Flexible Prices

Bob: Welcome to Market Economy Land!

Alice: I would like to rent an apartment. How much does it cost?

Bob: Well, show up tomorrow for the auction. We hold an auction each day for shelter.

Alice: When is the auction?

Bob: 8 am

Alice: How much money can I make working in market land?

Bob: You can sell yourself at the labor auction. We hold an auction each day for workers at 9am.

Alice: At 9 am? Why?

Bob: Because we hold the auction for goods at 8am. It must preceed the auction for labor so that we know what your labor is worth.

Alice: But how can I buy goods if I don’t know my wages?

Bob: Save money.

Alice: In order to buy goods, I must first not buy goods?

Bob: Exactly.

Alice: How much should I save? Is there an upper limit to the price of a room?

Bob: No, price ceilings are welfare reducing.

Alice: So how do I make a budget? How do I plan?

Bob: First, you need to form expectations. Then you make plans. Then you bid at auctions.

Alice: How do I form expectations?

Bob:

Alice: What was that?

Bob: Well, you can also borrow [Proudly] We have money markets every hour!

Alice: What is the interest rate?

Bob: That is also set at auction. Of course you will need collateral.

Alice: Why do I need collateral?

Bob: Because we don’t know what your future labor income will be when it is time to pay the loan back. Give us some assurance about the outcome of future auctions, and the present auction will go well for you.

Alice: But if I knew that, I wouldn’t need to borrow.

Bob: Well, in that case, you can let the market form expectations about your future labor income, and apply an appropriate discount. [coughs] Credit card rates are not too far from mortgate rates [coughs].

Alice: What did you say?

Bob: Well, in Market Land, we find it easier to assume that no one borrows.

Alice: Then why do you hold money markets every hour?

Bob: To discipline the government.

Alice: I see…what kind of collateral do I need?

Bob: A government bond would be best. Land is second best.

Alice: But if I had those things, I could just sell them if I needed money, without borrowing.

Bob: That is true. In Market Land, we find it easier to assume that no one borrows.

Alice: Fine. I will sleep on the street tonight, and tomorrow I will put in a bid for a room. And you will be on the other side of the auction?

Bob: Yes.

*Uncomfortable silence*

Bob: [placatory hand movements] Truly, it is the best of all possible worlds!

Alice: Why?

Bob: Because prices contain valuable information, they coordinate production and consumption in an optimal way!

Alice: How can prices coordinate anything if they are constantly changing? And how do you manage to get any work done if you spend so much time going to auctions?

Bob: You have to work quickly! In market land, we prefer to focus on what is important — the auction. [Defensively] We have great scientists studying the auction.

Alice: But if the goods auctions are at 8 am, and you want to buy more than one good, how do you do it?

Bob: [hushed voice] We call it Tatonnement.

Alice: Tatonnement?

Bob: Yes! Look  [begins to eat a Toblerone]

Alice: You seem … translucent. Amazing.

Bob: [voice is now an echo] You see! A master marketeer can enter a trance, and be imbued with the spirit of a dead political economist. Watch…

Alice: My God, I can see right through your clothes. You are [ looks away in horror] .. covered in bonds!

[Bob dissapears]

Bob: [emerging from behind a bush] Sorry, I lost friction.

Alice: I don’t think Market Land is very friendly for, uh,

Bob: Communists?

Alice: Humans. How do you have families, neighbors?  How do businesses make plans? How does anyone know their budget constraint? All of these auctions seem like an enormous burden. I would prefer to not have prices change so much.

Bob: [becoming angry] Every price must be set at auction. And you must attend every auction. It is law! Do not question the auction!

Alice: [backing away] Look! There is a ‘for-sale’ sign behind you!

Bob: I must go!

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Flexible Prices

5 thoughts on “Flexible Prices

    1. That was a good article. Yes, I think we should force economists to have some practical experience for a year before they are allowed to publish a single paper on anything. They can run a convenience store, or trade in the markets, or start a new business, etc. Their P&L should be displayed on every paper they subsequently publish.

  1. This is less to do with flexible prices actually, and more to do with tatonnement, as you yourself mention. To know one price you must know all prices. Sequential decision making, in the spirit of Marshall, gives way to Walrasian simultaneity. Very very Leijonhufvud-ian. I like.

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