Traditional price theory in new price theory

Traditional price theory mainly refers to Marshall's price theory, which is divided into demand law based on diminishing marginal utility and supply law based on increasing marginal cost.

Law of demand: other things being equal, if the price rises, the demand will decrease; -the influence of price on demand is a linear relationship of certainty.

Law of supply: other things being equal, prices rise and supply increases; -The influence of price on supply is a deterministic linear relationship. Traditional price theory is the theoretical basis of neoclassical school. On this basis, the neoclassical school believes that flexible price adjustment can balance supply and demand, so it advocates market freedom and opposes government intervention.

The theoretical basis of the classical school is Say's law, which holds that "supply determines demand", so supply and demand will automatically reach equilibrium, so it advocates market freedom.

From the comparison between the classical school and the neoclassical school, we can see that the concepts of "price determines supply and demand" and "supply determines demand" are exactly the same, and they are both the ideological basis of liberalism.

Keynes denied Say's law, thus establishing modern macroeconomics, but he did not deny his teacher Marshall's price theory that "price determines supply and demand", but only put forward price rigidity, which was not recognized by neoclassical economists and did not form a micro-foundation, resulting in numerous schools of macroeconomics and constant debates.

Neo-Keynesianism revised Keynesian micro-viewpoint on price rigidity, and put forward the viewpoint of price stickiness, arguing that the price cannot be changed flexibly because of menu cost, but this viewpoint has yet to be verified and has not been recognized by neoclassical economics school. (1) The fallacy that wages determine the supply and demand of labor.

For example, regarding the relationship between labor price and supply and demand, William J. baumol, an economist who served as the chairman of the American Economic Association, and Allen S. Blind, an economist who served as the vice chairman of the Federal Reserve, believed in the early edition of their book Principles and Policies of Economics that raising the minimum wage would lead to an increase in unemployment.

"However, some surprising economic studies published in the 1990s questioned this argument, which has always been regarded as a famous saying. For example, economists David Card and Alan Kruger compared the employment changes of fast food restaurants in New Jersey and neighboring Pennsylvania. They were surprised to find that after 1992 New Jersey raised the minimum wage, the number of new employees in fast food restaurants in New Jersey actually exceeded the number of employees in Pennsylvania who did not raise the minimum wage. Moreover, after 199 1 federal minimum wage increase and 1988 California minimum wage increase, fast food restaurants in Texas also found similar results.

In these cases, it seems that the higher minimum wage has not reduced employment, which is contrary to the inference of simple economic theory. As a result, a policy question that was previously considered unnecessary to debate seems to be brought up again: will the minimum wage lead to unemployment?

The result of this debate is not just for academic purposes. 1996, President Clinton proposed a bill to raise the federal minimum wage, which was passed by Congress, partly based on the conclusion that "unemployment will not increase as a result of new research". In 200 1 year, the democratic parties in congress once again proposed to raise the minimum wage, but President Bush opposed it and the proposal was not passed. Economic research may have played a role in it. "

The latest edition of this book obviously rejects the traditional view of the earlier edition, and the latest conclusion is also obvious: the policy of raising wages and protecting the minimum wage does not necessarily lead to an increase in unemployment.

(2) the fallacy that "interest rate determines investment and savings"

In addition, for the traditional IS-LM model, the IS curve is inclined to the lower right, indicating that the lower the interest rate, the more investment and the less savings. This also made the logical mistake of "price determines supply and demand". Interest rate is the price of monetary capital. We don't know whether the interest rate will decrease, whether the investment will increase and whether the savings will decrease. Here, we can make a further analysis from the derivation of the savings and investment curve by Ben Bernanke, chairman of the Federal Reserve, in Intermediate Macroeconomics. The book points out that the savings curve leans to the right, indicating that the rise of real interest rate increases the willingness to save. Bernanke believes that the reason for the downward inclination of the curve to the right comes from the "empirical conclusion". However, in the book's subsequent appendix "Normative Model of Consumption and Savings", after a "normative" analysis, the conclusion of the analysis is that "for lenders, income effect and substitution effect have opposite directions, so economic theory cannot explain whether savings will increase or decrease when real interest rates rise".

The conclusion is obvious. The IS-LM model made the same mistake as the thinking that "price determines supply and demand" in the traditional price theory. This is because the interest rate is an exogenous price and should be analyzed according to the actual interest rate (endogenous price).

(3) the fallacy that "exchange rate determines international trade"

Traditional economists believe that the appreciation or depreciation of a country's currency will have an impact on its international trade. Simply put, the exchange rate determines international trade. However, from 2005 to 2008, the RMB appreciated by 2 1% against the US dollar, while the international trade deficit between China and the United States continued to expand.

This is because the exchange rate is an exogenous price and should be analyzed according to the actual exchange rate (endogenous price).