I think a lot of confusion arises from the notion that something other then people mihgt be the cause of price fluctuation. It’s easy to forget that when talking about “supply and demand” or “average price” or “cost of production” to be determinants of price.
People act. They set the prices. They might take a lot of things into acount, but those things are not linear causes of his acts.
No, only the price consumers are willing to pay on the final good determines to what point an entrepeneur would be willing to pay on inputs (labor, steel, factory, tires, etc.) to create the output. The prices of factors of production are imputed backwards from how consumers are willing to pay on the final product. See Rothbard’s example on cigars which I quoted.
The problem I have with the Rothbard quote you gave is that he appears to be equivocating on the word ‘value’.
If we take valuation to be a subjective and unquantifiable process, i.e. the ordinal arrangement of preferences, then it is indeed true that valuation determines which goods are produced and in which proportions. But ‘value’ is not the same as ‘price’, which is objective and quantifiable.
So when Rothbard says “The cigar machines, which had been rendered valueless, now recoup their great loss in value”, all he is saying is that they are once again in demand to produce a wanted good - nothing about the price is inferred.
But this is not a contradiction to the thesis that costs of production are ultimately determined [other things being equal], by the consumer. Of course the supply of steel is a factor. The Austrian thesis is that, aside from supply, the other factor is consumer demand for consumer goods. And this is emphasized in contrast to the other position, that says the opposite, that costs of production are magically determined by who knows what. And of course they too knew that increased supply will lower the price of steel.
I absolutely agree that the two ideas are not mutually exclusive, however, I fail to see the connection between relative preferences between different commodities and the objective price. I just do not see the logical connection.
The subjective theory of value says that things have differenet values to different people.
Correct
If a merchant sets a price on what he is selling, he puts the price that he thinks is the best.
I agree
It is how much that thing is valuable to him. He might consider what others would pay, or what his production cost was, but it is still him who decides what the price will be.
In the first instance, yes this is true.
At the same time, the same thing might have lower value to other people - they will not buy it willingly. Some people, on the other hand, might think it is a bargain and will buy
Yep
So while there are enough of the people from the secon group to keep the merchant happy, he will probably not change his prices.
Until a competing producer comes along and makes the same product cheaper. At this point this first producer has to set the price at what the market dictates. His own ‘preferences’ for what he would like to sell the commodity for, must now be aligned with the ‘invisible hand’, if they aren’t he will soon go bust.
I absolutely agree that the two ideas are not mutually exclusive, however, I fail to see the connection between relative preferences between different commodities and the objective price. I just do not see the logical connection.
There is no such thing as objective price. There is perhaps average price sellers set if a product in a market. Because of sellers’ goals to avoid loosing money, they will change acording to the law of suplly and demand. The prices don’t behave according to the law, the sellers do.
You take for granted(just assume) that there is a demand. Why is there a demand? Where did the demand come from? Demand from whom?
What if no one wanted the drug? Would it matter how many units you produced or how much competition there was if no one wanted the drug? Under those conditions what do you think would happen to the price to influence demand?
You’re still missing it.
This is possibly true. I can’t rule it out.
Lemme put it another way…What is “demand” but a representation of market valuation? Individuals each have a level of demand for various things, and the prices are simply a result of the relative demand for those things…relative to the supply.
True (although I think a firmer definition of ‘valuation’ might be needed to check if we are on the same page)
Prices are a metric by which the preferences of all individuals participating in the economy (i.e. “the market”) are communicated.
This doen’t logically follow from the previous statement. It is an assertion which you have not yet proven to me.
In other words, prices are a mechanism that allows the coordination of all available resources to be utilized in the most efficient and effective ways…based on the preferences of all the individuals in the market.
OK, this is the claim.
Put more simply, as long as you are able to turn a profit, it is a signal to you and the rest of the economy that you are utilizing resources in a favored way. (And that you should continue to do that, and in fact others should do what you’re doing). If you become no longer profitable, it is a signal to you (and everyone else) that you are not utilizing the economy’s resources in a preferred way. You are destroying wealth (meaning, you are combining capital in a way that the finished product is actually less preferred by the market overall than what was consumed/occupied to create it.)
This is an extention of the same claim
So instead of thinking “prices of finished goods are determined by the prices of what goes into making them”, scale back and ask “well…what determines the prices of those inputs?” And the answer is of course, the same thing that determines the prices of anything: supply and demand.
I agree
So look at it this way: Suppose gold were fetching a high price. That would mean there is a decent enough demand for it, and a limited enough supply.
True
But what is the nature of the demand? What exactly do the people want the gold for? In what form do they prefer that resource to be placed? Do people want the physical gold itself? Or do they want it to be made into watches? Or do they want rings? Or does everyone just want authentic astronaut helmets with the gold lining in the visor?
I would suspect it’s the helmets, but I’m not very entrepreneurial so in reality I don’t know.
Whatever the answer is, it will be shown in the prices for all of those items…because the prices (including the price of gold) are determined by consumer preferences. In other words, the question that prices answer is: "of all the things every single resource in the economy could be used for…what is most preferred?
And the claim is made again
And how does that rank in terms of everything else?
I don’t see how the ordinal scales of an individual persons preferences can be applied on aggregate to the whole economy.
The helmet fetches a high price not because everyone wants a helmet…but because the helmet consumed and occupied a bunch of resources that could have gone to other things a lot of people do want.
I agree with this I think
But suppose no one (not even NASA) wanted a helmet like the one you made. It may have cost you $10,000 (worth of plastic, gold, machine time, labor, etc.) to make it…but if you can only sell it for $5,000 it means you have sustained a loss…why?
Because a bad judgment was made regarding what people wanted at the price I was trying to sell at. So, valuations on behalf of my customers certainly set an upper limit to what price I can charge, but not neccesarily the average price that will be charged. This would be set by competition between producers.
there is a limited amount of resources, and there is virtually a limitless amount of wants (meaning there is an infinite amount of things every single resource could be used for, and by every single person on the planet.)
true
So what prices do is allow a communication of all the preferences of everyone so that all the resources can be coordinated in a way that maximizes value.
There’s that claim again
There is no way any person or group of people could know the most efficient way to use the limited resources available to best provide for all the subjective wants of so many individuals.
I agree
This is why the Soviets waited 4 hours a day in lines just to get bread…because when you purport to set prices, what you are really saying is “Not only do I know exactly what people want, I know exactly how badly they want it in relation to everything else they want, as well as exactly the resources that are available and exactly the productive capacity we have to satisfy all those wants.”
OK, the cogs in my brain are beginning to turn slightly. Here is what I think you might be trying to say;
The amount of people that value a product to be worthy of purchase will determine the amount of demanders. Supply and demand, intermediated by price, will equilebrate production on the amount of goods produced. So it isn’t so much that valuation sets prices, its that changing prices (due to supply and demand interaction) enable the amount of output to be scaled to the correct size for satisfaction of wants on the scales demanded. Am I making sense?
There is perhaps average price sellers set if a product in a market. Because of sellers’ goals to avoid loosing money, they will change acording to the law of suplly and demand. The prices don’t behave according to the law, the sellers do.
This is what I meant by objective price. Sorry to be ambiguous
You take for granted(just assume) that there is a demand. Why is there a demand? Where did the demand come from? Demand from whom?
What if no one wanted the drug? Would it matter how many units you produced or how much competition there was if no one wanted the drug? Under those conditions what do you think would happen to the price to influence demand?
I already have stated that I agree a product will only sell if it is desired by consumers. This does not imply that those same desires set what the specific price of a good will be. Who on earth would claim that an unwanted commodity was worth anything? The issue here is about the price level.
You’re more or less getting it there. But that last statement is a bit misleading…those two parts aren’t mutually exclusive. Depending on what you mean by “valuation sets prices” they are both true…because it is supply and demand that sets prices…but the preferences of the individuals in the market (i.e. market valuations) are acted upon and (therefore) made known every second of every day…through the prices that are set by the supply and demand of all available resources in the economy.
You mentioned not seeing how individual preferences could be “applied on aggregate” to the whole economy…but that’s the whole point…there is no “economy”…there are only people. What is an “economy” but the various collections of resources and human actors? Individuals are what makes up the economy. It is the wants, needs, and actions of every individual in the market that make up everything about the economy. Prices are the result of every one of those individuals expressing their wants and needs in the open market (through transactions). No single person could know what every other person wants or needs. All they know is what they personally want or need, and what they are willing to give up to get it. And by transacting with others in a free market, all available resources are utilized in their most efficient, effective fashion based on what every individual who makes up the market has shown he or she wants and needs…through his open market transactions (and the prices that manifest as a result).
So what is it that makes you doubt the at least somewhat a priori assessment that the price mechanism is a communication about the subjective wants of the individuals in the market?
If I have a widget that gets bid up to a $1 million price, (based on the supply available and the relative demand shown through what people are offering to pay me for it), how is that not a communication about market preferences? The individuals offering making me the offers are showing that they value my widget more than all that money (i.e. everything else they could buy with it at that point in time)…they prefer my widget to whatever they are going to give up to get it. Every time you complete a transaction (or even refuse one) you are communicating your personal preferences. Now realize that every single actor in the market is doing that all the time. Prices are the result of all that communication.
(And again, this is why things get so messed up when government interferes and starts setting price controls or printing money out of thin air or setting up barriers that obstruct production or transaction…it sends false signals throughout the market. Think about the billions of transactions that take place every day. That’s a very intricate, delicate network of communication. When you print up a Trillion dollars and flush it out into that economy, that throws a serious wrench in the whole order of everything. This is what ABCT is all about.)
(Thomas Sowell talks about prices and central planning)
Again, the concept of what all the individuals (who make up the market) want, how badly they want it in relation to everything else they want, and what resources are available to provide it has been written on extensively, especially within the Austrian School. Mises called it the “economic calculation problem” and Hayek expanded on his work in the writings I listed for you earlier.
“Obviously a commodity won’t sell if it isn’t wanted, but that is just stating the obvious. What insight does this statement provide?”
A few insights that follow from the subjective theory of value:
There is no “real price” or “objective price” for something. The price is whatever two people agree on in an individual transaction.
When there is a nuclear explosion, and those who hold iodine pills want 100 times the usual price for it, they are not “price gouging”. Charging more is not immoral even in that case, [and indeed has many benefits].
The govt should never set wage and price controls. Since they impose restrictions on what the price would be otherwise, they do the economy harm.
Workers are not exploited, as Marx claimed, when they get paid in such a way that their employer makes a profit. Like every other commodity, the correct price of their labor is what they agree to take.
Minimum wage laws should never be imposed. They forbid people getting paid what they are worth [if they would agree to work for less than minimum wage], which will do great harm.
Reccessions are not caused by lack of aggregate demand. See the Rothbard book linked in an earlier post.
Gold is more expensive than bread, and movie stars get paid more than great teachers. This can only be epxlained by subjective theory of value.
Workers in China are not paid less because they are slaves.
If the recession makes it impossible to make a living wage, the fault is not with the free market.
No one has a right to healthcare, or a living wage.
Employers should be allowed to hire whomever they please, stores to refuse entry and service to whomever they please, landlords to rent to whomever they please, even if they have evil motives such as racism or sexism or agism or whateverism.
I saw but your going in circles and you never bothered to answer my question.
Let me ask the same question again but use your hypothetical drug company example.
Lets say the drugs are packaged and sold in 50 dollar bottles. Currently demand has dwindled. Does this mean conclusively that consumers are not interested in the drug? Not necessarily it would be a non-sequitur to assume so. All we can conclude is that consumers value their $50 more then the drugs at this point. Or in other words people are not willing to spend $50 on a bottle of the drug. If on the other hand the drugs were sold at $5 dollars a bottle than consumer demand may skyrocket.
As a result demand is not a black and white scenario, it is neither on nor off. It is never the case where there is demand, or not demand at all. It is not binary. There are degree’s of demand and those degrees are decided by the opportunity costs as considered by individual persons and their preferences.
If the drug companies cannot sell their bottle of drugs at $50 a bottle they will be forced to lower the price. An entrepreneur always guess’s at how much he thinks he can vend his good for(He is anticipating consumer preference, that is the very roll of an entrepreneur). He knows how much it costs to make and he knows how much to sell each unit to break even. What he doesn’t know is how much the consumer will pay for his good. Only the consumer can know how much the good is worth to him. Objects are only worth as much as people are willing to pay, ever heard that before? That price is weighed against other opportunities for the consumer. The consumer decides for himself if the satisfaction rendered justifies the price or if that money can be used elsewhere to get satisfaction. If the entrepreneur cannot attract the consumer at a certain price he must lower it. Consumers alone are the judge as to whether or not the price given is acceptable. The costs that go into producing the good are irrelevent to the consumer.
If an entrepreneur finds that consumers are only willing to buy the drugs at $20 a bottle but it costs him $30 a bottle to produce then all that we can conclude is that his product is considered a waste of resources by most consumers. Consumers conclude that the costs that go into producing the good outweigh the benefits.
You have to remember that these decisions occur on an individual basis. It may be that some consumers are willing to pay $50 a bottle, while others are not. Some are willing to pay $700 for an IPAD2 where others are only willing to spend $300 on an Android Galaxy. So these degrees change based on the individual preferences of each person. Markets and sub-markets are born all with a goal of appeasing a certain consumer. Some goods are priced high with the specific goal of being expensive to attract a haughty crowd. It is all done at the appeal of consumer preference.
Indeed it does. If the price is set wrong individual preferences may find other ways to spend their dollar. The consumer’s preference shapes and influences the direction of prices. If the majority of consumers do not wish to pay $50 a bottle for the drug, well then the drug companies will be forced to lower their price. Otherwise they will forever sit on an inventory making them no money.
The image below explains the process.
I was perhaps too vague in my statement. I was hoping you would have answered the questions I asked you. It’s not that there isn’t a demand, its that there is no demand for the price given. It all comes down to a price. Who would be willing to buy a ford taurus for 200 grand? Perhaps no one but who would be willing to buy it for 200 bucks? Lots of folk. People decide for themselves if the costs that go into acquiring that good are worth it or not. If not the price must fall.
Consumers are ultimately the end arbiter for prices. If you deny this you deny the foundational tenant of profit and loss.
Everything I stated here is WHY I asked the following questions which you ignored. You should consider answering these questions as they hold the answer to your own.
To add to Dave’s point. Prices are historical data. There is no wrong or right price. The right price for one person that would render a succesfull sale might be the wrong price for someone else. Prices are just simply historical data of succesfull exchanges recorded in time. Entrepreneur’s can use this historical data to forcast a price that is most likely to vend a good into the future. But there is no “objective” price(I don’t even understand what you mean by it). There is no static exchange ratio for goods and services.
There is no correct or incorrect price for corn. The rightness or wrongnes of it is only useful in so far as it becomes a factor in individual exchange. In other words there exists A price for corn that may attract certain indivudals into exchange while THAT same price might deter others. For each succesfull exchange the price used wil be recorded as historical data. The task of the entrepreneur is to find a rate that will maximize the opportunity for exchange. If he wants to vend his good it’s up to the scrutanity of the individual consumers to decide whether or not the rate given seemed appropriate to them.
Also I see no use in considering an “average” price as far as this conversation is concerned. The concept is useless as far as understanding markets are concerned.
I think you are also having a problem with how subjective valuations from many individuals becomes an objective price. I would recommend reading Bob Murphy’s book Lessons For The Young Economist:
Indeed, when the words price and value are used interchangably it does lead to some confusion. But if you substitute in the word price, the logic is still exactly the same. If people stopped wanting cigars, the price of the cigar machine would drop to 0 (or at least just to the price of the melted down steel). It is not the price of the cigar machine which determines how much cigars are.
The lower limit is generally more sensitive to demand for cash than to avoid a loss, in my opinion.
Who would object to the statement "people buy things because they want/need them"?
Lots of people; because it’s easy enough to rationalize the cognitive dissonance by setting up a ‘secret’ preference set in contrast to the manifested one. It’s nonsense, but that never stopped anyone from believing it.
OK, I apologise for making this post short. I often find in threads like this, that once more than a certain number of people get involved it becomes difficult to answer everyones reponses, thread fatigue sets in and I often abandon the conversation.
I don’t want to abandon another thread, and for that reason I will make one point which I believe sums up the position of mine that seems to be the root of out disagreements. If anyone specifically needs me to respond to their previous questions then let me know and I will attempt to do so, but hopefully this post will make things clearer (either in where I am misunderstanding yourselves, or where you are misunderstanding me)
What I believe to be the issue of conflict is this; I maintain that price determines the amount of demanders - at any given price there will be a certain amount of people demanding that good (nothing controversial so far). But it appears to me that Austrians are saying that the amount of demanders determines the price. This is absurd. It’s like saying that because the score of a football game determines who the winner is, we can find out the score of a game simply at looking at who won.
market prices are formed by bargaining between marginal pairs of buyers and sellers. It seems that you are disputing the insight that subjective value for economic goods motivates activity in the market and is the most fundamental force… Production processes come to carry costs only because other entrepreneurs would bid away your capital goods to fulfill what they expect are their customers needs, and so to overcome this competition of theirs for the capital goods (if you will!) you must bid more than they would. The cost prices (capital goods prices) are emergent due to subjective valuations of buyers and sellers. Both blades of supply and demand as you conceive them are formed by the more fundamental phenomena of subjective value…
Here you set up a thought experiment with an exogenous variable (price) and allow the endogenous variable (demand) to vary as you adjust the former.
but you could have easily set up the exactli inverse experiment…
Perhaps it would help to think of prices as dynamic, changing things. There is the first price a seller sets - he determines it arbitrarily. If there is much demand (more than production), the product will soon become scarce and expensive. So, you see, because of great demand the prices rose.
Now because there was a great demand, other sellers will enter the market and sell the product cheaper and cheaper.