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Vernon Smith

I see neoclassical utility theory as flawed, not only in accounting for and modelling human sociability (See Smith & Wilson, Humanomics, 2019), but in providing a satisfactory theory of price formation in markets. This is one of the themes in our book, Market Economics, (Sabiou Inoua and Vernon Smith in process for MacMillan).
To suppose that utility maximizing individuals choose quantities to buy (sell) contingent on given prices and income is to pose a consumer demand and supply problem without a price-determining solution. This neoclassical problem formulation imposes (1) given prices, (2) price-taking behavior, and (3) the law of one market clearing price, on markets before prices can have formed. Hence, unexplained prices are presumed to exist before consumers arrive in the market. If such conditions are hypothesized to characterize markets, the theoretical challenge is to show that they follow from a theory of how markets function. Hence, neoclassical economics did not, because it could not, articulate a market price formation process.
The classical economists suffered none of these logical inconsistencies. (see for example Adam Smith, 1776, book 1, chapter VII) They articulated a coherent theory of price formation and discovery based on operational pre-market assumptions about the decentralized information that buyers and sellers brought to market, their interactive behavior in aggregating this information and simultaneously discovering prices, and contract quantities in the market’s end state. Buyers (sellers) were postulated to have pre-market max willingness to pay (min willingness to accept) value for given desired quantities to purchase (sell) that bounded the price at which each would buy (sell) as each sought to buy cheap (sell dear). We articulate a mathematical theory of this classical price formation process, its connections with Shannan information theory, and the unexpected role of the early market experiments in using designs and reporting results consistent with classical theory.

Eric Schliesser

Dear Vernon, thank you for the comment and the advance notice of your work with Sabiou Inoua, which I look forward to reading and discussing with you! I know your interest is not Foucault, but it is striking -- despite his clear familiarity with Hayek -- he has little interest in price formation and so does not explore that angle at all in his analysis of the history of liberalism here. (That's in part because he is interested in the liberal art of government.)

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Here's a link to my past blogging (and discussions involving me) at: New APPS.


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