Natural Price Theory And Macroeconomic Model example essay topic

web 1 The Natural Price Theory and Macroeconomic Model Gonzalo P'erez-Seoane Abstract The Natural Price Theory and Macroeconomic Model suggest the existence of a natural economic order, an order which may be hidden in the very essence of human social and intelligent behaviour, an order which would facilitate the ultimate harmonisation of the actions of all individuals, peoples and nations, an order which would make the world economic system, as a whole, both understandable and rational. The Natural Price Theory and Macroeconomic Model has its origin in the empirical analysis performed on the principal macroeconomic variables of: France, Belgium-Luxembourg, Holland, Germany, Italy, United Kingdom, Ireland, Denmark, Greece, Portugal, Spain, United States, and Japan. 1. - The Natural Price Theory The natural price theory suggests that every good or service may have two distinct values. One visible, which would be the market price and the other, which is permanently hidden, would be the natural value (or natural price).

The difference between the natural price and the market price of every good and service would be inflation, which would imply a generalisation of the Fisher effect in the economy or, in other words, defining this effect in terms of the proposed hypothesis: any market price existing in the economy is composed of its natural value plus a certain level of inflation. The principal variations that are observed in any market price are the result of the mood of inflation over time (Other causes can affect the behaviour of market prices in a transitory form: supply-demand). It would seem that, to date, the generalisation of the Fisher effect has not been proposed in the terms described, and much less as a fundamental part of a macroeconomic model, thus, this effect will be termed universal Fisher effect. Natural Value Inflation Market Price Universal Fisher Effect Gonzalo Perez-Seoane web 2 The central principle of the natural price theory and model is that the natural value of every good and service is derived from the quantity and grade of productive capacities and skills incorporated by unit of time or, in other words, from the labour deployed in its production.

The above gives a new perspective on the theory known as the labour value theory. This theory, with different emphases and various levels of development was maintained by Albert the Great, Gerard Odonis, William Petty, Adam Smith, David Ricardo and Karl Marx. The changes in the natural prices will occur in line with modifications in the labour standard of value or indeed with modifications in the quantity and grade of the existing human productive capacities and skills. On the other hand, the labour value of every productive activity, and therefore, the natural prices, is supposedly fixed in terms relative to the other existing capacities and skills, so that, as suggested by Leon Walrus in a different theoretical context, all prices in the economy are interconnected. At present, Alfred Marshall's Law of Markets is the undisputed paradigm of Economic Science.

Thus, when the markets are in disequilibrium, it is assumed that the adjustment variable is quantity, which implies that the equilibrium price depends on the quantity supplied and demanded of the good. D = Demand S = Supply Q = Quantity P = Market Price Contrary to one of the basic principles of Marshall's Law of Markets, natural price theory, convinced of the existence of a natural or original value in each and every good or service in the economy -a value derived from the hidden but real functioning of the labour value standard- suggests that: the quantity supplied and demanded of good or service will tend to adjust to the natural value of every good or service. Vt = value of labour deployed in its production Thus, the natural price theory may be summarised in the following diagram. Px = f (Qx) Spx = f (Qx) Qd = f (px) px = f (Vtx) Qx = f (px) px = f (Vtx) The Natural Price Theory web 3 Universal Fisher Effect Natural Price Theory Equilibrium point Qd = Qs Qd, Qs = f (P) P = f (inflation, relative value of labour incorporated) Value of labour incorporated Price Quantity po Qo Inflation Demand (d) Supply (s) Market price Natural value Market Price: price derived from the relative value of the labour incorporated in a good; this value is altered over time by inflation and by the supply and demand Natural Value: price derived from the relative value of the labour incorporated in the good; this value is altered over time by the supply and demand All prices in the economy would perform and vary over time in accordance with this theory, apart from the labour market and the price of money. As may have been observed, the natural price theory combines three important price theories from economic history: 1. - The Labour Value Theory.

The labour value theory, in a broad sense proposes that human work is the absolute standard of value and so determines the price of all goods and services. This theory with different emphases and various levels of development was maintained by Albert the Great (1206-1280), Gerard the Odonis (1590-1633), William Petty (1623-1687), Adam Smith (1723-1790), David Ricardo (1772-1823), and Karl Marx (1818-1883). 2. - Marshall's Law of Markets. The theory of demand was introduced in a half- hearted way by Richard Cantillon (1734) and Adam Smith, John Stuart Mill (1806-1873) developed the theory, and Alfred Marshall (1842-1924) brought it to its culmination.

3. - The Fisher effect. The Fisher effect was developed by Irving Fisher (1867-1947); it is a theory on the price of money and its variation over time. Currently it is the mainstay of global financial thought. The combination of these three theories, in spite of appearances, arises neither from an amusing game of chance nor from an intellectual demonstration of Gonzalo Perez-Seoane web 4 uniting distant economic areas.

The combination arises, rather, as a result of empirical demonstrations where the central doctrinal antecedent is Adam Smith in his book The Wealth of Nations. How does the natural price theory differ from Marshall's Law of Markets, a law which has been the mainstay of economic thought throughout the 20th century? The natural price theory confirms, for every good and service, the existence of: the supply function, the demand function and the sensitive relationship existing between these functions and the price of the good or service. However, in addition, the natural price theory proposes that the interplay between supply, demand and price, is just one of the three parts of the mechanism that would seem to be capable of explaining the functioning of economics as a whole. Thus, from the point of view of the natural price theory, Marshall's Law of Markets contributes an economic truth in an isolated way, it necessarily can only give rise to a model of partial equilibrium, (just as Marshall himself defined it). The extrapolation of Marshall's Law of Markets as the mainstay of a macroeconomic model, leads, inexorably, to normative macroeconomic models, with no possibility of empirically verifying the complete macroeconomic functioning.

Marshall's Law of Markets is correct but incomplete. The natural price theory tackles the problem of the functioning of any market using an approach different to Marshall's Law of Markets. While accepting the existence of supply, demand and price for any market (good or service), as well as the possible interrelationships of one market with another by reason of the existence of complementary and substitutive products or services or as a consequence of the income effect, the natural price theory views all these relationships as transitory or circumstantial, when the effects are considered in the short term. The suggested validity of the labour standard value in the economy, a standard which is highly stable over time, would imply that all market prices undergo continuous corrections towards their true natural or intrinsic value, the value derived from the hidden but real functioning of the labour standard. This frenetic activity of market prices in the pursuit for their true natural value would correct, over time, the transitory or short term alterations that may have transpired.

The above, if correct, means that all variables from the long term perspective should exhibit completely rational economic behaviour over time, a behaviour subject to the principles of the functioning of the labour standard value, and this should be empirically demonstrable. 2. - The Natural Macroeconomic Model The Natural Price Theory web 5 The concept of a natural macroeconomic model is nothing new in economic thought (Physiocratic doctrine, Adam Smith, Jean Baptiste Say ). The process of natural wealth creation may be explained in the following form: Population Growth Natural Circle of Economic Growth Increase in the aggregate natural demand Increase in: income per capita, spending and saving per capita, investment per capita, national capital stock Increase in the quantity and grade of productive capacities and skills Increase in the aggregate natural supply Division of labor, accumulate knowledge, innovation: increase in productivity Increase in Population Increase in Active Population Increase in the basic, convenient, and pleasurable needs of life Progress effect: propensity of human being to improve his material standard of living Seesaw effect ( ) Theory of human capital Labour Value Standard The natural model establishes that the economic development of each nation depends of the concourse and iteration of the following three factors over time: 1. - Population growth. The natural model suggests that population growth is the true and principal driving force of the global economic system.

2. - Productivity. 3. - The black and white effect. The suggested process of wealth creation is in agreement with tradition and economic doctrinal logic. However its clarity and practical simplicity is only apparent.

What happens in reality? 3. - Final Note Gonzalo Perez-Seoane The surprising and powerful empirical capacity of the Natural Price Theory and Macroeconomic Model opens a new door to the comprehension and analysis of the global macroeconomic phenomenon. It must be stated that the conclusions about the behaviour of every variable suggested by the Natural Model are extraordinarily close to orthodox Economic Doctrine. With the hope that the Natural Model may, in the near future, constitute a complete and efficient tool in the sphere of economic policy and a real academic reference on the subject thanking you for your interest,.