[ExI] Psychology of markets explanations

[Dan]

--- On Sun, 5/31/09, BillK <pharos at gmail.com> wrote:
> 2009/5/31 painlord2k wrote
> <snip>
>> The psychology or the conditions at hand could change
>> the scheduling of the
>> wills of the agents involved, sure. Psychology could
>> help explain the
>> behaviour of the agents, but do not invalidate the law
>> of supply-demand.
>> Different psychologies or conditions could change the
>> shape of the curve as
>> they change the demand and the supply. But the law is
>> always the same.
>>
>> "If the supply grow (all other equal) the price will
>> not raise; if the
>> demand grow (all other equal) the price will not
>> fall."
> 
> But in the real world 'all other is *never* equal'.

As someone pointed out, this applies to all laws -- including those of physics.  You'll never get two experimental conditions, e.g., to be exactly the same.  (The usual tack is to reduce the variability down enough so that the relevant factors overwhelm all others, but this is a matter of judgment and one can think of two theorists coming to completely different conclusions from the same experiment -- as has happened often enough.)

> So the theoretical perfect law is of little practical use.

No so.  This is not a perfect law in the sense that it doesn't apply.  Instead, it applies to all such phenomena.  To wit, armed with this law (and other economic laws) one can look at the data and attempt to interpret it correctly.  This is especially important in cases where it appears that the law is being violated: it directs you to look for confounding factors.  (Of course, at the limit, it should call you to question the law; economic science has progressed by steadily weeding out "bad" economic laws -- I mean laws are either are completely false or only apply to a limited range of economic phenomena.)

For instance, if one sees an increase in supply and price going up, then there has to be an increase in demand and one can start, as an empirical researcher rather than armchair thinker, to look for where that demand has gone up and why.  (Prices, per se, are really price surrogates*: they tell us something but not really the Why of something.  For example, a rise in the price of oil could mean supply has decreased or is expected to decrease, but it could also mean demand has increased or is expected to increase -- or some combination of the two.  The price increase doesn't tell us which -- much less tell us why, e.g., the supply has gone down (war? an oil spill? peak oil?) or the demand up (summer driving season? booming economy?).)

Regards,

Dan

*  See Hayek's "The Use of Knowledge in Society" at:

http://www.econlib.org/library/Essays/hykKnw1.html

and Esteban Thomsen's _Prices and Knowledge_.  Thomsen especially emphasizes that all real world prices are disequilibrium prices -- so they never perfectly transmit even in their information surrogate role.  This is not a critique of free markets per se as an interference in the price mechanism can't improve it -- because interfering agents possess no better means of improving the price system.  Any intervention can only makes things worse -- from the perspective of perfecting the price mechanism or the market process.