Tuesday, November 13, 2012

The Coherence of the Market

"The [substitution] principle states that higher relative prices tend to discourage and lower relative prices encourage the use of a commodity or service. [Demand curves slope downward.]

"If the principle of substitution is sufficiently strong, then decentralized markets are reliable tools for allocating output to households and input to businesses. However, in financial and capital-asset markets, in which speculative and conjectural elements are powerful, the principle of substitution does not always apply. A rise in the relative prices of some set of financial instruments or capital assets may very well increase the quantity demanded of such financial or capital assets. A rise in price may thus breed conditions conducive to another such rise." -- Hyman Minsky, Stabilizing an Unstable Economy, p. 106

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