In the Market, the Price doesn't Determine Anything

 

Macroeconomists, by birth or by training, take “the price” or “the interest rate” as the determinant “variable” in their hypothetic equations and diagrams incl. the shiniest IS-LM and AS-AD models. They at best fall in the trap of “fallacy of composition.” More weird is that they often in building hypotheses refer to Paul Samuelson who famously warned against such a fallacy at the dawn of macroeconomics (Economics, 1948, p. 9).

             To begin, with the term “the price” we mean “the equilibrium price,” so to speak, not the sacrifice or cost we must pay in return for a benefit. Sacrifices are “individual,” but the price must be “collective”: the former for “each” participant the latter for “all” the market.   

             To be fair: ①We presume an accounting period of limited duration so as to make plausible such calls as the quantity traded and the price. ②The demand for marginal benefits and the supply at marginal costs are defined ex ante, or before the market trade, ③A price is set between the MB and the MC of the two parties at any time in the period. ④In Here as opposed to Eternity, the quantity and the price are known ex post, or at the end of the period.

             All in all, individual prices are ex ante while the collective price ex post. Apparently we owe a credit to Paul Samuelson.

             Suppose a macroeconomic modeler announces the quantity and the price to the community ex post facto. Consumers and producers take note of them, only half-heartedly. That’s the way it is!

             Looking ahead, some change their minds and plans while others not. Ditto those who did not participate previously.

             Apparently:

1)     “The price” is the effect, not the cause.

2)     The price may or may not work as a reference point towards the next period on. After all, there are foreseers, second-guessers, contrarians, job-losers, new recruits, newly-weds, Eternity visitors, and the like.

3)     More probably than not, the quantity and the price will be different in the next period, the next after next, and on. Otherwise, or the price finishes changing, the price will eventually be finished. Down with the quantity as well!

 

Question. With the price and the quantity down, where is each market? Where is the whole economy?

An Answer “for the sake of convenience.” The market is one the economy is another. With individual markets down, the collective economy might still be viable as the composition is rightly reversed from all to each. Or so would Peter Winters among other macroeconomists claim.