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Price Signals - How Do They Work Again?

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Price Signals - apparently they are rather important to us all. But why?

Please point out the flaws in my reasoning.

Assumptions:

1) The point of a price signal is to indicate to people where demand for goods and services lies.

2) money is not a good or service, its purpose is to allow in theory the market to emit price signals.

3) Money cannot itself have a price signal, because it would be a price signal measured in itself.

4) A price signal would need to be unambiguous to be useful, and would not need to be further qualified beyond the price today of a given item, and the price yesterday.

Given the above we could say that an item that has declined in price has done so because of reduced demand or increased supply, or alternatively because the stock of money has declined relative to the quantity of the item, Likewise for rising prices, we could say that an item increased in price is a result of increased demand, reduced supply or because the stock of money has increased more rapidly than the item stock.

It seems to me then that the problem with price signals is that it requires an 'all else being equal' assumption about money, which seems impractical no matter how far back in history one looks, and even less practical given the existence of things like credit, IT, herding behaviour and so on.

Also problematical is that liquidity would appear to be almost an 'item', that can rise and fall in demand alongside other real world stuff, in which case, any price signal for real world goods is superimposed upon an intrinsic signal of liquidity demand.

What does the Austrian, or indeed any other school of price signal goodness have to say about this question?

Thanks in advance.

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Price Signals - apparently they are rather important to us all. But why?

Please point out the flaws in my reasoning.

Assumptions:

1) The point of a price signal is to indicate to people where demand for goods and services lies.

2) money is not a good or service, its purpose is to allow in theory the market to emit price signals.

3) Money cannot itself have a price signal, because it would be a price signal measured in itself.

4) A price signal would need to be unambiguous to be useful, and would not need to be further qualified beyond the price today of a given item, and the price yesterday.

...

1. I think this is pretty much true, but perhaps a better way of saying it is that the advantage of a market is that it allows prices to adjust in order to ensure that supply matches demand.

2. I think money is a good. Another way of looking at this is that any good can play the role of a standard price gauge or numeraire. Money is just the ill defined set of things that are conventionally used for that and little else, and includes government tokens, gold, silver, oil.

3. Money has a price relative to other goods. It is therefore impossible to say whether or not gold has risen or the pound has fallen, only that the relative prices have changed.

4. An asset that has a stable value is a very useful thing. It allows saving, lending and therefore long-term planning and therefore real economic growth. Without that people are forced to become gamblers and this is one of the real social consequences of inflation (or deflation I guess).

In light of 4, it is interesting to ask whether or not there is a way of creating a standard fixed price gauge. It certainly isn't fiat, I'm not convinced by the 'money is gold is money' argument, and so I suspect not.

If you believe in democratic government and the social contract, then I think you could make a good case that maintaining a stable currency to facilitate saving and planned long-term investment is one of the key things that a government can do in order to help the economy and improve the quality of life for ordinary people.

Liquidity is a difficult subject. Everyone knows what it is, but no-one can define it.

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2. I think money is a good. Another way of looking at this is that any good can play the role of a standard price gauge or numeraire. Money is just the ill defined set of things that are conventionally used for that and little else, and includes government tokens, gold, silver, oil.

Can money then be said to emit a price signal regarding other goods that is more pure than say, a price signal emitted by new cars, or copper, or the price of getting your lawn mowed?

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If you believe in democratic government and the social contract, then I think you could make a good case that maintaining a stable currency to facilitate saving and planned long-term investment is one of the key things that a government can do in order to help the economy and improve the quality of life for ordinary people.

Given that you say in light of (4) "I suspect not", then is such an undertaking doomed, or worse, harmful to social welfare?

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Given that you say in light of (4) "I suspect not", then is such an undertaking doomed, or worse, harmful to social welfare?

Maybe you could create a stable commodity, if you were a government that actually wanted to provide a useful service and a stable economy.

This is what they are supposed to do by setting interest rates, but they seem to have lost the plot somewhat. I don't see why it wouldn't work in principle, except they are corrupt idiots, who don't really know what they are doing. For that reason we'd probably be better off without them.

When I say it can't be done, what I mean is that ordinary individuals probably can't find a commodity or basket of commodities ourselves that could function as stable money given the current economic system. Gold? Oil? Euros? All of these can form, have formed, might form or are forming bubbles. Lots of people seem to have adopted housing as a measure of and store of wealth, but that's horribly bubbly and totally illiquid.

Some people have suggested ultra diversified portfolios as being the most stable investment, which could be used as a standard measure of value, but I don't believe diversification works in a crisis, and you have liquidity problems again.

Not that I'm an expert or anything.

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Price signals -

The point at which people stop saying no and start saying yes to you offer.

Money itself should also be subject to the price signal mechanism.

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Can money then be said to emit a price signal regarding other goods that is more pure than say, a price signal emitted by new cars, or copper, or the price of getting your lawn mowed?

In principle, I think that one of the roles of government is supposed to be to ensure that money should be stable, so that we can ignore any changes in supply and demand of money and assume price changes are caused by supply and demand of the good.

For example, the FTSE index moves more vs the GBP than the USD does, so we can have some confidence that a change in the index is mostly driven by changes in the demand for the component stocks.

If GBP itself is losing value quickly, then you really don't know whether there is demand for more copper, or just less demand for holding GBP. This is also pretty much what happened to houses, where the supply of borrowed money has completely overwhelmed any price signals for housing.

Now that the government is printing money to back housing debts, the currency itself is collapsing. This sends the signal to spend on pretty much anything regardless of whether that thing is needed or wanted.

I should add that:

1. I'm assuming that government exists for the benefit of its citizens, which I don't really believe. I am going along with their creation myth for the sake of the question.

2. I'm not an economist.

Edited by (Blizzard)

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Price Signals - apparently they are rather important to us all. But why?

Please point out the flaws in my reasoning.

Assumptions:

1) The point of a price signal is to indicate to people where demand for goods and services lies.

2) money is not a good or service, its purpose is to allow in theory the market to emit price signals.

3) Money cannot itself have a price signal, because it would be a price signal measured in itself.

4) A price signal would need to be unambiguous to be useful, and would not need to be further qualified beyond the price today of a given item, and the price yesterday.

Given the above we could say that an item that has declined in price has done so because of reduced demand or increased supply, or alternatively because the stock of money has declined relative to the quantity of the item, Likewise for rising prices, we could say that an item increased in price is a result of increased demand, reduced supply or because the stock of money has increased more rapidly than the item stock.

It seems to me then that the problem with price signals is that it requires an 'all else being equal' assumption about money, which seems impractical no matter how far back in history one looks, and even less practical given the existence of things like credit, IT, herding behaviour and so on.

Also problematical is that liquidity would appear to be almost an 'item', that can rise and fall in demand alongside other real world stuff, in which case, any price signal for real world goods is superimposed upon an intrinsic signal of liquidity demand.

What does the Austrian, or indeed any other school of price signal goodness have to say about this question?

Thanks in advance.

My thoughts are that price signals are important to us because they allow us to make a decision on how much of our resources we devote to the items we need or want. Each of us makes our own judgement based on our own values, needs and preferences.

The flaw I perceive in your reasoning is that you assume money as something with a single purpose. It serves a dual purpose, a means of exchange and a store of value. As a means of exchange it emits price signals, but as a store of value it is subject to price signals.

Price signals are relative and subjective. The value placed on anything is subject to the individuals preferences and needs at a particular point in time. These needs and preferences vary according to many factors. Economic theory calls these needs and preferences the utility the individual derives from them. To illustrate the point think of the utility placed on a glass of water. It is much higher to an individual at a time when he is thirsty in the middle of a desert than when he is enjoying a pint of beer in a pub.

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As a means of exchange it emits price signals, but as a store of value it is subject to price signals.

very interesting point that - one that had not crossed my mind, though it ought to have done!

I'm inclined to agree with it, though I'd observe that it then follows that if one wanted ideal price signals then ideally your means of exchange would not be considered a long term store of value. There is still the problem of liquidity preference though, either way.

Price signals are relative and subjective.

So it seems. So you would agree that a price signal can't have a common interpretation collectively, its a matter for an individual actor?

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In principle, I think that one of the roles of government is supposed to be to ensure that money should be stable, so that we can ignore any changes in supply and demand of money and assume price changes are caused by supply and demand of the good.

I think you said earlier:

"In light of 4, it is interesting to ask whether or not there is a way of creating a standard fixed price gauge. It certainly isn't fiat, I'm not convinced by the 'money is gold is money' argument, and so I suspect not."

I think this means that the universal price measurement function is an impossibility. In which case I'm struggling to see how you reconcile that with the role of stable money you outline above.

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Scepticus,

anything that is traded has a price signal.

You can trade copper for bread, bread for money or copper for money.

It doesnt matter what it is that is being traded, money is just the same as copper or bread when considering a trade, and you dont have to worry about the motives of people that want it.

All that matters is the rate at which it is being traded at. That is the price signal. 1 Pound of copper for a loaf of bread is the rate, and suddenly I realise that I would be better off baking bread to get some more copper, and lo, more bread, but no more copper is supplied to the market. Or if it is £1 a loaf, I see that I would be better off if I made some bread to get that £1, and lo, more bread is supplied to the market.

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anything that is traded has a price signal.

You can trade copper for bread, bread for money or copper for money.

It doesnt matter what it is that is being traded, money is just the same as copper or bread when considering a trade, and you dont have to worry about the motives of people that want it.

All that matters is the rate at which it is being traded at. That is the price signal. 1 Pound of copper for a loaf of bread is the rate, and suddenly I realise that I would be better off baking bread to get some more copper, and lo, more bread, but no more copper is supplied to the market. Or if it is £1 a loaf, I see that I would be better off if I made some bread to get that £1, and lo, more bread is supplied to the market.

Personally, I agree. It seems to me a price signal can only really exist as a cross between two items, say copper and wheat, or money and getting your lawn mowed for example. A money cross with something else is no more useful than a cross between two non money items, and arguably, given that money isn't 'real' it could be said to be less useful.

My confusion arises from the perception that seems to be popular that messing with the money system corrupts price signals.

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My confusion arises from the perception that seems to be popular that messing with the money system corrupts price signals.

The catch is in the 'all else being equal'. I would worry less about price signals and money system corrupts than government handling

purchase power to a small number of people.

Further, purchasing power is more important and meaningful in my view than price signals.

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Personally, I agree. It seems to me a price signal can only really exist as a cross between two items, say copper and wheat, or money and getting your lawn mowed for example. A money cross with something else is no more useful than a cross between two non money items, and arguably, given that money isn't 'real' it could be said to be less useful.

My confusion arises from the perception that seems to be popular that messing with the money system corrupts price signals.

It depends how it is being messed with.

Price signals are signals of refusal and acceptance.

Do I really have to expalin how the entry of an entity who doesn't take refual as an answer can have an effect?

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Personally, I agree. It seems to me a price signal can only really exist as a cross between two items, say copper and wheat, or money and getting your lawn mowed for example. A money cross with something else is no more useful than a cross between two non money items, and arguably, given that money isn't 'real' it could be said to be less useful.

My confusion arises from the perception that seems to be popular that messing with the money system corrupts price signals.

Another way to view money is a basket of all things that you can buy with the money. If the price of gold doubles against money, then you get twice as much stuff for your gold as you did before, prompting some to produce more of it.

Yes, do that, view money as a big choice of stuff rather than a bland unit of currency.

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It seems to me then that the problem with price signals is that it requires an 'all else being equal' assumption about money

I think you might have stumbled at the first hurdle in assuming perfection is a prerequisite. Price signals are imperfect and vulnerable to distortion, but they're still more effective than Gosplan at allocating resources.

My confusion arises from the perception that seems to be popular that messing with the money system corrupts price signals.

I guess it depends on who is getting the real price signal. I think there is always a real price signal.

If the government or associated group of commercial entities don't like the price signals they're getting on the UK housing market, they collude to corrupt the price discovery mechanism with every egregious scheme they can concoct. As a result, end users become the victims or beneficiaries of these warped price signals. Then animal spirits kick in and we're off to the races.

I'm inclined to agree with it, though I'd observe that it then follows that if one wanted ideal price signals then ideally your means of exchange would not be considered a long term store of value.

Yes, agreed. If money is merely a thought-concept - an associated notional value to facilitate the exchange of goods and labour, then attempting to capture this value and freeze it on paper is unlikely to end well. I'd say it's ending pretty damn badly right now.

But capitalism and free men require long-term exchangeable wealth reserve assets. I can think of a good one :)

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Well - in a way monetary policy does. Because it changes the 'affordability' of many things bought on credit. Most people just look at monthly payments for things, i.e. what does it cost, what they can afford.

So you are saying that one can cause big ticket items to emit modified price signals by altering the cost of credit?

For sure they emit a price signal as credit gets cheaper (an upwards signal) but an affordability signal is unchanged because those items get more expensive as a result of becoming suddenly 'more affordable', because suddenly demand appears where before the demand was suppressed by monetary policy. Or vice versa if you make credit more expensive.

The whole point of monetary policy is to suppress demand to restrain inflation. And that is the whole problem with it, it only affects demand for items bought on credit.

Indeed this is the premise of the OP - that a pure money price signal is not telling us anything very much about demand for the item in question, unless one first eliminates all these other factors. So, what then is the point of them and of worrying about the lack of a universal price signal?

As per my post earlier...

shapeshifting always leads to tears...

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So you are saying that one can cause big ticket items to emit modified price signals by altering the cost of credit?

For sure they emit a price signal as credit gets cheaper (an upwards signal) but an affordability signal is unchanged because those items get more expensive as a result of becoming suddenly 'more affordable', because suddenly demand appears where before the demand was suppressed by monetary policy. Or vice versa if you make credit more expensive.

The whole point of monetary policy is to suppress demand to restrain inflation. And that is the whole problem with it, it only affects demand for items bought on credit.

Indeed this is the premise of the OP - that a pure money price signal is not telling us anything very much about demand for the item in question, unless one first eliminates all these other factors. So, what then is the point of them and of worrying about the lack of a universal price signal?

The whole point of monetary policy is to enable theft.

:)

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I think you might have stumbled at the first hurdle in assuming perfection is a prerequisite. Price signals are imperfect and vulnerable to distortion, but they're still more effective than Gosplan at allocating resources.

There are a number of issues here. Firstly, unless the signal can be of reasonably high fidelity, then it is likely to confuse as to help the process of resource allocation. Who should define the relevant threshold, and how should the definition be decided upon?

Secondly, and perhaps most importantly, advocating that a 'money neutral' price signal should be obtained as a social benefit by increasing and decreasing the quantity of money in relation to some other variable (which as per above is difficult to define), is advocating for manipulation.

Would one voluntarily ask for "protection" from men with guns?

Does the social benefit of neutral price signals justify the manipulation of important and essentially distributed economic variables such as employment, credit and money stocks, and is it sensible to believe that a human society will achieve a non biased and fair outcome as a result?

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There are a number of issues here. Firstly, unless the signal can be of reasonably high fidelity, then it is likely to confuse as to help the process of resource allocation. Who should define the relevant threshold, and how should the definition be decided upon?

millions of signals make a song.

Secondly, and perhaps most importantly, advocating that a 'money neutral' price signal should be obtained as a social benefit by increasing and decreasing the quantity of money in relation to some other variable (which as per above is difficult to define), is advocating for manipulation.

it is indeed - but that's nothing compared to telling everyone what to use as money instead of discoering it.

Would one voluntarily ask for "protection" from men with guns?

Sure. But it's only voluntary if you don't have to.

Does the social benefit of neutral price signals justify the manipulation of important and essentially distributed economic variables such as employment, credit and money stocks, and is it sensible to believe that a human society will achieve a non biased and fair outcome as a result?

Not yet.

We'll be long dead when that day comes, Sceppy. Long dead. If this problem is to be fixed, it needs a much better class of men than keynes.

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millions of signals make a song.

Ah, the old 'price song' argument...

How does it go, and is there a chorus?

We'll be long dead when that day comes, Sceppy. Long dead. If this problem is to be fixed, it needs a much better class of men than keynes.

Well it was keynes who said, in the long run, we are all dead.

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Ah, the old 'price song' argument...

How does it go, and is there a chorus?

Millions freely trade - this produces what the market wants as money. The process of choosing is everything.

Well it was keynes who said, in the long run, we are all dead.

Complete human extinction seems a way off.

What he meant to say was "I'll be dead, so ****** you." And what he should have been told is "I've got kids, so no, ****** you!"

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There are a number of issues here. Firstly, unless the signal can be of reasonably high fidelity, then it is likely to confuse as to help the process of resource allocation. Who should define the relevant threshold, and how should the definition be decided upon?

Secondly, and perhaps most importantly, advocating that a 'money neutral' price signal should be obtained as a social benefit by increasing and decreasing the quantity of money in relation to some other variable (which as per above is difficult to define), is advocating for manipulation.

Would one voluntarily ask for "protection" from men with guns?

Does the social benefit of neutral price signals justify the manipulation of important and essentially distributed economic variables such as employment, credit and money stocks, and is it sensible to believe that a human society will achieve a non biased and fair outcome as a result?

I think you are correct to say that the fidelity of price signal is not great - the housing bubble (and commodities, and that yellow metal) was a good example - driven by speculative

demands. However, as 50sQuiff said, it is still better than central planning. Ideally, we would like to have a supercomputer who knows who is wasting time on HPC and then issue them with an instruction to do some useful works required to satisfy someone's demand - but of course, that is not possible.

However, let's not forget the other side of Austrian economic that practises natural selection of the smartest - those who follow the false price signals will go bust and the next lots will be better and deciphering the true 'price signal' and allocate resource accordingly.

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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