Market clearing prices

[Lynx]

Market-clearing prices are prices which balance the supply of goods (previously decided upon when the plan is formulated) and the demand. By definition, these prices avoid manifest shortages and surpluses. The appearance of a shortage (excess demand) will result in a rise in price which will cause consumers to reduce their consumption of the good in question. The available supply will then go to those who are willing to pay the most. The appearance of a surplus will result in a fall in price, encouraging consumers to increase their demands for the item.

When a particular good is in short supply relative to consumer demand, an alternative to raising the price is rationing. This can be done formally (with ration books, as during wartime) or informally, simply by letting queues or waiting lists emerge, in which case the goods go to those who are willing to get in line early and wait. Our marketing algorithm relies upon setting prices at market-clearing levels in each period, and then using the gap between these prices and labour content as a signal for increasing or reducing production in the next period.

But are there cases in which rationing is a fairer way of dealing with a shortage? And on a related point, our algorithm presupposes that the equilibrium price of a good ought to equal its cost of production, as measured by its labour value. But are there cases where goods ought to be subsidised, i.e. where the product should be made available to consumers, even in the long run, at a price below its cost of production?
What would be the preferred policy in case of non-essential, durable goods? For example, suppose a particular model of electric bicycle is popular, leading to an anticipated shortage. Should the market clearing price be adjusted upwards, to slow demand? Should a backorder price equal to LTV be offered for those consumers willing to wait?

On a related point, what role should pre-orders play in a socialist economy? While it is convenient to be able to go to a store and buy consumer items on the spot, other non-essentials could be ordered online. For example, Amazon.ca offers a discount to encourage pre-ordering of future movie releases. Would the expanded use of pre-orders help with socialist planning and production?

[Hyacinth]

Regarding pre-orders, I think that is an interesting question. In the case of distribution of things like movies, books, etc. I think all of this can be done for free given the existence of the internet. There's no need to distribute these things non-digitally, so we can save ourselves resources with respect to that.

I'm not sure what the most sound policy would be regards to offering consumers who pre-order products the option to pay the LTV price, instead of an adjusted price, but with respect to pre-orders, I think that for goods that are not in expected to be in large enough demand it might be produent to produce them on the basis of pre-orders. For instance, the planners could release information about a product that they think only a segment of the public might want to consume, asking all of those who do to pre-order the product, and with this data garner information as to what the demand for it is, and whether or not the product (if it proves popular enough) should enter general production.

Planners shouldn't only try to respond to consumption, but should try and anticipate it: a socialist economy cannot only be reactive. Having consumers heavily involved in consultations when it comes to new product design would be one way to help anticipate consumer demand, as well it would make the process more democratic.

[ckaihatsu]

I agree with Hyacinth entirely here. This topic also speaks to many of the issues raised in the "Economic Calculation Problem" thread, also in the Economics forum.

The handy, shortcut answer to the question of valuation in a post-capitalist economy is to simply look at how *corporations* handle valuations *internally*, within their own departments. Much of it is more qualitative in the nature of its information, compared to relying strictly on balance sheets.

Corporations and industries give rise to their own sets of politics, and now, with the nationalization of major financial firms, we can definitively say that the financial elite functions as a nationalist bureaucratic elite.

Given mass participation in a wholly public-owned system of global industries we could easily see the expansion of Ebay- and Amazon-type portals all the way up the supply chain to register public discussions and decision-making at all levels of production and consumption.

Here's my own recent contribution to the subject -- it's a one-page diagram. Please feel free to have a look:


Supply prioritization in a socialist transitional economy

http://tinyurl.com/5mjhhh


Chris




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[Lynx]

Your chart includes Maslow's hierarchy of needs ranking.
I believe this consideration is expressed when alternatives to price are discussed:


Rationing is the best way of ensuring that scarce goods are fairly distributed if incomes are unequal, since it prevents the rich cornering the market. Take the case of food for example: formal rationing will ensure that everyone can get enough to survive. If there is ample food to go round but poverty prevents some people from being able to feed themselves adequately, then some kind of food subsidy is a rational policy, though it is not clear that holding the price below cost is the best way to proceed: the issue of food tokens to those most in need is probably more effective. If food subsidies in the form of reduced prices are attempted when food is scarce, the available supply will disappear from the shops and queues will form whenever new supplies come in. This is true irrespective of whether incomes are equal or unequal. The policy of the EC, which artificially raises the price of food to benefit private farmers, and of the USSR, which subsidised foods in scarce supply, are both unsound. (In both cases strong political pressure inhibits changes.)

Table 8.1: Market prices and rationing
Supply of good---- Income distribution ---- Best policy
scarce--------------------- unequal ---------------- rationing
plentiful-------------------- unequal ---------------- subsidies
scarce---------------------- equal ---------------- market prices
plentiful--------------------- equal ---------------- market prices

The basic point is that if incomes are equal, the distribution that would obtain at market prices is likely to be fair, and there is no justification for subsidies. We can envisage extraordinary cases where formal rationing might be desirable, in order to ensure access to necessities under conditions of severe but temporary disruption of supply. But in general we see the establishment of market-clearing prices as the best policy in a socialist commonwealth with a basically egalitarian income distribution.
Thoughts?
With profit out of the picture, alternative mechanisms become possible - its just a matter of considering them carefully and examining how well a particular problem is resolved.


Planners shouldn't only try to respond to consumption, but should try and anticipate it: a socialist economy cannot only be reactive. Having consumers heavily involved in consultations when it comes to new product design would be one way to help anticipate consumer demand, as well it would make the process more democratic.
'Pre-order production' would be more responsive to individual needs, while 'common goods production' would respond to consumers actuarial needs. The latter mode would normally be expected to be more predictive of consumption patterns.

I believe I like the idea of a socialist version of Amazon or eBay. It could also handle the trading of used goods and help with recycling.

p.s. goods are one piece of the pie, services are another.

[ckaihatsu]

Yeah...!

Services is just a scheduling issue with individuals / groups -- any Internet-based portal could handle that, logistically, as well as it could with goods....

[Die Neue Zeit]

Some recent material on "transitions" got me thinking on an intermediate "currency" between $$$ and the social-abolitionist labour credit. I don't really care much about what to call this "currency" - consumption credits or even socialist credits (since the term "socialism" has, I think, been irreparably associated with the maintenance of wage slavery, from the bourgeois "state socialism" known as "social democracy" to even the prevailing revolutionary interpretation of "socialism") - but this transitional "currency" system would be designed to abolish the formation of money-capital (non-circulation) but not wage slavery (since the "socially necessary labour-time" planning apparatus would still be set up during the transitional period).

Could this transitional "currency" system replace all forms of $$$ immediately after the social-proletocratic political revolution?

[Schrödinger's Cat]

There's no need to distribute these things non-digitally, so we can save ourselves resources with respect to that. Whoa. Whoa. Where is this being concluded from? A large segment of the population prefers "ol' fashion" over e-books, printers, and those strange portable readers.

Yes we can distribute these items to people who don't give a fig, but let's not cut short everyone else.

[Lynx]

Some recent material on "transitions" got me thinking on a intermediate "currency" between $$$ and the social-abolitionist labour credit. I don't really care much about what to call this "currency" - consumption credits or even socialist credits (since the term "socialism" has, I think, been irreparably associated with the maintenance of wage slavery, from the bourgeois "state socialism" known as "social democracy" to even the prevailing revolutionary interpretation of "socialism") - but this transitional "currency" system would be designed to abolish the formation of money-capital (non-circulation) but not wage slavery (since the "socially necessary labour-time" planning apparatus would still be set up during the transitional period).

Could this transitional "currency" system replace all forms of $$$ immediately after the social-proletocratic political revolution?
1. Money can be made electronic and personally identifiable (linked to the individual). This can replace 'anonymous cash' quite readily.
2. The ability of money to earn interest can be eliminated.
3. Other structural changes regarding currency could be implemented.


Whoa. Whoa. Where is this being concluded from? A large segment of the population prefers "ol' fashion" over e-books, printers, and those strange portable readers.

Yes we can distribute these items to people who don't give a fig, but let's not cut short everyone else.
Always better to have choices, although the prospect of high bandwidth as a pre-requisite is mighty tempting.

[ckaihatsu]

This is all begging the political question -- who controls the means of mass production?!

[Lynx]

This is all begging the political question -- who controls the means of mass production?!
See chapter 14

[Paul Cockshott]

What would be the preferred policy in case of non-essential, durable goods? For example, suppose a particular model of electric bicycle is popular, leading to an anticipated shortage. Should the market clearing price be adjusted upwards, to slow demand? Should a backorder price equal to LTV be offered for those consumers willing to wait?

On a related point, what role should pre-orders play in a socialist economy? While it is convenient to be able to go to a store and buy consumer items on the spot, other non-essentials could be ordered online. For example, Amazon.ca offers a discount to encourage pre-ordering of future movie releases. Would the expanded use of pre-orders help with socialist planning and production?
We originally emphasized the market clearing price mechanism. I still think it should be the fallback mechanism, but would now say that the first order mechanism should probably be a simple stock in hand adjustment process. The output of a good should be adjusted to keep a certain number of days stock at current sales levels in the warehouses. Suppose the target stock is 20 days sales. One would try to adjust output to keep this constant in the face of varying sales. Only if stocks fell below some lower limit - say 8 days stocks, would prices be raised.

I came to this conclusion in the mid 90s after attempting to do some simulations of a multi-industrial sector model with the simple market clearing price system and found
that it was difficult to keep the model stable. One saw wild fluctuations of prices which
led to the whole economy eventually collapsing. The aim of the simulation was
not to study socialist economies, but to study the law of value in capitalist economies,
but the conclusion I came to was that even in a capitalist economy price adjustment
probably plays a lower role in economic regulation than economic theorists suggest.
Instead I think that the 'quantity channel' which focuses on the flow of quantative orders
between regular customers and regular suppliers is probably more important. I
think that the whole Hayekian school have over estimated a the role of the price
as opposed to the quantity channel in economic regulation. This was one reason
why their attempt at shock therapy in the ex ussr was such a no no.

[Lynx]

Thank-you for your reply. You've improved my understanding of some of the underlying mechanisms of 'for-profit' and socialist economies.

[Lynx]

If it helps, the inventory method might be analogous to a swimming pool - varying the inflow of water (production) has little immediate effect on the outflow (consumption) - and vice versa. The pool acts like a capacitor, dampening and smoothing out the effect of abrupt changes.

[Paul Cockshott]

That is an exact analogy

[Lynx]

In that case, perhaps there is a relationship with hysteresis (http://en.wikipedia.org/wiki/Hysteresis).

[Paul Cockshott]

That is an interesting observation, I think you are right.