The Concept Of Fluid Pricing

This is about another possible major application of computer technology. Stock trading is already computerized, and I think that there is tremendous potential for use of computer technology to facilitate the smooth operation of the economy as a whole.

The idea of a market economy began, as we might expect, with markets. The type of traditional markets that have operated in town squares for thousands of years. In such traditional markets, there was no such thing as an artificial recession. Any reductions in economic activity were caused only by outside factors, such as drought or warfare.

The wonderful thing about a market economy is that it enables us to fill our potential, to economically "do all that we can do". An economy must be balanced between it's supply and demand sides to continue functioning, any changes in either supply or demand can disrupt this balance.

When this happens, to keep the economy running smoothly, it must be quickly brought back into balance. The traditional market deftly accomplishes this by haggling, the seeking of an agreeable price between buyer and seller.

We get our well-known "Law of supply and demand" from these traditional markets. When demand rises relative to supply, prices rise. When supply increases relative to demand, prices drop. The goal of the economy is to produce all that the people need, and will buy, and to leave nothing unsold.

We have adapted the market concept from the town square as the basis of the modern economy. As you may notice, things do not always work smoothly. There are periodic recessions, or cutbacks in production and economic activity, that are very harmful. It is a really absurd situation when, for example, a family is struggling to keep and old car running because they cannot afford a new one, while down the street there is a car dealership letting employees go because so few people are buying cars. Most of these recessions are artificial recessions and are not caused by outside factors beyond our control.

The truth that I want to point out is that we do not have a genuine market economy. The hinge upon which a true market functions is the haggling between buyer and seller to arrive at an agreeable price. This was discussed in the posting "Recessions Made Really Simple" on my economics and world issues blog, www.markmeekeconomics.blogspot.com . This continuously maintains the essential balance between the supply and demand sides of the economy.

There is a form of haggling done on a global scale, since the prices of oil, other commodities and, national currency exchange rates are usually reset on a daily basis. The selling price of cars also tends to be open to a certain amount of haggling. But in the stores where ordinary consumers shop, it is quite a different story. Prices are indicated on the product and the shelf with a label or price sticker. Prices do change, to reflect the law of supply and demand, but this is not done continuously.

Decisions to change prices, when necessary, is done at the management or corporate level. This takes time, and it is in this delay in responding to continuously-changing supply and demand that the seeds of recession are planted. This slowness to change prices is known to economists as their "stickiness".

By the way, one thing that I think Reagan-era Republicans had right is their terminology. Referring to the "supply side" (business) and the "demand side" (consumers) is much more descriptive than referring to the two sides as "liberal" and "conservative".

In the posting, on the economics blog, "Recessions Made Really Simple", I explained how an increase in production can actually bring about a recession. Unless there is a corresponding increase in wages, there will not be enough money in circulation to buy all of the goods and services that have been produced. Since it does not make sense to produce goods or services that are not going to sell, companies tend to cut back on production when demand seems to fall. This means letting go of workers, who then have less money to spend on consumer goods, thus furthering the recession spiral.

This beginning of a recession could be remedied by a lowering of prices. This would re-establish the balance between the supply and demand sides of the economy, that was upset by the change in the relative positions of production and demand.

Companies are reluctant to lower prices since this will cut into expected revenue. But, with the economy as a whole, this reluctance means that the correction to keep the economy balanced when there is a change in the equilibrium between the supply and demand sides caused by increased production, without a corresponding increase in wages, must come from another direction.

Unfortunately, the correction then comes in the form of a cutback in production, because the newly-increased level of production is not balanced by the wages on the demand side. This begins the downward spiral that we refer to as a recession.

The old practice of haggling, as practiced in traditional marketplaces, would solve all of this by continuously resetting the balance between supply and demand. But haggling is simply not practical in the supermarket and big box store chains of today. Haggling only makes sense when the merchant actually owns the goods, or at least is working on commission. Cashiers and clerks in stores cannot be expected to haggle with customers over prices, many would likely be accused of giving away merchandise to their friends and families.

However, in recent years store records have become computerized. We all know that the real reason that stores give out bonus cards, with a magnetic strip, is so that they can track who buys what. Stores using bar code technology on products keep databases on the volumes of each item sold. This is matched with an inventory record of the goods.

The root of the trouble is that the pre-determined prices of the goods are too slow to change, whereas this would not be the case in a traditional market, based on haggling. Why not apply computer technology to bring the haggling mechanism back?

A program could keep track of the sales of every product. If the product was not selling well, relative to it's previous sales and inventory in stock, the program would try lowering it's price. Instead of the standard price displays on the shelves, new digital price displays would be used and would be connected to the central pricing system.

Prices would be automatically reviewed weekly in supermarkets, daily in smaller stores and, maybe monthly in stores selling larger items. The volume per purchase would be taken into account, it would count as "less" of a sale if one customer bought five of a certain item than if five customers each bought one, because the purchase of five may be less reflective of true sales trends. Total sales in the store would also have to be considered, since something like a severe storm would mean that there would be fewer shoppers than average in the store. A certain upper and lower limit could be pre-set for the price of each item.

Companies would, of course, lose revenue when prices are lowered, but this would usually be preferable to the items not selling at all, especially when it comes to perishables. But in the same way, these losses could be recouped by edging up the prices of those items that were selling well.

Supposedly, the benefit of a market economy is that economic decisions are made, in effect, by all consumers, not just by a few central planners as in a command economy such as Communism. Yet, our existing pricing system more resembles an inefficient command economy in that it has lost the advantage of haggling, as in a traditional market, and must wait for management to make decisions on pricing.

Running an economy without fluid pricing is a lot like trying to run a car engine without oil. Sooner or later, the economy seizes up. The "oil" of a true market economy is the fluidity of pricing which characterizes a traditional market based on haggling. I believe that computer technology has made it possible to incorporate a form of haggling into the economy, so that we can stave off these destructive recessions. Another possible way is, as I suggested in "Recessions Made Really Simple", the manipulation of payroll taxes by the government to ensure that the supply and demand sides of the economy remained in balance when there is an increase in production, while wages still lag behind.