Friday, June 14, 2013

Relative Prices Rule in Markets

“Peabody Energy Corporation (BTU), Arch Coal Inc (ACI): Now Is the Time to Focus on Coal Companies”.
 Read more at Insider Monkey HERE 
Motley Fool” a.k.a Reuben Brewer writes: “The invisible hand”
Markets are guided by a so-called invisible hand in which reasonably rational individuals do what is in their own best interests. In the end, supply and demand come together to create a working ecosystem. That's happening to coal in spades.
New methods of drilling for natural gas overtook demand for the fuel and led to a steep price decline. That led utilities, the largest users of coal, to switch to gas as a fuel source to keep costs down. Coal demand and pricing fell as a result. The coal industry reduced production and refined operations as a result.
Natural gas prices, however, were so low that drillers couldn't make money drilling. Natural gas drilling has, thus, slowed. That has pushed gas prices notably higher to the point where the choice between coal and gas as a base load fuel is no longer tilted in favor of gas.
The invisible hand is an incredible thing. And there are other long-term positives for coal, too.”
Read more at the above link.
Read this piece and note how the so-called “invisible hand” attributed to Adam Smith has absolutely nothing to do with the ever changing relative VISIBLE prices of natural gas and coal having the predicted affects that “Motley Fool” identifies nor any explanation of exactly what the contribution of the so-called  “invisible hand” does in these processes.
No explanation is given of what the “invisible-hand” actually does to bring these changes about, separate from the normally expected reaction of buyers and investors to changing VISIBLE prices in these markets.
Whatever “Motley Fool's” assertions, they have nothing to do with what Adam Smith wrote in Wealth Of Nations nor what he wrote in his “Theory of Moral Sentiments”.
And that itself is the real problem. 
So imbued with the “invisible hand” ideology are modern economists that they spout platitudes about the “invisible hand” without ever questioning its thin-ice logic given the perfectly complete explanation of relative price movements in competing markets nor they do stop to question the import of an “invisible” operator whose role in VISIBLE price changes is clearly redundant. Prices determine market decisions.  There is no invisible force doing anything else in markets.


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