A Stock-flow Approach to a General Theory of Pricing

[Kimura]

[MENTION=2926]Toro[/MENTION] [MENTION=21524]oldfart[/MENTION] [MENTION=25159]Norman[/MENTION] [MENTION=41430]JimmieD[/MENTION]

The paper seeks to lay out a stock-flow-based theoretical framework that provides a foundation for a general theory of pricing. Contemporary marginalist economics is usually based on the assumption that prices are set in line with the value placed on goods by consumers. It does not take into account expectations, or the fact that real goods are often simultaneously assets. Meanwhile, contemporary theories of asset markets are flawed in that they either rely, implicitly or explicitly, on a market equilibrium framework or provide no framework at all. This paper offers a working alternative that relies, not on a market equilibrium framework, but rather on a stock-flow equilibrium framework. In doing so, we lay out a properly general theory of pricing that can be applied to any market - whether financial, real, or a real market that has been financialized - and which does not require that prices inevitably tend toward some prespecified market equilibrium.

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[oldfart]

[MENTION=2926]Toro[/MENTION] [MENTION=21524]oldfart[/MENTION] [MENTION=25159]Norman[/MENTION] [MENTION=41430]JimmieD[/MENTION]

The paper seeks to lay out a stock-flow-based theoretical framework that provides a foundation for a general theory of pricing. Contemporary marginalist economics is usually based on the assumption that prices are set in line with the value placed on goods by consumers. It does not take into account expectations, or the fact that real goods are often simultaneously assets. Meanwhile, contemporary theories of asset markets are flawed in that they either rely, implicitly or explicitly, on a market equilibrium framework or provide no framework at all. This paper offers a working alternative that relies, not on a market equilibrium framework, but rather on a stock-flow equilibrium framework. In doing so, we lay out a properly general theory of pricing that can be applied to any market - whether financial, real, or a real market that has been financialized - and which does not require that prices inevitably tend toward some prespecified market equilibrium.

Download

I'm going to download this at the office where I have more resources and take a good look at it. Until then just a couple of general comments.

In general equilibrium analysis and standard neo-classical micro theory, price and quantity are always linked, so what is called a theory of production is also the theory of prices. The first break in this were the theories of imperfect competition, especially Joan Robinson, and the reaction to it of the "rational markets" thesis which incorporated expectations. A couple of decades ago the hot item was markets with imperfect and asymmetrical information. By now theories of pricing in perfectly competitive markets exist only in the minds of textbook writers who have to start somewhere and the fevered imaginations of right wing ideologues who know not of what they speak.

There is another tradition to which I belong that regards the theory of price as an expanded version of Wassily Leontiff's input-output models which generate "shadow prices" for each resource. Prices are still a mode of communication of economic circumstances, but variances from shadow prices creates arbitrage opportunities which become self-enforcing. The literature on this is sparse (because of the taint of it's use in planned economies) and utilizes an entirely different set of mathematical tools than classical analysis, which turns out to be an advantage in both increased realism and in explaining phenomena that are very awkward to explain in a calculus based model.

Anyway, best of luck, and I look forward to a good read!