Principle of Price Chaos
The principle of price chaos means the kinetic law of price change caused by sudden variables such as wars, unusual weathers or policy revisions. However, it is not easy to find a regularity in the occurrences of sudden variables. It is impossible for me to establish a scientific principle of the occurrences, as it is difficult to find any regularities from them. However, I can not ignore the impacts of these sudden variables on price change, because they often impact significantly on overall economic phenomena such as income and employment as well as price.
For example, the two oil crises that broke out at the end of 1973 and the end of 1978 had a decisive impact on the prices of all goods and income along with one other variable which is the economic overheating due to the fiscal expansion(This issue will be examined in full in the ‘Scientific Economic Policy’.). The fluctuation of oil price affected almost all primary resources and caused the resource shock, which in turn affected sequential secondary and tertiary products. As a result, the price change had persisted for many years, and it had also affected income causing a serious economic slump. This is why it should not be derived the principle of the unexpected phenomena occurred often in reality from the price theory. Especially the principle of price chaos should be considered carefully in reading and predicting price trends.
There are certain areas that show a certain law among the chaos phenomena. Even though It is difficult to predict how and when an unexpected sudden variable will occur, but its effect on price afterwards is regular. From the conclusion, the regularity is given by the influence of future price on current price. The occurrence of an unforeseen incident means that a temporary imbalance between supply and demand occurs or will occur, and therefore price change have to be brought about. This outbreak makes the prediction inevitable that future prices will change drastically, which affects current prices. Why is it? The reason is very important, so let's take a close look.
Decisions of all economic activities, such as consumption, production, employment, investment, distribution and storage are made in the present, but the results always will appear in the future. For example, if you buy a piece of clothing at 500 dollars you can see whether it is reasonable or not after you put on it, and if you produce the clothes you can see whether they are profitable or damaging after selling them. The same is true for investment, employment, distribution and storage. Whether investment and employment will result in loss or profit will be revealed later on, and it will be revealed whether profit or loss will occur. All the activities takes time until the result is revealed. Therefore, all the economic subjects always have to predict the future and do economic activities. It does not matter whether the predictions are right or wrong. Rather, they are often wrong, so the interest in the future becomes greater and greater. This attribute enforces the economic entities to be interested in the future price and it allows the future price to have a strong influence on the current price. If it seems that the future price will go up the current price goes up naturally, and if the future price will come down the current price goes down rightly.
Not only that. If the price continue to rise, tremendous increase of demand may be lead by the time-shift and space movement of the demand. So to speak, if the price of a goods is likely to go up, the demand which is expected to appear in the future may shift to the present and it is combined with the demand which appears in the present, so that the price will soar up and up. This is the conclusive evidence that the future price affects the current price. And the space movement of demand also drives up the price. For example, if buying a goods becomes profitable, the demand of other goods moves to the goods for the profit and its future price will go up and up. This fact that the future price affects the current price means that prices will be further stimulated by their own changes. This phenomenon is common in the stock market, where the principle of price chaos has a relatively large influence. To the extent that the chaos principle dominates, the stock price climbs up when it is likely to rise and declines when it is likely to fall. This logic implies that psychological variables have strong impacts on price. In short psychological variables have this important meaning in the principle of price chaos.
The economics of complexity system which is emerging recently also focuses on the psychology of economic agents, but the theoretical basis is weak. Let's take a moment to look at the cause of speculation that is one of the appreciable achievements in the behaviorism economics. It suggests that investors attract more investors when the prices of their investments continue to rise and these activities cause the bubble. This logic is similar to the time shift and space movement of demand in Choe's economics, but the theoretical basis is fragile. This feedback theorem may explain why the bubble occurs, but it can not fully explain the inevitable reason for all the bubble to collapse. Other economics of complex system that have attracted attentions of economists are also fragile in the theoretical basis. On the contrary, the principle of price chaos has a theoretical basis to embrace not only behaviorist economics but also other complex system economics. This issue will be reviewed shortly, dealing soon with the ‘Evolution of Supply and Demand Theory’.
On the other hand, some kinds of goods operate more sensitive to the principle of price chaos than others, while some others operate more sensitive to the principle of price fluctuation and some another goods are more affected by the principle of price decision. In general, the commodities such as real estates, stocks and gems that are consumed by the accumulation of income show more sensitive responses to the principle of price chaos than the others and they play an important role as a means of value storage in the economy, while the necessities of life such as foods and clothes show duller response to the principle of price chaos but their speed of reaction is faster than them. These characteristics are caused by the reason that the price elasticity differs for each commodity. This issue will be reviewed in detail later in the course of dealing with the ‘Principle of Demand and Supply'.
For example, if a war breaks down, what happens first in the economy is the price fall of the goods such as stocks, securities, real estates and gems. If the war continues and the production of the economy is not smoothly performed, what happens later on is the quick price rise of the necessity of life. Using these traits, there were someone who gathered great wealth during the war. They sold quickly their properties such as jewelries, securities and real estates right after the war began, while they stored foods and clothes. They sold foods and clothes after the prices rose during the war, while they collected jewels, real estates and stocks that fell in price. After the war they sold them back and made big money.