A Price is Signal Wrapped Up in an Incentive

Here is the second rose video which goes deeper into the meaning and operation of the invisible hand. One warning, however, don’t watch this video while drinking!

All MRUniversity videos are free to use in the classroom. To that end, we have put together a short guide for teachers that suggests some ideas for using the rose videos in class and how one might continue to deepen the lessons.

Comments

So what is the price given to somebody who invents a world changing technology, like PCR DNA cloning by Kary Mullis, and gets nothing but the standard lump sum given to all inventors, regardless of how great their invention is? Mullis himself said he made more money as an expert witness in patent litigation than he ever got from his employer.

In other words, the important stuff in society is done for free, but trivial stuff is rewarded. A recipe for mediocrity, and rent seeking, exactly what we have today.

A trigger warning would have been nice...

A Price is Signal Wrapped Up in an Incentive
...
All MRUniversity videos are free to use in the classroom.

There are signals, I guess, and then there are signals...

Alex & Co, great video. In the last two videos you have killed it. Excellent work.

Prices are gosh-darn magic.

All MRUniversity videos are free to use in the classroom.

Spreading the Koch financed propaganda

Well if you can't make an actual logical objection, then an ad hominem argument is a popular fall back position. And it's popular on both the Left and the Right, so it's a bi-partisan fallacy!

I suppose that Hayek's Nobel prize was a product of the Koch juggernaut.

Yes, much like the slow down in spending on US healthcare which preceded Obamacare, Hayek's Nobel prize was awarded on the future expectancy of the Koch billionaires propaganda. ;)

Its not a Nobel Prize.

I had a chance to use these videos in class today. Superb.

While a tremendous public good, I think these kinds of videos are a great resource and complement to your textbook, making your book that much more adoptable for others. Either way, a small step toward a much better world...

https://wiki.kastnet.at/Here%E2%80%99s_A_Quick_Way_To_Solve_The_Imsomnia_Problem

Actually, the price system was invented, or rather re-invented, by accident, in a way that illustrates just how deep an intellectual insight it is. In the 1930s, when the Soviets were trying to do scientific central planning, Kantorovich invented linear programming (LP), a method of constrained optimization. Basically, LP is a mathematical way to maximize a utility function in the face of constraints on inputs, i.e. scarcity. The soviets, and later also large American and European firms, developed and employed it with great enthusiasm and some success. It wasn't until it was already being applied to large-scale central planning problems that Kantorovich and other mathematicians realized that the algorithm could be reformulated in terms of prices (called "shadow prices") and profit-seeking. This deep mathematical fact caused the soviet mathematicians some embarrassment, and for the sake of their own lives, they worked to bury/downplay it for some time.

I don’t think we should really wait for any signal instead we must do our work with full certainty and that’s what I do with OctaFX, it is a company that is wildly popular for their amazing system and latest offerings while their conditions are also top class with charging low spread of just 0.2 pips, high leverage up to 1.500 and also has a customer service to die for as it is available even on weekends so it’s simply fantastic.

Its a nice fairy story but re-run it with the Kenyan farmers switching production not from coffee to roses but from staple crops to roses. The local town who depend on the farmer for affordable food now have to find alternatives. If no-one can make an acceptable profit delivering food for the price the local farmer could and if the townsfolk can't afford to pay higher food prices then the net result is malnutrition. While I agree that free market prices are generally a good way of allocating resource surely everyone can also see that a completely free market won't always produce a beneficial result. Unless of course you think that feeding people who have little spending power is an inefficient use of food and the world would be a better place if the land were used instead to grow roses for wealthy but unimaginative US lotharios. Perhaps there's something faulty with your definition of efficiency? Regardless asking the poorest people in the world to outbid the wealthiest people in the world for the right to grow food on their own land is cruel and insane.

So, you dare raise the issue of distribution again. I tried that, but to little avail. Economists would rather hide behind the 2nd theorem of welfare economics (a Candide philosophy if ever there was one) than face the fact that there are distributional consequences of markets and these cannot be wished away by appealing to infeasible and unrealistic "lump sum taxes." The reality is that some rich people get roses while many people remain malnourished. This, too, is part of the miracle market system.

Let me be clear. I am not advocating against the value of markets. Indeed, I am quite willing to defend unfettered markets, even in the face of unequal (and potentially, "unfair") distributions of the gains from trade. The alternatives - interfering with trade in order to achieve distributional goals - usually ends up worse for everyone. What I object to is that economists make this decision and then decide it is unimportant for students to understand all sides of the argument. A principles of economics course should open students minds and present them with an array of options and permit them to make up their own mind. Instead, it seems that many are willing to decide for the students that markets are best so there is no need for students to really appreciate the tradeoffs that market allocations involve - nor is it important for students to believe there are any alternatives or that there may be cases where intervention (yes, interference if you insist) may be preferable.

This is what I find dissatisfying about these otherwise excellent videos. They are part education and part indoctrination. And, I believe the latter is not necessary. In fact, for a principles course I think the latter is inappropriate.

Distribution is important but actually my point was that price does not signpost the most efficient use of resources it simply signals the most profitable use. Which will always be in service of the needs and wants of those with most money. That this is also efficient is not proven.

Consider house prices. If and when the Chinese gov't decide to float the Yuan and allow free capital transfers you can expect a great deal of middle class Chinese to buy property across the rest of the world including in America. If the locals can't compete on price then the higher (international) price will be a signal to seek alternatives to living in a house you own. Perhaps you'll rent or live in tents or caves or your car. And when US farmland (now Chinese owned) can be more profitably put to use farming rhino horn or some such then you might have to pay a lot more for imported food. For this kind of thing to happen American consumers and producers need do nothing wrong they simply need to lose their status as the worlds richest economy. This will put them on the wrong end of many price signals which will steer capital and resources to serve the needs of richer people elsewhere. Profit might still be made housing and feeding Americans but if MORE profit can be made providing holiday homes and rhino horn for wealthy Chinese then America will not be housed or fed. At least not until Chinese demand for US property is satiated. And then maybe Indian demand and Indonesian demand and Malaysian demand. Its hypothetical of course but how does it square with any sensible definition of "efficient"? Try not eating for a few days before you answer that question.

I'm afraid you are misusing the term "efficiency." For the most part, your examples are, in fact, perfectly efficient. That is what efficiency is about - guiding decisions according to willingness to pay and costs to provide. The fact that willingness to pay depends on ability to pay is simply out of the equation - especially if you believe lump sum taxes can always be used to rectify an undesirable distribution.

Not eating for a few days will not change these facts - though it may create indigestion when thinking about economic efficiency. The uncomfortable fact is that economic efficiency cannot stand on its own - it contains moral judgements. Only (some) economists are willing to fool themselves into believing that efficiency is objective science devoid of such judgements. And, of course, the clients of these economists that are willing to pay handsomely for advice based on such efficiency analysis.

(I again want to emphasize that I am not rejecting the importance of economic efficiency - it remains, in many cases, the best measure of good policy especially when compared with the alternatives. However, I do reject the notion that presents it as devoid of moral judgement - and it is exactly that notion that underlies the supposed "superiority" of economists over other social sciences - the subject of a number of other MR posts)

http://test650.com/profile/chsfv

http://rocket-raccoon.com/

Comments for this post are closed