CDB said:
...According to neoclassical school mathematical models yes. In the real world prices tend towards an equillibrium or 'rational' price and get very, very close but never get there. Rational pricing also cannot account for loss leaders and other such phenomena, because prices in the real world, outside the models of mathematicians, reflect subjective evaluations that can't be quantified in a model and solved. Quantities are never perfectly cleared nor is the full stock of inventory of a particular good always on sale. The free market merely gets closer than any other system to perfect efficiency which is, in the end, a fantasy of mathematicians....
Your point is?
Pricing for loss leaders? WTF? I don't give a sh1t about putting a tooth paste on sale in the hope of drawing more customer into the store. That is marketing technique. It has nothing to do with asset pricing. You can't do loss leader pricing with the stock of IBM. You will be arbitraged to bankruptcy.
There is no difference between the two prices as there is no such thing as inherent 'rational' or 'correct' value to any good or service. Value is always subjective and prices are always subjective. What you're saying is you simply disagree with people's judgements about value, which is standard for mainstream economists who try to make the positive normative, and to be blunt that's the natural result of using mathematical models whose one real claim to fame is basically that they perfectly 'predict' the past. If people start valuing a certain commodity more for either its immediate use or as an investment product with an expectation of a future return is irrelevant, their subjective evaluations of that commodity relative to other ones at price x or x+100 or x+1000 or any other variant in price is equally valid and 'rational.' That they may be wrong in their judgement is irrelevant as well, the prices ex ante and ex post the aquisition of information that leads to a different price are equally valid and 'rational.' To assume otherwise is once more to assume perfect information which you yourself admit is impossible.
Let me illustrate the concept using an example. The value of commercial building is a function of rent, current and future occupancy rate, and future growth of the economy base of the locale. There are other factors. But lets keep things simple. All these parameters are estimates. There is a range of estimates. Hence there is a range of value for the property. And this is the rational price range or value range. If you pay more than this, then, chances of low return is extremely high. The more you pay, the higher your chance of financial disappointment. It is entirely possible that the value of property will be less than the mortgage, and the cashflow is not enough to service the mortgage. It is foreclosure time. lol
When real estate speculation heats up, people will bid up property prices, beyond its true economic value.
If you don't know the rational prices, then you are doomed. Financial ruin is very relevant. :lol: If you have no ability to assess the rational value or rational prices of an asset, then your goose is cooked. Get out of the business and go do something else for a living.
If it is impossible then information must always be imperfect and therefore no 'rational' price of the type you describe is ever possible. There is no such thing as "true economic value," and any such claim of value is merely substituting the subjective evaluations of one person for another's. One person may have access to information that leads to them making a better decision based on their value scale and current market conditions, but that's impossible to know ex ante unless perfect information is also available to compare it to, which it isn't, and the judgement of valuation is not made in a vacuum therefore it can't be looked at as such. One person's judgement based on the same information will be different than another's because of their differring values.
Perfect. You have stumbled upon something that I have discovered long ago. "...that's impossible to know ex ante ...." There lies the fault line in academic thinking. This is where academics fail.
In the real world, there are skills that you acquire so as to enable you to maximize your chances of success. The academics fail to recognize this point. They consider that success is only known after the fact and there is no way you can predict that ex ante.
Let me illustrate this with an example, using topics that I have experience and direct knowledge in.
It is widely accepted in the academic world that professional money managers fail to outperform the stock market index. What happen is, they look at the professional money managers as a group. And as a group, they sure have underperformed the S&P 500. So far so good. Based on this, they theorize that, the rational approach, would be to invest in an index fund that mirrors the S&P500. Logical and sound, so it seems.
Uhfortunately, that is not how it really is in the real world. Now, if you follow their advice and invest in an index fund, you would most likely to outperform the professional managers as a group. Sound good?
Well, not quite. You see, the key is NOT to look at professional managers as a group, but rather, to identify those with exceptional skills who OUTPERFORM their peers and thus outperform the index.
But the academics not only fail to recognize this, they simply refuse to accept the reality that superior professional managers exist.
What you have just done in your post, is to echo what the academics have been doing all along. You assume, in the same way the academics have been assuming, that there is not such thing as skills and knowledge that can be learnt that enable one to succeed in assessing the rational value/price of an economic asset.
Well, that is not the way it is in the real world.
You can't lump the superior participants with the inferior participants together and declare that they don't have the ability to assess ex ante the economic viability of an asset.
The key is to separate the superior ones from the inferior ones and to find out what make the superior ones superior and to seek if you can duplicate the same success.
It can be done and it has been done. The relevant question to each of us is, Can we do it?
And that is the point at which the schedule tends toward flexibility. The point is any additional inflexibility in the schedule that allows for such a dramatic price rise the result of two things. One, the government previously forcing the natural market price down to make oil and fuel cheap for their own short term gains. A structure of production will develop around that commodity price that will become unsustainable once the price hikes which it always will in time. In that sense the government making cheap oil available is no different than making cheap money available. Or two, the government restricting entry into the industry and/or enacting regulations which make fuel alternatives less available. If there were only two types of bread for sale and the government artificially entrenched that market situation bread would be more expensive too.
As far as the crude price rise is concerned, I am very tempted to call this Bullsh1t. LOL
There are no such statistics. Not because such changes haven't occurred but because it's impossible to know or quantify how much a change in demand here or a restriction in supply there will affect prices in a free market, much less one as managed as the petroleum industry. Point is these effects do not materialize from corporate greed or any other such thing or prices would have always been high. Therefore the price differences in oil and gas are the result of market forces, however screwed up they may be, and based on the behavior of all other commodities, no matter how critical they are, it is obvious that the biggest force in dramatically increasing prices is the government. All prices, unless dictated by the government, are free market prices in that sense in that they are the result of normal market forces. That the government works to change and pervert the conditions of the market by restricting supply, market entry or exit, artificially creating demand through direct or floating price controls affecting quantities, etc., is what leads to problems.
Nice to know. But totally useless info.
Yes, and that's a natural market process. Pricing within an inflexible range of demand means inefficient use of resources. All prices tend upward whenever consumers are not responsive to price changes until they become responsive. That's what all corporations do with the prices of all their products and services unless they expect some gain, such as loss leaders, through lower prices. Pricing is and always was a discovery process, no one knows what something 'should' sell for a priori. And no one is whining about other prices set in the exact same way.
And what the hell does this has any thing to do with anything?
You may indeed but that's besides the point. Taking on that risk is a vital market function, and no matter how one speculates the underlying idea is that temporally reallocating supply will lead to greater profits and efficiency and tends to smooth price fluctuations, not exacerbate them. Speculation raising prices now and gradually over time is better than a shortage spiking them instantly at some point in the future. It has nothing to do with prvateering, it has to do with different risk tolerances that end up serving a vital market function.
It is clear that, when you talk about speculation, what you are really talking about is just the hedging side of the futures market.
Hedging lower price volatility. When people with underlying goods to buy and to sell, and they go to the futures market to hedge their future position, the result it the smoothing out price volatility and more efficient allocation of resources.
Speculators are just taking bets. They have nothing to hedge against. (Technically they can hedge against their positions, but that is too complicated to explain and will just muddy the water. The kind of hedge only relates to trading position and has nothing to do with real production of goods. ) The only redeeming value of speculators is they provide liquidity in the market. If they are contrarian speculators, they may lower or dampen the volatility. If they are trend followers, then they just add to volatility and exaggerate it. Since it is financial suicide to buck the trend, most speculators are trend followers. The majority of successful speculators are certainly trend followers and they own their success to riding major price trend. So, there is no doubt whatsoever that while speculation does not create trend, speculation definitely exaggerate the volatility of the trend.
Speculation is modern day's equivalent to privateering, with similar risk and return profile, except that there is no bloodshed. Not many people can comprehend the concept. I don't expect people who are not in the business to understand it. This is not said to be condescending. It is the cold harsh reality.
But in practice it never works.
