Velocity Wanted: What “the Price” Really is

 

One of the most vicious names in economics is “equilibrium.” As a matter of simple fact, no organism can be in equilibrium until post mortem. That’s the very definition of “organism,” as opposed to “mechanism”: There in an organism indefinitely many parts act, react and interact and that incessantly so as to allow no room for equilibrium.  

 

What the Price Means. Economics is no more “empirical” than physics is. In other words, “science” starts from abstraction also called idealization. For instance, the Newtonian gravity theory never applies as is to the reality where all different things, the observer-cum-researcher included, coexist with the apple and the Earth. Don’t get Sir Newton wrong, either: Owing to Eugene Fama from Chicago, in the first place: “Theories are approximations. Nothing is completely anything.” The great Theory of Gravity is a rough, and very rough in fact, approximation to the reality.

             Science is not engineering, after all.

             The “equilibrium price” or the price more simply is defined as something like this: The idealized “price of one” that might have cleared the market for trade of a predefined product of utility (M∙U) per confined community (L^-2) per definitive period of time (T^-1).

            There is no way whatsoever we can name “the price” (p) or “the quantity” traded (q) if any of the three boundary conditions is missing. Specifically, we can name “the price” as the ex-post average of different prices that might have equalized the “aggregate quantity sold” to the “aggregate quantity bought” per period in the market. We, macroeconomist or otherwise, shall never forget that the price is imagined, or conceived if we will, to be “one” over the particular “one” period.

             The market is the conceptual framework, stupid. Don’t even think about empiricism.                                Economics is no political economy. There is no such thing as “empirical science” exogenous to Eternity. TINST as “macroeconomics”!

What the Price Level Means. First of all, the market is not the economy. The market is of the apple, for instance, one of indefinitely many goods to choose from. On the contrary, “There is no alternative” as for the economy, to borrow from the great British PM Laura Norder. By definition in general and due to the GAAP in particular, there is only one GDP, one AS, and one AD. To eyes of the rest of us: Y≡ AS≡ AD, period.

             There would be no question that the “Y” for the “gross domestic products” is defined per nation per year. So must the price level (P) be. For instance, how many “economy” per annum, “GDP” per annum or “price level” per annum is there in France or Mexico? Is either Y or P variable along the abscissa or the ordinate (L^-1) in a model of coordinate system?  

             To be “intellectually honest” (cf. Paul Krugman in 2007 to Milton Friedman ante 2006), there was, is or will be only one price level (P) in FY 2007, 2025 or 2525, even in the US or the UK. The price level “is” always sticky in its completeness “everywhere except for in” Cambridge (borrowed from Robert Solow).

             Macroeconomists might open the first textbook ever on macro-Economics (1948) to page Nine (p.9) for the sake of learning about fallacy of composition. And, they would possibly realize that the AS-AD model is a still-born child of the particular misconception.

             In the meantime, the rest of us would not so lightly “speculate” how the economy works in the short or long run (cf. J.S. Mill, 1848, Preface). For instance, the market is a microcosm, while the economy a macrocosm. The price is the proxy of value, while the price level is the emptiness in its entirety. The latter is nothing but an index, your Excellency.