closed system, if you accept the condition that money is not created or destroyed.
If loans were not spent, that might decrease liquidity, in either system...:confused:

I don't have the statistics either, so I can't say anything definitively...but no one can without statistics
But I wouldn't go so far as to assert that any money system is on the "oil standard".
Money is independent of oil, so it's not really a good model Well, why does the American dollar appear to be a 'benchmark' for many of the other fiat currencies? Is it because the Saudis only take payment in USD? Is it the overwhelming confidence in America's economy? Is it because too much of your assets are held in USD and you're afraid of dumping them?
Granted, the currency exchange market is yet another layer of complication and uncertainty.

But you can find out how much money is in circulation...even wikipedia recognizes the various forms of money supply:Current known status is information that can be used by those who know how. When you talked about removing or adding money, was that an official or surreptitious action?
The inflation rate in Zimbabwe is said to be running at 66 000 %. That too, is information.

This is not necessarily so, empirically speaking. See England's monetary policies of Thatcher and what happened statistically for more details.Okay, I shall.
Meanwhile, BB said something about hitting the snooze button...

[Lynx]

Yes...exactly. In a fiat system...where no physical commodity backs up and gives money its value, how can it be determined>? How does the LTV come into play?

Also, when it comes to token money, how can its worth be greater than its intrinsic value? How can its intrinsic value be determined as less than its worth...if money is the objective measurement of value...how can it measure itself? If that makes sense.
I wish someone could answer your questions definitively. Different currencies are denominated at different scales. Prices in Yen are 'higher' than prices in USD, yet value (utility value) is similar. Ideally, the smallest denominated unit would correspond to the cheapest item that could be exchanged.

[Luís Henrique]

Money needs to have a "price" - or, in fact, millions of prices, one to each other commodity. And prices are determined by supply and demand. But does money really need a value of itself? (When it had, it seems to have harmed its function, as people would melt coins if their metal valued more than expressed in their prices. Or, more infamously, people would use Reichsmark notes to make paper when inflation destroyed its usefulness as currency.)

In any way, the "price" of money is given by the formula:

P~MV/Q

in which P is the average price of all commodities (which is, the inverse of the average price of money), M is the amount of money in circulation, V is the speed in which money circulates, and Q is the amount of commodities produced within the economy as a whole.

Expanding M will either rise P, devaluating money, or Q, resulting in economic growth - V seems to be fairly unrespondant to changes in M.

Lu&#237;s Henrique

[Issaiah1332]

Money needs to have a "price" - or, in fact, millions of prices, one to each other commodity. And prices are determined by supply and demand. But does money really need a value of itself? (When it had, it seems to have harmed its function, as people would melt coins if their metal valued more than expressed in their prices. Or, more infamously, people would use Reichsmark notes to make paper when inflation destroyed its usefulness as currency.)

In any way, the "price" of money is given by the formula:

P~MV/Q

in which P is the average price of all commodities (which is, the inverse of the average price of money), M is the amount of money in circulation, V is the speed in which money circulates, and Q is the amount of commodities produced within the economy as a whole.

Expanding M will either rise P, devaluating money, or Q, resulting in economic growth - V seems to be fairly unrespondant to changes in M.

Luís Henrique

Thanks...that does seem to make sense.

It all just seemed paradoxical. Thanks to all who replied.

[ComradeRed]

Money needs to have a "price" - or, in fact, millions of prices, one to each other commodity. And prices are determined by supply and demand. But does money really need a value of itself? (When it had, it seems to have harmed its function, as people would melt coins if their metal valued more than expressed in their prices. Or, more infamously, people would use Reichsmark notes to make paper when inflation destroyed its usefulness as currency.)

In any way, the "price" of money is given by the formula:

P~MV/Q

in which P is the average price of all commodities (which is, the inverse of the average price of money), M is the amount of money in circulation, V is the speed in which money circulates, and Q is the amount of commodities produced within the economy as a whole.

Expanding M will either rise P, devaluating money, or Q, resulting in economic growth - V seems to be fairly unrespondant to changes in M.

Luís HenriqueAhem, this is vulgar economics. It's the monetarist's "quantity theory of money" which has been falsified by Thatcher's monetarist policies.

GDP grew, but inflation did not follow predictions made by the "quantity theory of money".

(It also goes without saying that GDP didn't grow as predicted either.)

It may make "intuitive sense", but it is not how money's value is determined.

Life's more complicated than this, unfortunately.

Otherwise there would be no crisis in capitalism.

It should also be noted that this assumes a static economy, which is again not really empirically supported by the...existence of time...

So we'll have to look at the alternatives that non-vulgar economists propose.

Or look at the data for ourselves and try to figure things out. Whichever one is better.

[Lynx]

I don't believe anyone is saying that Price is determined exclusively by the equation. The price of oil is driven by supply/demand issues independent of M and can affect inflation. There's also 'irrational exuberance' etc

[ComradeRed]

I don't believe anyone is saying that Price is determined exclusively by the equation. No one is.

GDP is not price, it's the "sum of the 'value' of all the output" of an economy in units of money.


The price of oil is driven by supply/demand issues independent of M and can affect inflation. First, I think you mean gas prices not oil prices.

Second, oil prices are not directly affecting inflation. It's because consumers have to shift around their budget that causes them to demand higher wages, which affects profits which causes more loans which...

Things are more nonlinear than you expect.

Third, "supply and demand" doesn't determine price...not even in the situations where it's assumed to do so!

That was demonstrated mathematically by an Italian economist Piero Sraffa.


There's also 'irrational exuberance' etc Which is independent of the price set by the producers...

[Lynx]

First, I think you mean gas prices not oil prices.
Oil, not gasoline.


Second, oil prices are not directly affecting inflation. It's because consumers have to shift around their budget that causes them to demand higher wages, which affects profits which causes more loans which...
...which affects inflation and the economy and politics and efficiency...


Things are more nonlinear than you expect.
The equation answers part of the OP's question. Nonlinear effects are the fault of humans.


Third, "supply and demand" doesn't determine price...not even in the situations where it's assumed to do so!

That was demonstrated mathematically by an Italian economist Piero Sraffa.
*added to read more about list*

Thatcher: cut taxes for the wealthy, increased taxes for the poor, made shift towards indirect taxation, confronted unions..... did any of this shake consumer confidence?

[Lynx]

It should be noted that oil prices have been deflationary for many years.

[ComradeRed]

It should be noted that oil prices have been deflationary for many years. It should be equally noted that there is no reliable way to measure inflation.

It's one of the open problems of econometrics; there are various approximations, but none are really satisfactory.

In economic analysis, there have been several "bounds" for inflation...but there is no real reliable way to measure inflation.

So this entire proposition is untestable.

I'd be highly suspicious of any proposition that any vulgar economist gives us.

[Die Neue Zeit]

You're tempting me to invoke Alan Greenspan's manipulative BS regarding the idiotic "chain-weighted" CPI.

[ComradeRed]

You're tempting me to invoke Alan Greenspan's manipulative BS regarding the idiotic "chain-weighted" CPI. Ah but you've recognized that Alan Greenspan's argument is BS!

It's very hard to measure economic indicators scientifically...or more precisely, it's hard to use economic indicators scientifically.

E.g. GDP doesn't adequately measure the total value of the aggregate output of an economy...there's inflation, change in value, change in output, etc. etc. etc.

If we -- like the vulgar economist -- assume a static economy, then there's no need to consider these issues.

But since we're scientific (or we try to be as scientific as possible), we can't make such assumptions.

[Die Neue Zeit]

^^^ Speaking of static, ready to have at it with uneven development (http://www.revleft.com/vb/stamocap-t59014/index4.html) and the reductionist nature of base-superstructure analysis (http://www.revleft.com/vb/internal-challenges-revolutionary-t70556/index.html)? :D



[Nice avatar, BTW ;) ]

[Lynx]

What you call vulgar economics, they may call refined economics. It's a process of learning as you go along. For each bump in the road, assumptions change and theories are revised.

[ComradeRed]

What you call vulgar economics, they may call refined economics. It's a process of learning as you go along. For each bump in the road, assumptions change and theories are revised. Actually, no.

The assumption of a static equilibrium economy, which should be a red flag to anyone in the social sciences, has largely been unquestioned in economics since it was first proposed by Alfred Marshall.

But Marshall worked along your line of reasoning that it would be heuristic and thrown away later.

The problem is that when you throw it away, the equations become nonlinear which means you can't solve them exactly. You can get a "set" of answers.

Furthermore, the entire notion of static equilibrium is used to justify capitalism. That's the raison d'etre of marginalism!

What's really interesting is that under the guise of "change", marginalism assumes (nay more it demands and requires) a static equilibrium.

Remember from thermodynamics, an equilibrium system shows no observable change.

Since we can observe change in the economy, we can reject marginalism.

Also of serious concern to me is that the use of "infinitesmals" in "contact geometry" as used by the vulgar economists is set to 0. That means that change doesn't happen.

It means the difference between two points in time is a linear relation, and there are no nonlinear processes in the economy.

Something which is observably wrong!

So just because it is "modern" does not mean it is better.

Hell, vulgar economists haven't even replied to critics from 80 years ago! :scared:

Worse, vulgar economics, in all its reformation glory, is observably wrong.

So we need to leave it in the waste bin of history...a place where it deserves to belong.

[Lynx]

Actually, no.

The assumption of a static equilibrium economy, which should be a red flag to anyone in the social sciences, has largely been unquestioned in economics since it was first proposed by Alfred Marshall.

But Marshall worked along your line of reasoning that it would be heuristic and thrown away later.

The problem is that when you throw it away, the equations become nonlinear which means you can't solve them exactly. You can get a "set" of answers.
Is the reason they haven't been thrown away contingent on plans to continue managing the economy?

[ComradeRed]

Is the reason they haven't been thrown away contingent on plans to continue managing the economy? Business men don't use economics.

This has been shown empirically in several papers.

What happened in one was they asked businessmen what they would do in certain situations. The authors classified the response as "Predicted by Marginalism" or "Not predicted by marginalism".

It turns out that it's an anomaly that any businessman would follow marginalist predictions.

See Eiteman & Guthrie (1952): The shape of the average cost curve, American Economic Review 42: 832-838; and Blinder, Alan; et al. (1998): Asking about prices: a new approach to understanding price stickiness, Russell Sage Foundation, New York.

SO the reason it has been kept has very little with "running the economy".

A more materialistic observation would be that these people are justifying capitalism in ever aspect.

A more cynical observation is that these people are incapable of doing math beyond basic derivatives.

It is actually something rather interesting that fields without observable experiments result in "Work on our paradigm or you don't get a job"-type of an environment.

Vulgar economics naturally has never really looked at the economy, and they don't have empirically based models.

They have models which are based off of circular reasoning, however, and that's supposed to be just as good?

(If you want a mathematically thorough proof of the circular reasoning of vulgar economists, see Piero Sraffa's Production of Commodities by means of Commodities.)

I'd suggest you take a look at Steve Keen's book Debunking Economics...he provides a thorough dissection of vulgar economics that demonstrates its absurdities at every turn.

[Lynx]

Business men don't use economics.
I had in mind people like Ben Bernanke and the cabal otherwise known as the federal reserve board and their advisers, but point taken. I would suggest however, that therein lies the justification for the current paradigm. The sorcerers are loathe to give up their cauldrons.

I appreciate your replies, you've opened my eyes. I have much to study and read further about :)

[Die Neue Zeit]

^^^ And that is why I'm a BUSINESS student and NOT an ECONOMICS student. :cool: The example of cost behaviour functions alone (committed/fixed costs (http://en.wikipedia.org/wiki/Fixed_costs) and flexible/variable costs (http://en.wikipedia.org/wiki/Variable_costs)), which implies economies of scale, demonstrates the absurdity of marginalism.

Pricing decisions and the neoclassical theory of the firm (http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6WMY-48YVVK2-1&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=d7ce1546e5c54f6ceea68f6bf7126bd1)


Many accountants seem to have accepted the existence of a ‘reality gap’ between management accounting’s conventional wisdom, based on the neoclassical economic theory of the firm and actual business practice. Whilst the former recommends the use of a decision relevant cost approach to pricing decisions, the latter is believed to be dominated by a full cost plus approach to pricing. In accepting the existence of a reality gap, accountants do not seem to have addressed the arguments of economists. These arguments seriously undermine the research findings of accountants that have given rise to the belief in such a gap.

On the other hand, the empirical evidence supporting neoclassical price theory is not strong and much of the research that generated it is methodologically flawed. This paper evaluates the research supporting the accountants’ and economists’ respective positions and argues that neither is strongly supported by the conflicting empirical evidence. It then identifies the issues that need to be resolved by future research intended to assess whether empirical evidence supports neoclassical price theory or (full) cost plus pricing.