Re: Classical Economists Reject Theory Of Supply And Demand (was Re: Is information the fourth factor of production? Was - Re: what's wrong with eastern germans?)

royls_at_telus.net
Date: 08/24/04 

Date: Tue, 24 Aug 2004 21:07:50 GMT

On Tue, 24 Aug 2004 16:04:26 -0400, Robert Vienneau
<rvien@see.sig.com> wrote:

>In article <412a5862.10966969@news.telus.net>, royls@telus.net wrote:
>
>> On Mon, 23 Aug 2004 01:47:28 -0400, Robert Vienneau
>> <rvien@see.sig.com> wrote:
>>
>> >In article <41297a67.5956204@news.telus.net>, royls@telus.net wrote:
>> >
>> >> On Sun, 22 Aug 2004 09:30:36 -0400, Robert Vienneau
>> >> <rvien@see.sig.com> wrote:
>> >>
>> >> >In article <4123b3f9.14234752@news.telus.net>, royls@telus.net wrote:
>
>> >> >> >I can see why some might have read this trinitarian theory
>> >> >> >into Adam Smith. But the Classical economists had another
>> >> >> >theory of value and distribution. They - for example, Ricardo -
>> >> >> >thought of the value of (gross) output as being that of the
>> >> >> >sum of capital goods used up in production and value added
>> >> >> >by labor.
>
>> >> >> ?? But where are supply and demand, here??
>
>> >> > "It is...not, as has been often said, the proportion between
>> >> > supply and demand...which must ultimately regulate the
>> >> > price of commodities...:
>
>> >> It is not clear how "the proportion between supply and demand" relates
>> >> to the meeting of supply and demand curves.
>
>> >> >the proportion between supply and
>> >> > demand may, indeed, for a time, affect the market value of
>> >> > a commodity, until it is supplied in greater or less
>> >> > abundance; but this effect will be only of temporary
>> >> > duration."
>> >> > -- David Ricardo, Principles, Chapter XXX
>
>> >> Much as I respect Ricardo, this seems to be hopelessly confused. Is
>> >> not being supplied in greater or less abundance by _definition_ going
>> >> to affect supply? Ricardo seems to be claiming here that price is not
>> >> determined by supply and demand, because an increase in supply will
>> >> reduce price, and a decline in supply increase it!
>
>> >No. Ricardo has another theory of price. He says prices are not
>> >determined by supply and demand, except for a short period or in the
>> >case of monopoly.
>
>> But the equivalent logical problem persists: is not any given point in
>> time part of one of those short periods within which supply and demand
>> will determine price?
>
>This is another one of those cases of "The less they know, the less
>they know it." The question was what is Ricardo's theory.

No, the question was, "Is it correct?"

>It is not
>my fault that Roy does not know of the distinction between market
>and "natural" prices or what the issues here are.

I believe I know it well enough, though not exactly what you mean by
"the issues here."

>It is not my
>fault that he thinks variations around a trend must be explained
>by the same theory as that that explains the size of the trend.

IMO it is rather that supply and demand do determine price, but are
not the causal primaries. Think of market price as being like the
point where a ball is caught. It depends on the catcher's position
and the path of the ball (supply and demand). But those in turn
depend on gravity, the ball's initial velocity, and the catcher's
initial position, hand-eye coordination and hand speed, among other
things.

> "...we must not be supposed to deny the accidental and
> temporary deviations of the actual or market price of commodities
> from this, their primary and natural price.
>
> In the ordinary course of events, there is no commodity which
> continues for any length of time to be supplied precisely in that
> degree of abundance, which the wants and wishes of mankind
> require, and therefore there is none which is not subject to
> accidental and temporary variations of price.
>
> It is only in consequence of such variations, that capital is
> apportioned precisely, in the requisite abundance and no more,
> to the production of the different commodities which happen to
> be in demand. With the rise or fall of price, profits are
> elevated above, or depressed below their general level, and
> capital is either encouraged to enter into, or is warned to
> depart from the particular employment in which the variation
> has taken place.
>
> Whilst every man is free to employ his capital where he pleases,
> he will naturally seek for it that employment which is most
> advantageoues; he will naturally be dissatisfied with a profit
> of 10 per cent., if by removing his capital he can obtain a
> profit of 15 per cent. This restless desire on the part of all
> employers of stock, to quit a less profitable for a more
> advantageous business, has a strong tendency to equalize the
> rate of profits of all, or to fix them in such proportions,
> as may in the estimation of the parties, compensate for any
> advantage which one may have, or may appear to have over the
> other. It is perhaps very difficult to trace the steps by
> which this change is effected: it is probably effected, by a
> manufacturer not absolutely changing his employment, but only
> lessening the quantity of capital he has in that employment.
> In all rich countries, there is a number of men forming what
> is called the monied class; these men are engaged in no trade,
> but live on the interest of their money, which is employed
> in discounting bills, or in loans to the more industrious
> part of the community. The bankers too employ a large capital
> on the same objects. The capital so employed forms a circulating
> capital of a large amount, and is employed, in larger or smaller
> proportions, by the different trades of a country. There is
> perhaps no manufacturer, however rich, who limits his business
> to the extent that his own funds alone will allow: he has
> always some portion of this floating capital, increasing or
> diminishing according to the activity of demand for his
> commodities. When the demand for silks increases, and that for
> cloth diminishes, the clothier does not remove with his capital
> to the silk trade, but he dismisses some of his workmen, he
> discontinues his demand for the loan from bankers and monied
> men; while the case of the silk manufacturer is the reverse:
> he wishes to the silk trade, and thus his motive for borrowing
> is increased: he borrows more, and thus capital is transferred
> from one employment to another, without the necessity of a
> manufacturer discontinuing his usual occupation. When we look
> to the markets of a large town, and observe how regularly they
> are supplied both with home and foreign commodities, in the
> quantity which they are required, under all circumstances of a
> varying demand, arising from the caprice of taste, or a change
> in the amount of population, without often producing either
> the effects of a glut from a too abundant supply, or an
> enormously high price from the supply being unequal to the
> demand, we must confess that the principle which apportions
> capital to each trade in the precise amount that it is required,
> is more active than is generally supposed.
>
> A capitalist, in seeking profitable employment for his funds,
> will naturally take into consideration all the advantages which
> one occupation possesses over another. He may therefore be
> willing to forego a part of his money profit, in consideration
> of the security, cleanlness, ease, or any other real or
> fancied advantage which one employment may possess over
> another.
>
> If from a consideration of these circumstances, the profits
> of stock should be so adjusted, that in one trade they were
> 20, in another 25, and in another 30 per cent., they would
> probably continue permanently with that relative difference,
> and with that difference only; for if any cause should
> elevate the profits of one of these trades 10 per cent. either
> these profits would be temporary, and would soon fall back
> to their usual station, or the profits of the others would
> be elevated in the same proportion."
> -- David Ricardo, _Principles_, Ch. iV, "On Natural and
> Market Price"

That doesn't explain market price, except insofar as it presages a
more general and more modern concept: the effects on supply and demand
of their long-run elasticities, over time.

-- Roy L

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