What Is the Theory of Price?

The new price theory studies the causal relationship between supply and demand and price, negates the traditional price theory that prices can determine supply and demand, that supply and demand determine prices, and that supply and demand and price are one-way causal relationships, while the role of price on supply and demand is feedback. The effect is both negative feedback and positive feedback. Therefore, the effect of price on supply and demand is uncertain. The traditional price theory believes that the effect of price on supply and demand behavior is certain (the law of demand).

New price theory

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The new price theory studies the causal relationship between supply and demand and price, negates the traditional price theory that prices can determine supply and demand, that supply and demand determine prices, and that supply and demand and prices are one-way causal relationships.

Price theory systematically studies the formation and function of prices

Since Adam Smith established economics, the classical school has emphasized the role of the "invisible hand", believing in free trade, advocating free competition, and resolutely opposing high tariffs without government intervention in economic activities. Liberalism has become classical economics Core beliefs. The theoretical foundation of the classical school is mainly Say's law, that is, all products produced can be sold. This was basically established under the circumstances of material poverty and underdeveloped production. There was no oversupply of economic activities, and supply created its own demand, thereby balancing supply and demand. ^[1]

The neoclassical school has inherited the liberalism of the classical school, but the theoretical basis has been changed to the traditional price theory, which believes that price can determine supply and demand, so the flexible change of price can achieve market clearing and reach equilibrium state spontaneously. The internal mechanism maintains its healthy operation without the intervention of exogenous government forces. ^[1]

Based on the emergence of the economic crisis, Keynes first criticized Say's law, but did not overturn his teacher Marshall's price theory, but only believed that prices were rigid, so that the market could not be cleared, and the economy could not be spontaneously in equilibrium. Therefore, exogenous Government intervention in economic intervention. It can be seen that Keynes questioned the traditional theory from the phenomenon of the economic crisis, but he did not completely deny his teacher Marshall's view that "price can determine supply and demand", but only analyzed it from the perspective of price rigidity, although he established modern macroeconomics However, his rigid viewpoint on prices did not get rid of the traditional thinking of price theory, nor did he establish a new micro-theoretical basis, which led to the formation of macroeconomic schools and controversy. ^[1]

Neo-Keynesianism has made some adjustments to the theory of price rigidity, arguing that price stickiness has been formed due to menu costs and other reasons, nor has it overturned traditional price theory, nor is it persuasive, and has not been recognized by neoclassical economists . However, neo-Keynesian economists did not fully agree with neoclassical price theory, and Stiglitz, a representative of the neo-Keynesian school, even proposed "abandoning the law of supply and demand" (1987). ^[1]

It can be seen that the views of the neoclassical and neo-Keynesian schools are diametrically opposed. The former advocates market freedom and the latter advocates state intervention. The theoretical basis of the argument is price theoryprice flexibility and price stickiness. ^[1]

The new price theory proposed in "Transaction Theory" (He Quansheng, 2010) believes that price does not determine supply and demand, but supply and demand determine the price. Therefore, flexible price changes cannot bring supply and demand into equilibrium, and the market clears In a special case, free market transactions do not have inherent stability. In addition, due to the subjectivity and objectivity of value, the transaction results between the supply and demand sides are uncertain. This uncertainty cannot meet the prerequisites of Coase's theorem. Therefore, free trade cannot achieve Pareto optimality . Furthermore, even if free trade competition can improve efficiency, it will cause monopoly and winner-take-all issues, resulting in equity issues such as unfair distribution and rich-poor differentiation. of. It is precisely because of issues such as uncertainty and fairness that it causes "market failures" and, in severe cases, even economic crises. ^[1]

Because of "market failure", Keynes introduced government intervention into economic operations and advocated that the "visible hand" of the government should actively manage and coordinate the operation of the economy. This was a breakthrough in traditional theories by Keynesian economics. However, because of the fear of the negative effects brought about by the feudal monarchy and the planned economy of some countries, the negative effect of the "visible hand" is more obvious than the negative effect of the "invisible hand". At the level of academic theory and economic operation, the understanding of government intervention in the economics community is limited to the emphasis on deregulation and ignores the positive role of effective government intervention. The economics community only emphasizes the construction of a free market economy, and there are many policies on government intervention in the economy. Avoidance or firm opposition. For example, in the United States, neoclassical theories dominated university classes, but neo-Keynesianism governed national economic policy. Because of this, government intervention has lost the support of economics theoretical research, and it is more difficult for the state's intervention in the economy to adapt to the requirements of the market economy. Therefore, a good intervention system has not been formed, and there has been a large number of disorderly government interventions, such as fake products in the commodity market. Inferior products, fraud in financial markets, monopoly profits from utilities, corruption within the government, and so on. It can be said that market chaos and conflict are both the result of excessive government intervention and insufficient government intervention. Therefore, how to scientifically understand the role of government intervention and improve government efficiency is an urgent task in economics research. ^[1]

The practice of China's reform and opening up shows that "no market is absolutely impossible"; the experience of western countries after the economic crisis has also shown that "no government is absolutely impossible". People often face the dilemma between "government" and "market", "regulation" and "freedom", "regulated price" and "market price", and there is a trade-off between government and market, fairness and efficiency. Any extreme approach and system will lead people to what Hayek called "the road to slavery", either as a slave to money or a slave to power. Countries need to make a trade-off between these two extreme systems, give full play to the role of "invisible hand" and "visible hand", and choose a development path that suits the characteristics of their respective countries. There is no simple and consistent path. This "selection" process also means "natural selection". The criteria for "selection" are based on the sustainable development of human civilization, because human beings will not choose a path of self-destruction. The system will be retained, and the system that has a reaction to the development of human civilization will be eliminated. The change of this system is a long evolutionary process. ^[1]

Therefore, the new price theory negates the traditional price theory-flexible price adjustment can realize the view that the market can be cleared and the free market can form an internal equilibrium, and the neoclassical school's liberal thought has lost its theoretical basis, thus providing market freedom and government The interaction of interventions establishes a theoretical basis for microanalysis.

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