Home > Uncategorized > There are two price levels in capitalism

There are two price levels in capitalism

One essential aspect of Minsky’s Financial Instability Hypothesis was the argument that there are two price levels in capitalism: consumer prices, which are largely set by a markup on the costs of production, and asset prices, which are determined by expectations and leverage. This argument originated with Keynes in Chapter 17 of the General Theory, when he noted that investment is motivated by the desire to produce “those assets of which the normal supply-price is less than the demand price” (Keynes 1936, p. 228), and expressed more clearly in “The General Theory of Employment”, where he argued that the scale of production of capital assets “depends, of course, on the relation between their costs of production and the prices which they are expected to realise in the market” (Keynes 1937, p. 217). Minsky significantly elaborated upon this point, and this – as much as his focus upon uncertainty – was a key point of divergence from the neoclassical interpretation of Keynes.

The perception that the quantity of money determines the price level of capital assets, for any given set of expectations with respect to quasi-rents and state of uncertainty, because it affects the financing conditions for positions in capital assets, implies that in a capitalist economy there are two “price levels,” one of current output and the second of capital assets. A fundamental insight of Keynes is that an economic theory that is relevant to a capitalist economy must explicitly deal with these two sets of prices. Economic theory must be based upon a perception that there are two sets of prices to be determined, and they are determined in different markets and react to quite different phenomena. Thus, the relation of these prices-say, the ratio-varies, and the variations affect system behavior. “When economic theory followed Sir John Hicks and phrased the liquidity preference function as a relation between the money supply and the interest rate, the deep significance of Keynesian theory as a theory of behavior of a capitalist economy was lost” (Minsky 1982, p. 79). 

Over the very long term, these two price levels have to converge, because ultimately the debt that finances asset purchases must be serviced by the sale of goods and services – you can’t forever delay the Day of Reckoning by borrowing more money. But in the short term, a wedge can be driven between them by rising leverage.

Unfortunately, in modern capitalism, the short term can last a very long time. In America’s case, this short term lasted 50 years, as debt rose from 43 per cent of GDP in 1945 to over 300 per cent in early 2009. The finance sector always has a proclivity to fund Ponzi Schemes, but since World War II this has been aided and abetted by a government and central bank nexus that sees rising asset prices as a good thing.

Steve Keen

  1. November 8, 2016 at 1:07 am

    Making money tokens a store of value because we think we have to make all money the same value. Money is created as an IOU. We give all money tokens the same value of the currency in which they are created – or in the value of the IOUs issued by governments.

    We don’t have to do it this way. We can create different money tokens (IOUs) that are restricted in their use and only useful to purchase a specified goods and service from the organisation issuing the IOU.

    If we do this, then we can still have fungible money which is the government’s money, but we have special money (IOUs) that can be bought and sold and which can give a return on investment by earning discounts the longer they are held.

    Doing this gets rid of money markets as the way to fund investments. It removes interest and replaces it with discounts – which do not compound.

    The resulting financial system will eliminate interest and compensate investors for money inflation. It gives investors a higher return because they don’t have to pay for making money fungible.

    The two prices idea now becomes unnecessary because every loan (money) can have a separate price (discount) depending on its risk and the likelihood of generating a surplus.

    Here is a system that replaces debt with new money tokens called Water Rewards that reduces the cost of water to a community by at least 30%.


  2. November 8, 2016 at 2:39 am

    Asset prices are still linked to production as for instance the costs of building a house are still relatively fixed as are the costs of the contractors and home building corporation for which they work for.

    Whether or not there are two price levels is actually neither here nor there. What is necessary to stabilize a modern economy is a specific policy placed at a point which neither Keynes, Minsky nor apparently Keen has recognized as significant. A place and time where no economic agent can be harmed, and that is at the point of retail sale….which is the terminal end of the entire productive/economic process for any product, service….or asset.

    David Graeber has shown us that finance is THE problematic business model. We can correct both this and modern economy’s chronic problems with inflation by implementing a policy of reciprocal monetary gifting at retail sale where any merchant agrees to give their retail customer a 30-40% discount from their best competitive price and then a separate monetary authority other than either the FED or the treasury rebates every penny of the merchant’s discounts back to them.

  3. patrick newman
    November 8, 2016 at 10:15 am

    Price setting has moved on from cost plus. It is now almost universally set according to what the market will bear. And what the market will bear is the subject of some very sophisticated analysis and mathematics coordinated with market and customer research as well as customer ‘manipulation’ If the product is made fashionable, well the sky’s the limit. For example Ray-Ban aviator is priced (on web) at £120 but I would estimate the cost of production is about a pound maybe two! Customers are continually drawn and manipulated into paying more and more for rapidly diminishing value returns somewhere this should figure in economic analysis.

    • merijntknibbe
      November 8, 2016 at 1:17 pm

      You’re right about this – but it might miss the point a little. During the last 2 years or so, consumer price inflation in the EU was about zero. But house price inflation was, in many countries, about 5% or even higher. And we’ve seen such differences before. turning to money and debt creation, higher house prices increase the (perceived) value of the collateral which banks accept as the basis for debt creation. And there we go…

      Aside of this, I’m in favor of not using the normal consumer price index, which excludes interest rates and consumption goods and services provided by the government, but to use a broader index (which are available). And to compare this, always and everywhere, with changes in the nominal wage level. Not a new idea, by the way. Read the General Theory.

    • November 8, 2016 at 5:59 pm

      “Customers are continually drawn and manipulated into paying more and more for rapidly diminishing value returns somewhere this should figure in economic analysis.”

      Ha! Yes, theorists should always think the third and so actually and WHOLLY different way from dueling incomplete orthodoxies. If Keen looked past his usage of accounting equilibriums….he’d be exactly where….he unconsciously wants to be.

  4. Enquiring Mind
    November 8, 2016 at 7:52 pm

    My kids know two non-PC price levels, under a slightly different approach.

    China price – how much does it cost to produce something, as one endpoint of the value function.

    Mexico price – how much would the average Mexican immigrant (or swap in anyone of modest means) pay, as a proxy for the utilitarian, as opposed to status signaling, value of an object, also signaling another potential endpoint of the value function.

    I add a third item – The Berlinski price – named after a wise man who said “You can pay more because we know you can pay more”. That shows that intrinsic or production value is but one component of transactions.

  5. November 9, 2016 at 6:01 am

    Piracy is an act of robbery or criminal violence by ship- or boat-borne attackers upon another ship or a coastal area, typically with the goal of stealing cargo and other valuable items or properties. Those who engage in acts of piracy are called pirates.

    Most people believe piracy ended in the 18th century. They’re wrong. Piracy in alive and well in Wells Fargo, the ECB, JP Morgan, most mortgage companies, etc. In fact, it’s alive and well as the capitalist culture of the western world, quickly infecting or attempting to infect the entire world. So, all this theorizing about prices is interesting but irrelevant. Today’s pirates just use law, treaties, and complex financial mathematics to do what their predecessors did with canon and cutlass. If the pirates want a property, a country, a company, etc. they will find a way to take it. Your theories about prices aren’t going to stop them. Some folks just can’t help putting lipstick on a pig.

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