Tuesday, 20 January 2015

US Retail Sales and False Profits - Part 1 of 9

Figures out last week showed that US Retail Sales fell by 0.9%, in December, whilst the rise of 0.4% in November was lower than the original estimate. The figures were an excuse for yet another large sell off in US shares, especially as the data was followed by sharp falls in the price of copper, which added to concerns of deflation, as the price of oil continued to plummet. The main concern was that these falling prices, which feed through to falling prices of manufactured commodities, would mean lower profits. A concern that the mass of profits might fall, is what stands behind the fall in share prices. However, what this demonstrates is the false conception of what profits are, according to bourgeois economic theory. In fact, it also demonstrates the inadequacy of bourgeois economic theory in relation to prices also.

Let's take this latter error of bourgeois economic theory first, and in the process look again at that sales data. According to orthodox theory, prices are determined by the subjective valuation placed upon commodities by consumers. In other words, every consumer has a ranking of preferences for different commodities, based upon how much utility they obtain from having an additional unit of that commodity, as opposed to others. This is its marginal utility. To maximise their utility, consumers should, then keep buying each commodity, up to the point where the marginal utility they obtain is equal to the price they have to pay for that additional unit.

This is then a theory in which the price of commodities is determined by demand. Prices of commodities are determined by what consumers are prepared to pay for them, a view that is repeatedly stated by financial analysts and pundits on the business channels. When that subjective valuation rises, because consumers in aggregate feel that they obtain more utility from those commodities than they did previously, their demand for those commodities will rise, at any particular market price. As the demand rises, so the market price will rise, thereby reflecting this higher subjective valuation.

Put another way, if consumers subjective valuation of commodities remains the same, but the price of commodities falls, because the supply of them is increased, the demand will rise to soak up all of this additional supply, to the point whereby the price is again equal to this aggregate subjective valuation at this new level of demand. For any commodity, this new market price will tend to be lower than it was originally, because at this new higher level of demand, the marginal utility will tend to be lower, because its assumed that the more we have of something, the less utility we obtain from each additional unit. This is the basis of Say's Law, that markets must always clear, and so there can be no general overproduction.

In Part 2, I will look at the role of Say's Law, and how it relates to prices and the US Retail Sales data.

Forward To Part 2

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