Date: Wed, 22 Jan 1997 17:02:11 -0500 (EST)
From: Siddharth Chatterjee <siddhart-AT-mailbox.syr.edu>
Subject: Re: M-I: Market Socialism




On Wed, 22 Jan 1997, Doug Henwood wrote:

> Anyway, this passage reminded me of one of my own obsessions, the fact that
> MS types have conceded too much to the Hayekians on the price-as-signal
> issue. Prices in financial markets float the most freely of any prices on
> earth; there, market mechanisms operate with as few constraints as are
> humanly imaginable (i.e., individual participants can't have any more than
> a fleeting influence over prices; there is minimal price stickiness; time
> is measured in the millisecond, not the product cycle or fiscal year;
> etc.). And what do we get there? A lot less signal, and a lot more noise,
> than pure market partisans like to hear about. Actual prices are far more
> volatile than their underlying fundamentals, and psychology often drives
> prices to absurd and unsustainable extremes. Prices respond too quickly to
> "new" information, and are virtually incapable of incorporating anything
> longer than a horizon measured in weeks. Investment decisions made
> according to these price signals would be badly, even systematically,
> wrong.

Interesting observation. 



		|			 _____________
		|			|	     |
		|			|	     |
	Market	|  /\    /\             |	     |
	Price	| /  \  /  \	--->	| ECONOMY    |
		|/    \/    \	<---	|            |
		|			|	     |
		|_____________		|____________|_
                    Time


The rough sketch above is meant to represent the communication of
the market price to the economy (and its decision makers) and vice versa.
Provided the frequency of the oscillation of the market price is slow
enough,its changes can be smoothly communicated to the interior of
the economy.However, as the frequency of price fluctations increase,
due to system inertia, such changes will be communicated less and less
efficiently and a time will come when the system response will be
completely out of gear with the price signal. Any investment decisions
made on past market prices can result in huge losses as you point out
with regard to the oil crisis of the 1970s.

The above system also has a physical analog in the laboratory. Replace
the market price with relative humidity (RH) and the economy with a
cardboard. As the RH cycles up and down with time, the piece of carboard
will pick up and release moisture from and to the environment,
respectively. That is, the *average* moisture content of the cardboard
will cycle up and down in phase with the external RH, provided the
RH cycles very slowly. However, as the frequency of RH cycling increases,
the average moisture content of the board will cycle with lower and
lower amplitudes and will become increasingly out of phase with the
external RH due to system "inertia" - diffusional resistance offered by
board to moisture penetration. In the limit of extremely fast
RH cycling, the moisture content of the board will become completely
insensitive to the external RH and will remain *constant* or unchanging
with time.

Besides carrying out such actual experiments (performed by paper board
manufacturers), it is relatively easy to represent the above physical
process by a mathematical equation and actually show from its solution
that the predicted behavior of the board agrees with the lab experiments
and also our physical intution.

S. Chatterjee
 


 


 



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