Monday, May 14, 2007

I Snuck This in While the Family Awaits Without Their Legendary Patience...

‘Molly’ PhD in economics, aged 43, writes on the Gaian Economics Blog, what is billed as ‘The Assumptions of Perfect Competition: Lesson 5:’

Of all the assumptions of perfect competition the assumption about knowledge of opportunities to buy and sell this one relating to information has failed the test of time perhaps worst of all. In Adam Smith’s 18th-century market it was a reasonable suggestion that you might be able to have ‘perfect information’ about all the goods between which you were making your choice. There were, let’s say, three shoemakers and you could stroll from one stall to the next, and on to the third. In markets and fairs of this time, producers of similar goods helpfully located themselves alongside one another, which is why we are left with street names such as Butcher’s Row or Shoe Lane.”

Molly conflates the modern neo-classical economic general equilibrium theory of perfect competition with the classical economics of Adam Smith. He did not assume, state, or describe Natural Liberty in terms of ‘perfect information’. Landlords, labourers and undertakers did not need anything other than prices to motivate them to change their current behaviours. Market prices were determined by supply and effectual demand at the place where they were making their decisions.

Where prices, or price, which in Smith’s world were always local not general, and could vary from locality to locality, were whatever they were, they acted accordingly, either to maintain their current behaviour or to change it.

This could include circumstances when prices elsewhere were different, but of no operational relevance because of distance, or because of ignorance within the periphery of their knowledge. Owners of factors immediately close to price signals that suggested expanding their supply would draw on successively near, through to distant changes in demands. Perfect liberty allowed factors to move towards markets where prices covered the natural prices of the factors they owned, and away from markets where they didn’t.

Neoclassical price theory is an entirely different set of concepts. People do not appear in them; perfection rules; knowledge about all possible prices and costs is assumed to be general, mathematics determines actions.

‘Molly’s’ target does not include anything Adam Smith envisaged.

Gaia is misinformed and has a right to be ‘angry’ with ‘Molly’.

I do not have much confidence in Lessons 1-4 (nor time to read them just now)...


Blogger SNKoppenaal said...

Indeed, perfect competition is a useless assumption. It reminds me of a quote from another work that was capable of elaborating within the right context: the Federalist Papers. "But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary." (FP #51) Likewise nations can prosper in a system without the enjoyment of perfect liberty and perfect justice. (minor rephrase of Smith's line)

One could also comment that a market for information exists. It is a clear manifestation of the extent of the market that dictates the extent of division of labour, as Smith wrote in Book I, Chapter III of the WoN.

By the way, you have an interesting blog. It is rare to find someone who has read and understands Smith's works (including his Lectures on Jurisprudence, etc.)

5:32 pm  
Blogger Gavin Kennedy said...

Thank you for your comment of appreciation of Lost Legacy.

I note that you have also appreciated Smith's clear stance that while Perfect Liberty, and all that it entailed, was preferable, it was not a necessary condition for progress towards opulence.

If only this was also appreciated by many of those who miss Smith's fine sense of the practicable.

6:57 pm  

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