Price Fluidity In Economics

It is easy to see how algebra, the branch of mathematics concerning variables, originated in the long-ago markets of the Middle East. The name was originally an Arabic word, al-jabr.

On one side of a counter is a merchant, and on the other side a potential buyer. The counter represents the equal sign (=) in the equation. On one side of the equals sign is the goods that are bought, on the other side is the money that was paid for those goods. A transaction can take place only when both the buyer and seller are willing to accept the exchange as equal, hence the counter representing the equals sign.

Money is issued to represent all of the goods and services produced in the economy, which brings us again to the equals sign and variables. We could say that money = prices x supply, or in algebraic variables m = ps. It does not matter which numbers are assigned to the variables as long as m = ps.

This simple equation can be rearranged as p = m/s, or prices = money divided by supply. This shows that, while generally money = supply, pricing specifies just how much money equals what in terms of supply.

Supply x prices represents the basic economic rule of supply and demand. It does not matter which one is higher or lower, as long as their product equals the volume of the money supply. When supply is low relative to demand prices will be high, and vice versa.

When someone buys something, the buyer stands to the left of the equals sign, usually represented by a counter in a store, putting money over the counter so that a matching portion of the supply of goods goes in the opposite direction over the counter to the buyer, and the equation is maintained.

If we reverse this equation, when a worker increases the supply of goods by working, the equation is balanced by money in the form of wages moving across the equals sign to the worker. These two equations are joined together by the fact that the prices exchanged for goods are largely the same money that the workers who produced those goods are given as wages. So, in a static economy all variables remain constant.

However, in the real world, an economy is almost never static. In a way similar to the law of supply and demand if the supply of money available to purchase goods increases, without a corresponding increase in the supply of goods, then the prices of those goods must increase as well in order to keep the algebraic equation in balance. Remember the basic rule of algebra that we can do whatever we want to an algebraic equation and it will remain an equation as long as we do the same thing, such as divide by five, to both sides of the equation.

This approach to economics as an algebraic equation sheds some light on another rule that we can observe in order to create the most efficient possible economy. We have seen two such rules in other postings on economics. In one rule, I maintain that both right and left or both seller and buyer, are of equal importance in each economic transaction and thus in the economy as a whole. Based on this rule then, the best economy is not one which is either rightward (focused on the supply side) or leftward (focused on the demand side), but one which most successfully weaves left and right together.

In another rule, I notice that all workers can be broken down into four broad categories, and these categories are not created equal. They are: 1) Those who make things 2) Those who fix things 3) Those who move things and, 4) Those who run things. The goal should be to have as many workers as possible as high on the scale as possible, in other words as many workers as possible actually making things. This does not mean that we do not need workers who move things and who run things, but should aim to need as few as possible so that we can have more actually making things.

(Note- I have decided to define knowledge as wealth so that imparting knowledge falls under making things, the medical field falls under fixing things, selling is included with moving things, emergency services and the military is under fixing things and all administrative and legal positions are under running things).

We can also think of the economy as a pyramid. The broader the base relative to the height, the more stable the pyramid. Those who make things are at the base of the pyramid and all other workers are based upon them. The wealth structure is also a pyramid with more stability, although less incentive, when there is more wealth at the lower levels. Communism is represented by a low pyramid which never climbs very high, while capitalism is a much more vertical pyramid but one which is wealth is concentrated higher and is vulnerable to leaning or collapsing.

Another rule for the creation of the most efficient possibly economy becomes apparent when we consider economics as being based on algebraic equations. The best economy is one in which prices are as fluid as possible. The trouble is that economics cannot operate exactly like the algebraic equations which define it because it involves real-world movements and materials and changes.

The function of prices in an economy is to act as the change element to keep the equation in balance when there are changes in demand or the supply of goods or money. If, for some reason, prices are unable to change or to change quickly enough, then the change must come from another element in the equation. As we know only too well, this can be destructive if it results in a cutback in production which gets an inflationary spiral under way.

This can happen if buying decreases, but pricing is not fluid enough to maintain the equation. It is far better to let pricing act as the change element. Trouble often begins when workers are being paid too little, decreasing money available to buy on one side of the equation, with sellers reluctant to lower prices, and especially to sell below cost, on the other side of the equation in order to keep the equation in balance.

A true market is haggling for food. Buyers must have regular meals, buying food is not something that can be put off for another day, and merchants cannot hold out long for a higher price because they must sell the food before it spoils. The two must quickly agree on a price. But the more advanced an economy becomes, the more difficult is can be to keep prices fluid so that they always act as the change element in the economic equation.

The conclusion is that the best economy is the one in which the prices are the most fluid. On this blog is a posting "The Concept Of Fluid Pricing", in which I propose the use of computer technology to bring about more fluid pricing.