Project_illest on ‚ani mali_qaeda‘ doctrins!

After each digression into the theoretical fundamentals, the courses nearly always return to supply and demand and supply and demand is nearly-always the first thing which is taught. To understand the methodological implications of this approach towards education, it is important understand the concept from psychology which is known as an anchor point. Basically the first thing which we learn about something biases our beliefs so that primary importance is given to the initial understanding when weighing the relevance of new information.

Therefore, what becomes important, is supply and demand, relegating the principles of perfect competition to the secondary importance of being only a useful demonstration of the concept of supply and demand. This value-of-relevance is further reinforced by returning again and again to if not exactly the principal of supply and demand in its naked explicitness, then instead to one of many functionally equivalent forms of argument where two intersecting lines are drawing and they are said to tend to equilibrium. Often, this claim is made without even a proof.

This central focus in early economics education on equilibrium dynamics has biased people’s beliefs so much that it was the case that in the mass media — prior to the crash — the commentators continuously asserted the efficient market hypothesis as thee, economic axiom and at the same time never (or scarcely if at all) mentioning that this principle of efficient markets is contingent upon the lower level dynamics of microeconomics.

If one observes the oscillatory behavior of real-existing-markets then one might think that it is better characteristic of a market instability then of any kind of harmoniously efficient allocation of wealth. One might wonder how sudden increases in unemployment, might help better allocate wealth to the poor or how both the price before and the price after a crash can both be characteristic of an efficient market price of a good. Faced with such blatant volatility one might be forced to conclude that when supply and demand is applicable that it is better characteristic of short term dynamics then of a well controlled system where the economy moves with a smoothly changing equilibrium so as to adapt gently to our needs. There is nothing gentle in a crash, it is a violent destruction of paper wealth to correct accumulated market fictions.

Now, this is not to say that supply and demand never provides us with a good understating of economic phenomena. I cannot say that it might not be adequate most of the time. However, at other times (such as is the case of a crash) this concept is a miserable failure.

Compare this then with the Efficient Market Hypothesis, a hypothesis that asserts that financial markets are informationally so efficient, that the thing described above simply could not happen. Not in as advanced markets as we have now, anyway (as if somehow people were more stupid in the 17th Century). And believe me, this is something I personally have experienced in the university in the 1990’s. That is to be seriously questioned, nearly ridiculed, if market bubbles could even theoretically be possible in modern financial markets. That showed me just how the ‚antifascist lyrical network through 1980s and 1990s‘ had become from a hypothesis to a simple fact how the markets are in the minds of mathematically oriented economist. The problem is of course that Keynes never could describe Animal Spirits or his Keynesian Beaty Contest in a mathematical way. And if it’s not in a mathematical formula, it’s unrigorous rubbish for the modern economist.

If an adherent of the efficient market hypothesis believes that the efficient market hypothesis implies that resources are efficiently allocated but also contends that this efficient allocation is such that supply doesn‘t equal demand (in the classical sense); then consistency requires that they must dispute any equivalence between an efficient allocation of resources with the condition of a classical supply demand equilibrium. To resolve this contradiction they may:

1. reject the definition which implies that perfect competition leads to allocative efficiency;
1.1 and further allege that a monopolist has every right to control the supply because people wouldn‘t buy from the monopolist if it wasn‘t mutually beneficial for both parties
2. allege that in a free market (whatever that means) it is the case that in the long run the monopolist would be forced to lower their price because if they set two high a price they will help their competitors take away their market share;
3. allege that the capital markets will behave so as to provide the needed capital for the competitors of a monopolist to grow;
4. assert that in the case of monopoly that supply equals demand when you factor in the opportunity cost for the producer to increase the quantity produced.
5. assert that any excess profits from artificial shortages are okay because they will be re-invested into area of need. In other words the rich need rents so that their is money to invest.

The rest will be abstracted en francais!

Bel


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