Is the Market a Test of Truth and Beauty?

Chapter Ǻ: Macroeconomics and Coordination ȀȂȄ

by changes in technology and notably include perceived market imbal-

ances and frustrations of transactions at the old prices. Perceptions and

responses are not instantaneous.

Already in hisĻeory of Money and Credit(ȀȈȀȁ/ȀȈȇȀ, pp.Ȁȇȅ–ȀȇȆ), Lud-

wig von Mises recognized such facts of reality. Many prices are deliber-

ately set, obviously in retail trade, and set by trial and error.

Now this phenomenon is not accidental. It is an inevitable phenomenon

of the unorganized market. In the unorganized market, the seller does

not come into contact with all of the buyers, but only with single individ-

uals or groups.... Consequently the seller fixes a price that in his opinion

corresponds approximately to what the price ought to be (in which it is

understandable that he is more likely to aim too high than too low), and

waits to see what the buyers will do.... Ļe sole way by which sellers can

arrive at reliable knowledge about the valuations of consumers is the way

of trial and error.

Institutional forces work to postpone price changes otherwise called
for by small or transitory changes in supply and demand (ȀȈȀȁ/ȀȈȇȀ, p.ȀȂȃ).
“Every change in the market data has its definite effects upon the market.
It takes a definite length of time before all these effects are consummated,
i.e., before the market is completely adjusted to the new state of affairs”
(MisesȀȈȃȈ/ȀȈȅȂ, p.ȅȄȁ).

[C]hanges in the factors which determine the formation of prices do

not produce all their effects at once. A span of time must elapse before

all their effects are exhausted. Between the appearance of a new datum

and the perfect adjustment of the market to it some time must pass....

In dealing with the effects of any change in the factors operating on

the market, we must never forget that we are dealing with events taking

place in succession, with a series of effects succeeding one another. We

are not in a position to know in advance how much time will have to

elapse. (p.ȁȃȅ)

Mises recognizes a certain inertia of prices (ȀȈȀȁ/ȀȈȇȀ, pp.ȀȂȂ–ȀȂȅ).

Relatedly, he recognizes that flexible exchange rates tend to move ahead

of their purchasing-power parities; relatively, prices of many goods

and services are sluggish (ȀȈȃȈ/ȀȈȅȂ, pp.ȃȄȄ–ȃȄȅ). Mitchell (ȀȈǿȇ/ȀȈȅȅ,

pp.ȁȄȈ–ȁȇȂ) observed the same phenomenon in detail in the U.S. “green-

back” period ofȀȇȅȁ–ȀȇȆȇ. Mises also observes more of a historical element

in the value of money than in the value of any ordinary good.