It’s the ignorance that’s so painful

And that is the risk being seen here, that I very strongly suspect that few in government understand because most have been taught be economists who make the assumption that neoclassical economics usually makes, which is that businesses react instantly to new information, when the reality is that they cannot do anything of the sort.

Neoclassical economics doesn’t make any such assumption. It’s more a feature of classical theories than neo-. In fact, Marshall tells us that:

Marshall explained price by the intersection of supply and demand curves. The introduction of different market “periods” was an important innovation of Marshall’s:

Market period. The goods produced for sale on the market are taken as given data, e.g. in a fish market. Prices quickly adjust to clear markets.
Short period. Industrial capacity is taken as given. The level of output, the level of employment, the inputs of raw materials, and prices fluctuate to equate marginal cost and marginal revenue, where profits are maximized. Economic rents exist in short period equilibrium for fixed factors, and the rate of profit is not equated across sectors.
Long period. The stock of capital goods, such as factories and machines, is not taken as given. Profit-maximizing equilibria determine both industrial capacity and the level at which it is operated.
Very long period. Technology, population trends, habits and customs are not taken as given, but allowed to vary in very long period models.
Marshall took supply and demand as stable functions and extended supply and demand explanations of prices to all runs. He argued supply was easier to vary in longer runs, and thus became a more important determinant of price in the very long run.

That we’re dividing things up into four periods – where we have different levels of flexibility in each one – oes rather show that we’re not assuming instant reaction, doesn’t it?

That long term elasticities of supply and demand are greater than short term – a thoroughly neoclassical assumption – is just a restatement of the same point.

Man’s howlingly ignorant.

2 thoughts on “It’s the ignorance that’s so painful”

  1. For years there have been stock-market analysts demonstrating that (assuming that you know the precise instant to cash in your profits and have no transaction costs) the “momentum” trade strategy is the most profitable because most people take some time to observe, consider (“analyse”) and act upon any significant new news item. Most stock-market analysts belong to the despised (by Murphy) category of neoclassical economists and/or neo-liberals.
    What Murphy is doing is confusing the “efficient market hypothesis” with neoclassical economics.

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