Economics Questions

Re: Mixing barter with dollars.

rtr — Sun, 02 Dec 2007 05:44:58 GMT

Well, you're obviously talking to me if you are going to put "observed exchange" within quotes. And all EXCELLENT questions btw.

Calvin:
If you're one of the ten people and these "trades" occurred when you went shopping for groceries, do you focus on your reason why you're there ?

Somebody has the chance to focus on you when you are there. And that is information. Why are you there and not somewhere else besides there? Are you saying there was somewhere better you could have been at that moment in time but you still didn't end up there? How did that happen then?

Calvin:
Or do you pay attention to how much is coming out of your wallet for this "observed exchange"?

Well that depends on how much attention I pay to how much is coming into my possession for this "observed exchange".

Calvin:
You like exchanging labels to suit your framework of thinking and you go to great lengths to explain yourself with a lot of words without saying much. You really don't know why realized prices fluctuate? Or you don't like where the answer will take you.

So you are saying there is an answer? But you won't say what the answer is?

Re: Mixing barter with dollars.

Calvin — Sun, 02 Dec 2007 04:26:11 GMT

If you're one of the ten people and these "trades" occurred when you went shopping for groceries, do you focus on your reason why you're there ? Or do you pay attention to how much is coming out of your wallet for this "observed exchange"?

You like exchanging labels to suit your framework of thinking and you go to great lengths to explain yourself with a lot of words without saying much. You really don't know why realized prices fluctuate? Or you don't like where the answer will take you.

Re: Mixing barter with dollars.

rtr — Sat, 01 Dec 2007 15:32:43 GMT

Calvin:
If 10 trades occurred today between ten people "trading" dollars for beans and the trades produced different outcomes, can we call these outcomes "realized" prices?
And if so, to what could we attribute the diffrences in realized prices?

I don't know. Why wouldn't you just stick to calling it something more simply accurate such as "observed exchanges"? Remember "price" is just a crude arbitrary ratio measurement of one thing in terms of another thing (which itself is not exempt from changing subjective valuations independent of its supply). It sounds like you're getting into Hayek territory, and the evolution of information, or maybe what I would call "swarm intelligence". Information is not even and perfect, and nor could it ever even theoretically be perfect due to subjective valuation not being constant through time. Do you know what you want to have for dinner ten days from now? There are lots of people preparing now for your possible choices. But every trade event is information that SIGNALS bring more or bring less of this and that. But first you have to distinguish the times at which the ten different event trades occur. Subjective valuations are constantly changing. This means value, wealth, is constantly being created and lost, even when no exchanges are occurring, such as houses sitting on the market unsold for many months, or this movie you are watching becoming boring.

Possiblities for differences in "realized prices" could be attributed to lack of competitive information. The MORE and LESS aspects of trade events are not limited to unique amounts but can consist of wide overlapping ranges which are still profitable for both traders. See auctions and the final exchange terms. Traders of dollars (called "consumers") also could be said to use a kind of auction for "selling" their dollars to traders of goods (called "businesses") as traders of goods bid for dollars in terms of goods. Now if traders are aware or concentrating on the analysis of a wide overlapping range of mutual profitability (or are unsure if whether and where profitability consists in that range), that may be signaling WAIT, more information needed. Waiting for the new information to be signaled is subjectively more valuable for some individuals at some times than acting on and trading with currently regarded murky information. Everybody does this in comparing trade possibilities. But entrepreneurs subjectively value the greater profit payoff given the risks of acting sooner with less information more than waiting for information signals to have been broadcast in past tense. Every trade, every action, is new observed information. "Price" is just a subjective measure of information showing where positive value has been created for specific acting individuals.

Another possibility is the goods which are "thought" to be traded are actually different than what is first surmised (see the Big Box retailer you've had prior poor customer service from, you aren't just subjectively valuing their product Y but also simultaneously subjectively valuing their past service). If you were to go on a floor of a trading exchange you would quickly find that favoritism and politics are definite factors in trading decisions obscuring what the actual goods exchanged really are. This is very common. Actual goods aren't anywhere in actuality as cleanly delineated as they are in a supply and demand conception. Supply is far more often just varying degrees of "similar" rather than exact marginal units.

So yesterday I get one of those mass email forwardings talking about oil being sold from the Venezuelan Hugo Chavez gas stations selling gas $0.03/gallon cheaper than it's street corner competitors in Florida, and still customers were avoiding the Citgo stations and profiting more by paying more $/gallon purchasing gas from Citgo competitors. The email alleges Citgo is in the process of changing their name to "Petro Express". That's interesting free trade market information in action (even true or untrue), showing that the commonly regarded "price" isn't the actual price being signaled by those gasoline-dollars traders. So it's probably less accurate to call those transactions "realized prices" and more accurate to call those transactions "observed exchange signals". The difference is the supply is not exact marginal units but "similar" degrees of marginal supply, and the subjective valuation demand is distinctly subjectively evaluated within the trade action. But there is no trade whatsoever that does not change the present tense supply and demand and therefore its market "price". This is why observed trades are past tense signals of wealth creation rather than present tense "prices". Every exchange is a new price, even if the outcomes appear similarly exact to recent or older prices. Picturing a stock quote "ticker" is more accurate than picturing intersecting supply and demand lines. Nobody is supplying for the sake of supplying and nobody is demanding for the sake of demanding. So economics education should begin and proceed from the conception of *trade*, and not begin and proceed from the conception of supply and demand. People are trading because that which is received is valued more than that which is given away in exchange. All action is undertaken with the purpose to go to a state of lesser dissatisfaction from a state of greater dissatisfaction, MORE and LESS, again. Focusing on 'S'upply, 'D'emand, and 'P'rice is missing the *reason* trade is occurring.

And that's simply why the Austrian Business Cycle Theory is an egregious false error, because nobody would exchange for even massively inflating fiat dollars unless at the time of the transaction they were increasing their subjective wealth by so doing. There's no such thing as "malinvestment" from blaming one changing arbitrary good called "fiat money" precisely because there is no such thing as an individual "mal-exchange" trade. There are just signals that things are valued more and less than they were in the past by different persons. And entrepreneurs in response adjust their actions accordingly, i.e. they too change their subjective valuations, and vice versa. This is the "unevenly rotating flux" Mises was talking about. Why would massively inflated fiat currency "crash" the stock market or "crash" the economy? That's synthetically the same question as why would you trade your goods and services, trade your shares of stock, trade your houses, for even LESS of an amount of massively decreasing subjectively valued fiat currency? No, what actually happens, is the wealth creation which eminates from trades dries up, as people WAIT for the information of relative scarcity and relative subjective valuation to process through the economy while those more entrepreneurially exposed scramble. Throw in (poverty causing) protectionist barriers against free trade and you get a Great Depression. And trading for, holding, "investing" in dollars can be just as entrepreneurial a risk as trading for, holding, "investing" in "businesses", houses, hard assets, etc. There's absolutely no difference trading for and trading away any good A or any good B which exists in the set of ALL, not just "fiat money". And entrepreneurs always have to deal with risk of desperate significant changing signals of all goods (and services). And of couse in such times the subjective value of Good = "Credit Promises" may become far less stable than the subjective value of Good = Food.

Re: Mixing barter with dollars.

leonidia — Sat, 01 Dec 2007 04:28:55 GMT

Calvin:
If 10 trades occurred today between ten people "trading" dollars for beans and the trades produced different outcomes, can we call these outcomes "realized" prices?
And if so, to what could we attribute the diffrences in realized prices?

There are two possible causes for differences in price. Either 1) changes in supply or demand occurring over time, or, 2) if the trades occur contemporaneously, ignorance by some buyers and sellers of the price paid by other buyers and sellers. To the extent that such differences exist, however, arbitrage will tend to eliminate them and drive the market to a single price. Small markets will tend to experience these kinds of differences more than large markets.

Re: Mixing barter with dollars.

Calvin — Sat, 01 Dec 2007 02:47:22 GMT

RTR I'm trying to understand what you're saying. I think I follow you in that everyone comes to a market as an individual acting person.

If 10 trades occurred today between ten people "trading" dollars for beans and the trades produced different outcomes, can we call these outcomes "realized" prices?

And if so, to what could we attribute the diffrences in realized prices?

Re: Mixing barter with dollars.

rtr — Sat, 01 Dec 2007 01:43:05 GMT

Anonymous Coward:
I think you're confusing the individual's personal perception of their wealth increasing with a higher value of the exchanged goods as a direct result of the trade.

An individual's personal perception of their wealth (their actual real subjective value) increasing IS a higher value of the exchanged goods BECAUSE of the trade. Trade only occurs because that which is received is subjectively valued more than that which is given away in exchange.

Your bread/beans example just shows what I said: Every trade CHANGES the price. That's simply because circular instantaneous "reverse trades" are an absurdity for every specific acting trading individual.

Anonymous Coward:
The first trade has 1 bread = 3 cans and the second trade 1 bread = 2.5 cans -- everyone perceives their overall personal wealth has increased yet the value of the bread in relationship to beans has actually decreased through the trade.

That's the fundamental pre-marginal value theory fallacy. You are comparing ALL of the bread with ALL of the beans. All of the water may be more valuable than all of the diamonds while a diamond may be more valuable than a glass of water. Those are different trades. You might see 100 shares of company XYZ offered for $100 while 10,000 shares of XYZ are offered for $10,500. Overall wealth would increase from either trade even though the per share price varies from $1 to $1.05. And similarly if you sell 10,000 shares you may happily accept $9,500, or $0.95 per share. You won't do the trade unless you are better off wealthier from doing the trade.

Re: Mixing barter with dollars.

leonidia — Sat, 01 Dec 2007 00:19:19 GMT

tgibson11:
You are correct, but my assumption was that the demand for holding dollars remains constant. I do not see how the introduction of a parallel medium of exchange would necessarily decrease the demand for dollars. It seems to me that the value of dollars would decrease only if they become less acceptable as a means of payment. For example, say the new parallel currency is inferior to the existing currency. Why would this decrease the value of the superior currency? If you disagree, can you please explain?

I tried to post a response earlier, but for some reason it didn't go through. Basically, I don't disagree with you. My assumption was that in a newly created free-market, and given the long-term tendency for only one medium of exchange to prevail, the demand for a commodity currency would increase and that of the fiat currency would diminish. But of course, throughout history, parallel currencies have co-existed, and their purchasing powers are determined by their respective supply and demand.

Re: Mixing barter with dollars.

rtr — Fri, 30 Nov 2007 23:35:00 GMT

Sorry for the long reply, but, oh well.

leonidia:
The market price is determined by the intersection of supply and demand.

There is no PRICE without action TRADE. There’s no difference whatsoever between an offer to trade House Y for $700,000 and an offer to trade House Y for $500,000 if there are no takers at either offer. Hence, there is no $700,000 price nor a $500,000 price for House Y even if there’s a for sale sign advertising an offer to future tense trade at those terms. That is not a real “price”. Price is *observed* action. There's absolutely no new thing which is created from an "intersection", from an exchange of goods, or from an exchange of a good for "money". Net value is increased from all trades, but the same goods which exist before the trade exist after the trade. Let A equal all that is exchanged from Person 1. Let B equal all that is exchanged from Person 2. Price is EITHER the ratio of A in terms of B, OR price is the ratio of B in terms of A. There are therefore TWO prices for every exchange. That’s because all “real money”, and even all “fiat money”, is itself subjectively valued, in and of itself, both as means and ends. And all other goods not "money" are also in themselves subjectively valued, both as means and ends.

Now Let A = “Money”. “Price” is the ratio of B in terms of A. Now let B = “Money”. “Price” is the ratio of A in terms of B. There is only very limited insight from such a ratio “measurement”. A and B wholly exist both before the trade and after the trade. So what’s the “so what”? But the value of BOTH A and B is greater FOR BOTH A and B after the trade. There’s no “price” for either A or B when they are just sitting there in someone’s possession with no intention or possibility of exchange, but they are still both independently subjectively valued. There’s only a price for A and B when A and B are ACTUALLY traded. Price only exists in present tense exchange. That’s why valuations can sometimes drastically differ from what is expected in less liquid goods.

leonidia:
It is the buyers and sellers at the margin that determine where this intersection occurs and what this market price will be.

What "intersection" are you talking about? Things are merely exchanged from one subjectively valuing person to another subjectively valuing person. The two differing goods aren’t actually “intersecting”; the possession of the two differing goods is merely switched. But the KEY insight is that positive VALUE is created from exchange for both parties.

leonidia:
The buyer at the margin values the good he's buying ex ante slightly more than the good he's selling. Likewise for the person on the other side of the trade.

Correct. But the goods being "bought" and "sold" DIFFER for each acting PERSON. It is much more accurate to stick to the strictly defined term "trade". Use of the words "bought" and "sold" are entirely superfluous; that they are used so frequently is because of the confusing mess of the conception of monetary theory. To arbitrarily call one side of the trade the "bought" side and to arbitrarily call the other side of the trade the "sold" side leads to errors at even at some most basic fundamental levels of the field of economics. You don’t colloquially hear stores say they are “buying” dollars when they are “selling” goods, though that is technically correct. Likewise, you also don’t colloquially hear consumers say they are “selling” dollars when they are “buying” goods, though that is also technically correct. The side of an exchange called “the supply” and the side of an exchange called “the demand” is also just as arbitrary as the monikers “bought” and “sold”.

Trading results in immediate profit for both sides to the exchange. Not to mention "SLIGHTLY" is vastly more ill-defined than the mathematically precise definitions of MORE and LESS. "Slightly" MORE is definitively just MORE. "Slightly" LESS is definitively just LESS. And that's the point, MARGINALLY reductively EQUATES to simply MORE, OR, MARGINALLY EQUATES to simply LESS.

leonidia:
Supramarginal buyers will value the same unit of the good ex ante more highly than the marginal buyer, but they will still pay the same price as the marginal buyer. Submarginal buyers will be excluded.

What the? What is a "SUPRA-marginal" buyer and a “SUB-marginal” buyer? In actuality, there are only TRADERS, individuals that engage in the action of trade. The action of trade can only occur in the present tense.

But your overly complicated conception of “supra-“ and “sub-“ marginal buyers paying the same price can be shown to be false by Menger’s conception of marginal value. By definition two different buyers of different marginal pieces of the same good are acquiring different marginal pieces of the same supply. Buyer 1 may be purchasing the 100^th marginal piece of a supply and Buyer 2 may be purchasing the 101^st marginal piece of a supply. For you to maintain the “price” is the same you must maintain the marginal value of the 100^th marginal piece EQUALS the marginal value of the 101^st marginal piece. Now there *MAY* be some cases where that is true for a certain marginal range (the function would still be "monotonic"), but it is never universally true for the entire supply. That is a direct violation of MARGINAL value. Each additional marginal unit must be worth less than the previous marginal unit for the theory of diminishing marginal utility to hold true. That’s why goods in a free market are said to be employed in their most productive marginal capacity (including consumption)

Trade can be thought of to sometimes consist of a big chunk of supply for a big chunk of "money", divided evenly between a number of "consumers" on the other side of the exchange. It is extremely common to see long lines of people exchanging the same amount of dollars D for product Y at stores. But that does not reflect precisely the amount by which each buyer is marginally benefitting from the exchange. Some may feel they are getting a better deal for the same “price” than others; they would still be willing to exchange more dollars for product Y than others would be willing to. These people are epistemologically profiting more than those others, even though they are trading the same amount of dollars for product Y. That means there is arbitrage opportunity between those who value less and those who value more. But each trade at the highest marginal paying amount is reducing the market "price" which will be paid at the next highest marginal paying amount for that good. Just like when HDTVs first were traded, the manufacturers may have receieved greater marginal profit per unit then a year or two later, even though a year or two later they are still profiting trading away HDTVs at a lower "price".

leonidia:
The buyer might value the good ex post higher or lower than he valued it ex ante, but this has no direct bearing on the market price.

There’s no “MIGHT” about ex post higher valuation. It’s definitively established. It's the only reason trade occurs in the first place; there would be absolutely no reason for trade to occur otherwise. Of course that has a DIRECT BEARING on the market price precisely because both Person 1 who trades away Good A to Person 2 for Good B, and Person 2 who trades away Good B to Person 1 for Good A, will not simultaneously make that “REVERSE TRADE”. Goods A and B will never again exchange in that exact ratio at that specific moment in time precisely because the subjective valuations of both Person 1 and Person 2 are MORE with the goods distribution post trade than pre trade. So what’s the “price” then if trade will never again present tense occur at the ratio A/B or B/A between all people who have already traded for their subjectively higher valued A or B? The price is NOT an A/B or B/A ratio post trade, especially if Person 1 plus Person 2 equals the entire market. The price is GREATER than the A/B or B/A ratio (both sides of the exchange would need more of the other good), as I demonstrated differently earlier. Person 1 at time post-trade will only trade away Good B for a higher amount of Good A than occurred at time pre-trade, and vice versa for Person 2.

leonidia:
It is the marginal buyer's and seller's subjective valuations of the good ex ante that determine its market price.

Except there is not just one singular good, there are ALWAYS multiple plural goods in every exchange. OF WHICH GOOD do you refer? One good is subjectively valued MORE and the other good is subjectively valued LESS, depending upon the person. Exchange is only occurring because subjective valuations differ for the same goods. No matter what the good, and by “good” that means any specific marginal piece of a total supply, in the set of ALL you choose, in every instance of trade “the market” will be both subjectively valuing that good MORE AND LESS in relation to some other good. There’s no precise quantitative equals amount “price”, as “more” and “less” are not definitively bound. We don’t know the exact amount of profit each side garners from a trade; we just know that it’s more than what they traded away for.

Re: Mixing barter with dollars.

leonidia — Fri, 30 Nov 2007 20:58:42 GMT

tgibson11:
You are correct, but my assumption was that the demand for holding dollars remains constant. I do not see how the introduction of a parallel medium of exchange would necessarily decrease the demand for dollars. It seems to me that the value of dollars would decrease only if they become less acceptable as a means of payment. For example, say the new parallel currency is inferior to the existing currency. Why would this decrease the value of the superior currency? If you disagree, can you please explain?

I'm not really disagreeing with you. I was making the assumption that in a newly created free market, a commodity currency would almost certainly be more acceptable in the long run than an existing fiat currency, and given the long-term tendency for there to be established one currency instead of many, the demand for the fiat currency would fall. But in a free-market economy in general, there's nothing to prevent parallel currencies existing side-by-side, and the relative purchasing powers of such currencies are determined of course by their supply and demand.

Re: Mixing barter with dollars.

Anonymous Coward — Fri, 30 Nov 2007 19:03:09 GMT

rtr:
And I just DEMONSTRATED that absolutely every exchange whatsoever CHANGES the price of one good in terms of another by definition of something being valued MORE post trade and being valued LESS pre trade, no matter what goods whatsoever are involved.

I think you're confusing the individual's personal perception of their wealth increasing with a higher value of the exchanged goods as a direct result of the trade.

To use the bread/beans example, a person might happily trade three cans of greenbeans for a loaf of bread but only be willing to part with five cans for two loaves. The seller of the bread might also happily agree with this as they value five cans more than two loaves of bread but won't part with one loaf for two cans.

The first trade has 1 bread = 3 cans and the second trade 1 bread = 2.5 cans -- everyone perceives their overall personal wealth has increased yet the value of the bread in relationship to beans has actually decreased through the trade.

Hmm, does this mean I can call myself 'sir' or do I need a royal decree for that?

Re: Mixing barter with dollars.

tgibson11 — Fri, 30 Nov 2007 18:44:20 GMT

leonidia:
tgibson11:
The value of green beans may increase somewhat, since they now have the additional use of being exchangeable for bread, but the price of bread in dollars would not be affected.
Let's assume that green beans acted like real money and were widely used as money. There would be an increase in demand for green beans as money, and its price in terms of everything else would increase. Bread would become less expensive in terms of green beans. Simultaneously, the demand for dollars would become less. People are now using green beans as currency instead of dollars, so the price of bread in terms of dollars would rise.

You are correct, but my assumption was that the demand for holding dollars remains constant. I do not see how the introduction of a parallel medium of exchange would necessarily decrease the demand for dollars. It seems to me that the value of dollars would decrease only if they become less acceptable as a means of payment. For example, say the new parallel currency is inferior to the existing currency. Why would this decrease the value of the superior currency? If you disagree, can you please explain?

Granted, in reality there would be reason for an introduction of a parallel currency, and it almost certainly would result in (or accelerate) the decline in the value of the existing currency. That's the point I tried to make in my subsequent paragraphs.

Re: Mixing barter with dollars.

Inquisitor — Fri, 30 Nov 2007 18:41:24 GMT

Rtr is a troll that sometimes 'graces' Mises.org with his semi-informed, idiotic posts (claiming to have improved on Mises or some such crap usually.) I would recommend ignoring him.

Re: Mixing barter with dollars.

jdburdette — Fri, 30 Nov 2007 18:24:57 GMT

leonidia:
There would be a reduction in demand for fiat currency, so bread would increase in price in terms of dollars.

So, am I correct in thinking that an increase in the money supply (by acceptance of "other" means of payment) devalues the previous means of payment? For instance, the fact that I can exchange CDs as well as dollars means that the price of goods in dollars will rise?

Re: Mixing barter with dollars.

leonidia — Fri, 30 Nov 2007 10:10:47 GMT

rtr:
Yes. And I just DEMONSTRATED that absolutely every exchange whatsoever CHANGES the price of one good in terms of another by definition of something being valued MORE post trade and being valued LESS pre trade, no matter what goods whatsoever are involved.

The market price is determined by the intersection of supply and demand. It is the buyers and sellers at the margin that determine where this intersection occurs and what this market price will be. The buyer at the margin values the good he's buying ex ante slightly more than the good he's selling. Likewise for the person on the other side of the trade. Supramarginal buyers will value the same unit of the good ex ante more highly than the marginal buyer, but they will still pay the same price as the marginal buyer. Submarginal buyers will be excluded. The buyer might value the good ex post higher or lower than he valued it ex ante, but this has no direct bearing on the market price. It is the marginal buyer's and seller's subjective valuations of the good ex ante that determine its market price.

rtr:
Net value of all goods exchanged is GREATER post trade than it is pre trade. That can only be if price has changed. The set of ALL includes the good which you claim is measuring "price". This is FAR MORE INSIGHTFUL, NOBEL PRIZE QUALITY INSIGHTFUL

Well, I think that pretty much demonstrates your credibility.

rtr:
And I get elevated to the level of a Sir Isaac Newton in the field of economics for discovering that. Just like that ... the entire scientific economics field is reconceptualized from almost scratch over the last 150 years since Menger.

Need I say more.

Re: Mixing barter with dollars.

rtr — Fri, 30 Nov 2007 08:04:54 GMT

leonidia:
What we're talking about here is the market price of one good in terms of another.

Yes. And I just DEMONSTRATED that absolutely every exchange whatsoever CHANGES the price of one good in terms of another by definition of something being valued MORE post trade and being valued LESS pre trade, no matter what goods whatsoever are involved. Are new individual actions, are new individuals trades, excluded from your conception of "market price"? Net value of all goods exchanged is GREATER post trade than it is pre trade. That can only be if price has changed. The set of ALL includes the good which you claim is measuring "price". This is FAR MORE INSIGHTFUL, NOBEL PRIZE QUALITY INSIGHTFUL (except for the yearly manufactured dispensing of Nobel Prizes which devalues my comprative contributions), than "describing" X amount of good R exchanged for good Y, which is what the conception of "monetary theory" has fooled you into thinking is insightful. That's just a silly arbitrary ratio. And it's an extremely dangerous detrimental ratio conception which fools people into ignoring that subjective value for "money" itself is not constant. Changing prices ARE changing subjective valuations. All TRADE means subjective valuations have changed! Therefore prices have by definition changed! That which is receieved is valued MORE than that which is given away in exchange; that which is recieved is NOT valued EQUALLY to that which is given away in exchange. That's the FALSE equation ERROR the conception of "monetary theory" inflicted into the field of economics. And I get elevated to the level of a Sir Isaac Newton in the field of economics for discovering that. Just like that ... the entire scientific economics field is reconceptualized from almost scratch over the last 150 years since Menger.

leonidia:
Most of your argument is not germane.

Please demonstrate what you mean.

leonidia:
As Austrians, I think we all know about subjective value.

Actually, you don't, as I just demonstrated with TRADE. Once things of subjective value are traded, mathematically precise OBJECTIVE demarcated measurements of MORE and LESS are created at the specific moment in time when the trade occurs.