[OPE-L:6226] RE: What is the debate is about?

andrew kliman (Andrew_Kliman@CLASSIC.MSN.COM)
Thu, 26 Feb 98 15:45:01 UT

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From: owner-ope-l@galaxy.csuchico.edu on behalf of Ian Hunt
Sent: Wednesday, February 25, 1998 9:52 PM
To: ope-l@galaxy.csuchico.edu
Subject: RE: [OPE-L] What is the debate is about?

Ian: "Andrew's response to the thought experiment is to say that he doesn't
want to envisage any circumstance in which prices stay constant from one
period to the next."

Where did I say that?

I thought the challenge was to explain how the input and output prices of
period 1 can differ even though technology is not changing between periods 1
and 2, and supplies equal demands.

Now, it seems, Ian wants me to consider circumstances in which output prices
never change. Fine. Then I must obviously also assume that input prices
never change, since the output prices of one period are the input prices of
the next. As I pointed out to Allin, no one disputes the notion that, if you
begin from a stationary state, and nothing changes subsequently, you'll remain
in the stationary state. Indeed, this is exactly what the TSS equations
imply.

So Ian's objection to the TSS interpretation seems to be a non-objection.

To summarize:

(a) if the input prices of period 1 differ from the output prices of period 1,
then, in general, the output prices of period 2 will differ from the output
prices of period 1; this is true even if technology is the same in both
periods and there's no imbalance of supply and demand.

(b) if the output prices of periods 1 and 2 are equal, then the input prices
of both periods will, in general, also be equal, and equal to the output
prices.

Thus, if you want me to explain how the input and output prices of period 1
differ, you cannot postulate also that the output prices of periods 1 and 2
are the same. If you want to postulate that the output prices of periods 1
and 2 are the same, you cannot demand an explanation for nonexistent
differences between input and output prices of period 1.

The REAL underlying point in all this is as follows. The belief that prices
must remain constant if technology, etc. are not changing *presupposes* that
input prices are NOT a determinant of output prices. I.e., it presupposes
that changes in input prices, ceteris paribus, will not cause changes in
output prices. But Ian now acknowledges that input prices ARE a determinant
of output prices: "I agree that they are *a* determinant ...."

It seems to me that we agree about everything under discussion. We agree that
if input prices happen to equal output prices, and nothing else changes, then
prices will remain stationary. We agree that input prices are determinants of
output prices. We agree that if the input prices of a period differ from its
output prices, then the output prices of the next period must differ from the
output prices of this period, even if all determinants of output prices except
input prices are constant.

So it is my turn to ask "what is the debate about?"

Andrew Kliman