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What Are Prices?

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DavidV

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I am about to read a bunch of books on economics, and I would like to start with by arriving at a proper definition of prices. I find my economics degree very unhelpful in this regard. I started with this:

“A market price is a monetary quantity which reflects the intersection of the supply and demand curves.”

But that says nothing about value-judgments, so I tried:

“Prices reflect the aggregate value judgments of individual consumers and producers as to the highest or lowest value they are willing to exchange to reach a more desirable state.”

But this definition still says nothing the relation of prices to objective values. Are prices objective evaluations of subjective value judgments? No, that can’t be right because prices reflect a judgment of a good’s value to one’s life. On the other hand, a price is not the same as the aggregate objective value of a good because value-judgments are not always rational or infallible. So I tried:

“Market prices are an aggregate monetary estimate of individual estimates as to the value derived from a trade.”

What do you think?

Btw, one of my goals this summer is to finish reading CUI, Reisman’s Capitalism, and Human Action. I wonder if anyone else here has read these books and would be willing to discuss approaches and critiques, especially of Austrian economics.

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Are prices objective evaluations of subjective value judgments?  No, that can’t be right because prices reflect a judgment of a good’s value to one’s life.  On the other hand, a price is not the same as the aggregate objective value of a good because value-judgments are not always rational or infallible.  So I tried:

“Market prices are an aggregate monetary estimate of individual estimates as to the value derived from a trade.”

What do you think?

I think that's too complicated because you are trying to put too many true, but non-essential, characteristics into the definition. That is not necessary, because all you need for a good definition is the simplest, shortest, most accurate demarcation of what the units of the concept are. You can discuss all the concept's other characteristics separately.

With that standard in mind, I would define a price as:

"The exact amount of money at which the owner of a good or the provider of a service willingly agrees to exchange it with someone else."

Be careful in discussions about "market prices" because, as with the word "society," it is so easy for someone to sneak in collectivist premises. You can talk about "market prices" only so long as you keep the context that only individual people making mutually agreeable trades at particular prices really exist.

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I believe Betsy makes a valid point. Your definition is much too complicated for something relatively simple, and it includes some non-essential elements. I would, however, slightly adjust Betsy's definition:

"Price is the exchange ratio at which the owners of goods and/or services are willing to freely trade those commodities."

'Price' is properly applicable to *all* trades. Therefore I eliminated the term 'money' because it limits the concept 'price' to only *one* form of trade. Money is a very particular kind of commodity - a material commodity (it can also be a receipt for that kind of commodity). And that commodity is used in a particular kind of exchange - a triangular, or indirect, exchange. However, trade is not limited simply to exchanges of money for goods or services. In other words, trades are not limited to 'indirect' exchange. Trade also includes 'direct' exchange (often identified as barter). In such instances, instead of using money as one of the commodities being exchanged, some alternate commodity (a good OR a service), is traded. As it stands, Betsy's definition would exclude the concept of 'price' from such 'direct' trades.

ALSO, by defining 'price' in this fashion, one explicitly identifies WHAT is being exchanged by EACH of the parties involved - specifically commodities.

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I dont believe that prices are objective. The fact that they are subject to the personal whim of the creator, makes them very subjective.

This really isn't true - not if you are referring to actual market prices, i.e. the prices at which products are actually sold in the market (what I believe economists call "clearing prices"). Of course a seller can set any price he wishes, but that doesn't mean he's going to get that price.

The price at which a product actually sells is in fact objective - it reflects a complex interaction of cost, profit, competitive pricing, alternative products available, the amount of supply - and demand, etc.

While it's true that the products people purchase reflects their personal values, even that is not per se "subjective", even if in a given instance a particular choice may or may not be fully rational. That people choose to purchase automobiles vs horses or bicycles as a basic means of transportation, is a fully rational choice and has a fully objective basis. That someone may choose to purchase a "flashy" automobile that costs much more than they can afford and which ends up getting them in debt is probably not a rational choice. But that doesn't make the price of that automobile "subjective". Many people can afford such cars and value what it offers, even if the price is high. The pleasure such a car can offer them is completely objective - or can be. In any event the price that car sells for is set by the same complex interaction of market forces - and is not subjective, or subject to sheer whim.

Fred Weiss

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i didnt say that the owner sold his goods. I just said that the owner can charge a human life if he wants to. It doesnt mean he is going to get it. That would just be the PRICE he sets.

But then that bears no relationship to price theory and really is irrelevant to a claim that "prices are subjective". The mere fact that someone can set any price he wishes, regardless of whether it makes any sense, is no more relevant to this issue than is the fact that since people can do all kinds of irrational things makes morality subjective. It just means people can be irrational.

If you want to actually sell something then you need to be objective in your pricing and in a free market the "clearing price" of the vast majority of products will therefore be objective, not subjective.

Incidentally, this isn't a small point because many advocates of capitalism, Von Mises among the most notable, regarded pricing as subjective. His intent was laudable - he was attempting to counter the notion of "fair pricing" or some "intrincist" view of pricing which is often the basis for socialist planners. But in this regard he was defending a false alternative.

Fred Weiss

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well i deal in stuff on ebay. I see and agree with your point on "if the seller wants to sell." But i dont see how you can argue that prices are objective. not only can the owner of the product act irrational and charge whatever, but some people will offer more than the owner actually wanted to make off of the product. Then if you add in the fact that the monetary system we use is subjective, that doesnt help your theory either. The moment the worth of the dollar drops, the price of goods in the market is subjected to that. I cant imagine saying that in this market, with the way the economy is set up, that you can argue that prices are objective.

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Nimble first said:

"I dont believe that prices are objective. The fact that they are subject to the personal whim of the creator, makes them very subjective."

In other words, nimble placed price firmly outside the realm of objectivity. Furthermore, he did not qualify the term price whatsoever.

Fred responded to nimble, correctly pointing out that prices fall into the catagory of "optional" - and that price can be EITHER subjective OR objective - thus contradicting nimble's assertion that price is completely subjective.

nimble responded:

"i didnt say that the owner sold his goods. I just said that the owner can charge a human life if he wants to. It doesnt mean he is going to get it. That would just be the PRICE he sets."

First off, nimble engages in an equivocation. He claims he said the owner can set any ASKING price - ie a very specific type of price. Yet he did not specify this particular form of price was his subject.

However, regardless of that equivocation, Fred's response is valid even if limited to just the "asked" price (as it is to the "bid" price, and the "exchange" price). The asked price can be just as objective (OR subjective) as the other forms of price - for the reasons Fred states.

As evidenced by his example, nimble seems to believe because a price CAN (as he clearly states) be subjective, it MUST be subjective. This is, of course an error. Just because something CAN be X, does not automatically mean it MUST - or even WILL - be X in any given situation.

So nimbles assertion that prices are subjective is wrong, because it is based on fallacious reasoning.

--

Note - this post was started before the last two responses, so it does not take them into account. However, nothing in those posts changes or contradicts my statements, nor my conclusion.

Since nimble claims that objective prices do not exist, I would ask him for his definition of "objective price". I suspect that it is not a proper definition, and is thus contributing to his faulty reasoning.

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I am not starting from a set conviction of what prices should be defined as. It is a matter of that I see prices as an unpredictable thing, which seems very close to the realm of subjective. Just for argument i threw in the idea that our dollar is subjective, which is what determines prices. And that the owner may charge irrationally. If you have a good definition or explaination, i am willing to hear it. I just would think that prices would be very easy to predict if they were based rationally and objectively, yet they are not. To me this isnt a fact that they are subjective, I stated that i dont understand how they could be objective. If you have a valid explaination I may change my mind. Just I dont see how you can even get past the fact that money's worth is subjective.

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I am not starting from a set conviction of what prices should be defined as. It is a matter of that I see prices as an unpredictable thing, which seems very close to the realm of subjective.

But prices in most settings are in fact not unpredictable - not at least where there is a relatively stable money supply. Even in highly inflationary situations, prices are not completely unpredictable. You can predict that they will be higher!

I grant you that auctions settings can produce unpredictable pricing, but that is because you are sometimes dealing with one-of-a-kind items and prices can be influenced by "emotionalistic" factors, e.g. bidders getting carried away or caught up in "auction fever".

Separately, the "subjectivity" of the dollar - I assume by that you mean that it is not based on the gold standard or some other objective measure - really has nothing to do with the issue. Regardless what it is based on, it does provide a standard of measure and using that standard pricing can be objective.

Simply look at your own experience. Under normal circumstances, if you are pricing a new car and you go to the showroom on Monday and the price of a car you are interested in is, say, $20,000, you don't expect it to be $10,000 or $40,000 when you come back a few days later. And that $20,000 price is not subjective or arbitrary. The car manufacturer/dealer has looked very hard at that price and based it on a lot of very careful consideration.

Fred Weiss

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"I am not starting from a set conviction of what prices should be defined as."

This is an amphiboly. Does nimble mean he doesn't have a definition of prices - or that he doesn't specify what individual prices should be in particular situations.

Because the identity of the statement is undefined, it has no intellectual content.

--

"It is a matter of that I see prices as an unpredictable thing, which seems very close to the realm of subjective."

Well - IS price subjective because it is supposedly "unpredictable" or is it NOT subjective?

With this statement, nimble has moved price OUTSIDE the "realm" of subjective. Yet his ORIGINAL premise was that price IS subjective - ie is INSIDE the "realm" of subjective.

In other words, he is contradicting himself. As such, THIS statement (and his original assertion now) have no intellectual content.

--

Since nimble claimed prices were subjective, he was asked to define what would qualified as an objective price - thus indicating why prices cannot fall into this catagory. His response:

"If you have a good definition or explaination, i am willing to hear it."

In other words, he avoids answering the question, implying he does not have one. In either case, his provides NO intellectual content.

Then - after having AVOIDED providing a definition of an OBJECTIVE price, he goes on to say:

"I just would think that prices would be very easy to predict if they were based rationally and objectively, yet they are not."

So, nimble provides NO definition for the concept OBJECTIVE price, yet states that prices are NOT objective, because they would be very easy to predict.

Well apparently predictability is at least PART of his definition. However, on what basis does he make the claim that predictability is a requirement of objectivity when it comes to choice (ie setting a price)? He leaves that part out as well. So he has an UNSUPPORTED ASSERTION - ie MORE intellectually empty content.

"To me this isnt a fact that they are subjective, I stated that i dont understand how they could be objective."

That is not what nimble stated. Nimble didn't say that he didn't "understand" how they could be objective. He EXPLICITLY stated they are SUBJECTIVE - and he did so WITHOUT qualification. This statement is therefore a contradiction of his previous statement - and as such has no intellectual content.

--

"If you have a valid explaination I may change my mind."

Valid explanations have been provided to him already. However, since he does not have a definition (valid or otherwise) for objective prices - OR - for subjective prices, then the question is: how does nimble plan to determine whether the explanation is valid? What STANDARD will he use to claim it is valid or invalid?

So far, he has provided no standard whatsoever. As such, it means his assertions have no basis - and thus he holds them invalidly, ie irrationally.

--

"Just I dont see how you can even get past the fact that money's worth is subjective."

I would suggest, to avoid the creation of a straw man, that nimble stick to the specific terms in use. Money is NOT synonymous with price. And the context of this discussion is price. As such, I suggest you rephrase this statement:

"Just I dont see how you can ever get past the fact that price is subjective."

Which just happens to be a restatement of his original premise (which he has already contradicted in subsequent statements).

--

Now I would suggest, since nimble is asserting that price is subjective, that he DEFINE HIS TERMS.

What is the definition of price? What is the definition of subjective? (also a definition of OBJECTIVE would be helpful, since the claim is that price can NOT be objective 'in his view')

Then - and ONLY then (because without such definitions your words are mere gibberish) - he needs to explain WHY prices fall into the catagory of subjective - and why they are excluded from the catagory of subjective.

Until - and unless - he defines his terms and support his assertion, that assertion is worthless. There is literally nothing to it. As such, we all must be discarded out of hand, because one cannot rationally address nothingness.

Thus, if nimble wish to continue this discussion in a rational manner, I suggest he provide such definitions. If he cannot, then I suggest he retract the assertion - because that would mean he has no valid basis to even utter it.

-

Oh - as a complete tangent - I would like to say hello to Mr. Weiss. I am happy to see you here. I like and admire your business, whose services I one day hope to be able to utilize. Congratulations on its continuing success.

(Hope you don't mind the informal use of your name. Its just quicker - and thus easier - to write Fred, rather than Mr. Weiss. :) )

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Oh - as a complete tangent - I would like to say hello to Mr. Weiss.  I am happy to see you here.  I like and admire your business, whose services I one day hope to be able to utilize.  Congratulations on its continuing success.

(Hope you don't mind the informal use of your name.  Its just quicker - and thus easier - to write Fred, rather than Mr. Weiss.  :)  )

Thank you for the welcome.

And calling me "Fred" is fine.

Fred Weiss

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'Price' is properly applicable to *all* trades.  Therefore I eliminated the term 'money' because it limits the concept 'price' to only *one* form of trade.

Good point.

I mentioned money because the context is ECONOMICS and non-monetary trades are usually ignored in that context.

I would define "price" in the widest context as:

"The value for which someone is willingly to exchange a value he owns with someone else."

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"I mentioned money because the context is ECONOMICS and non-monetary trades are usually ignored in that context."

Since direct trade is most definitely economic in nature, I believe ignoring it in the *context* of economics is an error (not on your part, since you say it was a good point). Also, as I indicated, the reason I changed the definition was because it specifically identified the fundamental nature of the trade - an exchange of commodities.

As such, in the context of economics, I stand by my definition.

For the "widest context" though, I do agree with your definition:

"The value for which someone is willingly to exchange a value he owns with someone else."

As an aside, I will ask - do you think there is a better way of presenting the idea? I am speaking here of gramatically/linguistically. I am not speaking of conceptually - ie I don't think you have left any pertinent information out of the definition. Its just that it doesn't seem to flow as well as it might.

Any ideas? Or do you think I am off-base here?

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For the "widest context" though, I do agree with your definition:

"The value for which someone is willingly to exchange a value he owns with someone else."

As an aside, I will ask - do you think there is a better way of presenting the idea?  I am speaking here of gramatically/linguistically.  I am not speaking of conceptually - ie I don't think you have left any pertinent information out of the definition.  Its just that it doesn't seem to flow as well as it might.

As a writer and editor myself, I definitely agree. It is clumsy-sounding, but it was a first stab at a genus and differentia definition.

The genus has to be "The value" or even "The specific value," but the rest needs work. Maybe

"The value someone requests in exchange for something he owns."

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The "asking price" of all goods offered by the producer is an amalgam of many competing inputs; market prices (of competing goods), accounting valuation of cost of production, target return on investment, maximisation of profit, position in the product life cycle, perceived psychology of the buyer etc. etc.

Although all of these elements have objective bases of measurement some of them are certainly open to subjective interpretation.

The accounting valuation of thecost of production is certainly open to much debate.

The closest thing to a true value for value transaction would be at a farmer's market or on the trading floor of a stock or commodity exchange.

So the price at which the product is offered is an attempt at a rationaly determined value, the value that the purcheser places on the good is (hopefuly) rationaly based, and the price at which the exchange is made is objectively "the price".

Take the example of a new, unique, patent protected, life-saving pharmaceutical.

The full absorption cost accounting cost of production (including the amortisation of development expense and an allowance for the cost of developing non-succesful drugs etc) is $x per unit, the target rate of return is 33%.......therefore the price proposed to the board by the accountants is $1.33x.

However, given the nature of the drug, the consumer is willing to pay $5x for it.

What is the "objective" price?

Brent

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GreedyCap,

Is Thomas Sowell's Basic Economics - A Citizen's Guide to the Economy among your planned readings? I recommended it today on another thread. I can't stress enough how great this book is. I have a friend who studies economics and dreams about studying with Sowell, after reading this book.

I read it myself - Sowell's genius is in his ability to convey complex ideas clearly and engagingly, with no jargon. After Ayn Rand's nonfiction, this is definitely my favorite nonfiction work yet.

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A distinction needs to be made between price and cost. A price is the dollar amount affixed to a monetary transaction. (Note, this is not intedende to be a definition.) The cost of the transaction (and this is where the value judgment comes in) to each party is any of the alternatives they could have chosen. What could they have done instead? Since each party, by definition, values what they trade for more greatly than what they give up, the price will be somewhere between each party's value-judgment of the other good being exchanged.

As far as a definition of price, I read what I thought was a really good one somewhere, but I can't remeber what it was, and I'm not sure where I read it. Not much use, huh? I think it may have been "Libertarianism: A Primer" by David Boaz, and he may have been citing von Mieses. But I'm a little iffy on that. The definition, as I recall, was something to do with the relative demand for resources, and the information prices convey allows resources to be channelled to where there is the greatest demand. Or more accurately, perhaps, away from where there is a realtive surplus and towards a relative shortage. High oil prices, for instance, will draw more resources into the exploration and extraction of oil, and vice versa.

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The von Mises (Austrian) theory of prices is that prices are completely subjective, because (according to this theory) they are based on value judgements that must ultimately be subjective.

The Marxian view is that prices are intrinsic. They reflect the costs of the inputs that went into making the product. The fundamental input, to which all others can be reduced, is human productiveness (or, as the Marxists call it, "Labor").

Once Austrian (Menger) formulated an Objective theory of price, but the later Austrian economists moved toward subjectivism. Finally, Ludwig von Mises (for all his other virtues) made an absolutely clear stand for the complete subjectivism of prices.

An objectivist economist (Buechner) has explored the idea of "objective prices" in some taped lectures.

Here is a riddle: Can philosophy be objective even is some people have irrational philosophies? If so, why can prices not be objective too?

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I dont believe that prices are objective. The fact that they are subject to the personal whim of the creator, makes them very subjective.

and yes i have read capitalism the unknown ideal. But not the other two.

I don't agree.

A price is a value placed upon a good or service that is a component of trade.

i.e., for my preliminary design of a house, you will pay me X dollars.

Price is tangible, therefore, it is objective.

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  • 1 year later...

I would like to revive this topic because no conclusion, as far as I am concerned, was ever reached.

Price is not static and is specific to its context.

Price is simply the agreed upon value between a seller and a buyer. (very broad)

Cost, market fluctations, inflation and whatever else that was said prior may affect the price but should not be included in its definition because they are not essential to every price. Inflation may not exist, sometimes cost isn't a factor and may sell far below its cost, at cost or far above its cost, and market fluctuations, which include many things, may not be fluctating or even exist in a certain situation i.e life and death.

Price is a post-trader mentality concept created to convey what someone is willing to pay for something else, but in every situation, whether we are in a bartering situation, inflationary, deflationary, fixed (or variable) costs rising and falling, three things remain: a buyer, a seller, and an agreed upon price.

I should note that price requires consent, is a value and is capitalistic in nature. Which makes it objective, whatever you choose the price to be. I am not exactly sure what I would call the monetary value placed on an item arbitrarily by a dictatorial regime.

On a more difficult point, when considering the current price of a widget one should consider technology as it most important predictor of price. This will be a relative price, of course, but given the amount of antecedent technology, any increases in technology will decrease the price. The amount of decrease would be determined by the specific technology. Furthermore if there was a decrease in the input price due to technology for a certain widget, the price would drop as well.

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