I think that I learned about it with hog > > prices...the fact that there is a time constant between the price of hog > > bellies and the ability to add new hog bellies to the market. This > leads to > > market volatility, since when prices are high, a lot of new little > piglets > > are raised, causing an excess in supply, lowering prices, causing few > > piglets to be raised, causing a shortfall in supply, etc. > This is called the Cobweb Theorem, first articulated by Kaldor.
OK, I forgot the name, but I'm glad that someone who's got a Phd in econ reinforces that this is a well known phenomenon. > > When you are in a doctoral program in economics, one of the things you > are drilled in is that the assumptions you make in developing your > models are often the most significant factors in the results you make. FWIW, this is the most critical part of solving complex problems with partial information, much of which is not primary information, but information plus the hidden assumptions of those reporting the problems. In working with worldwide downhole fleets of nuclear measurement tools, I've had to deal with this. Problems that are forehead smakers when you finally see them can linger unsolved for months or even years because of hidden assumptions. So, one of the greatest skill sets a team (often comprised of engineers, scientists, techs., field operators, manufacturing people, etc.) can have is going through the data and finding their hidden assumptions that make them miss the elephant in the room. Indeed, if the team is beyond the bare minimum number to get the job done, hiring a well trained person from an adjacent field who has creative ignorance is very useful because they ask good basic questions. 95% of which have easy answers, 5% of which take some though, and 1%-2% of which lead to finding flaws that were missed due to assumptions. > That is why grad students and their profs all have large repertoire of > jokes in which the punch-line involves an economist making an assumption > (e.g. "Assume a can opener.") In the case of perfect competition, the > assumptions include: > > 1. Numerous buyers and sellers > 2. Homogeneous product > 3. Perfect information in the market > 4. No barriers to entry or exit Yup, I've heard of that. > For all of these reasons I am not one to subscribe to the > quasi-religious faith that markets are always the optimum solution. OK, we're on the same page so far. >But in the case of the gasoline market, there is in fact some fairly > persuasive evidence that there is a pretty high degree of competition. > It is the fact that prices do move around a lot, and in both directions. > When firms have a large amount of market power, you definitely do not > observe this kind of price movement. Firms with power set prices, and > control those prices, so as to maximize their profits. You just don't > see a lot of price movements. But with gasoline you see prices move on a > frequent, even daily basis. What is interesting about this market is that there is a cartel that provides 40% of the output. Yet, this cartel couldn't prevent oil prices from falling to under $10/barrel in '98 because they could not penalize cheaters. The big oil companies (BP, Shell, Exxon) are very small players in comparison with OPEC's national oil companies. Yet, folks are convinced that these bit players control everything. Anyways, it seems, in this case anyways, that we agree fairly completely. Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
