This section will prov ide a solution to our aforementioned problem, that is, where does the demand come from if agents try to sell first. Apparently, for the system to work, there must appear a trader who comes to the economy only to demand without trying to sell something first Does this type of trader exist in the real world? Yes, it does, and we call the demand from such a trader the non-supply related demand Supply-Related Demand and Non-Supply Related Demand. a supply related demand is the demand whose payment is supposed to be covered -not necessarily in ad vance but soon by a corresponding sale. A non-supply related demand is the demand whose payment is not supposed to be covered by an immediate sale, though perhaps in a very long future, this pay ment should still be covered. a typical example of supply related demand is consumption demand which is supposed to be covered by consumer income coming from the sell ing of endowments Another example is production demand, e.g., labor, material, etc, whose pay ment is supposed to be covered by selling commod ities on which they are used in production processes. The non supply related demand is the autonomous demand in the usual sense In the traditional equilibrium framework, there is no such distinction. 2 As we shall see later these two types of demand play different roles in the market exchange process and hence the distinction turns out to be necessary Constraints for Economically Sensible Supply-Related Demand Demand always means a financial pay-out and hence for an agent it is a loss in his wealth. Thus before he pays out, the agent must make sure whether his pay-out is economically sensible Then what do we mean by an economically sensible pay-out or an economically sensible demand? For supply-related demands, two constraints must be posited Financial Constraint: The agent must have financial resource to pay for his p urchase. as demand 2. Paul Davidson (1992) remarks that in this sense"Keynes's taxonomy provides an inherently more general theory. (pp 458)
6 This section will provide a solution to our aforementioned problem, that is, where does the demand come from if agents try to sell first. Apparently, for the system to work, there must appear a trader who comes to the economy only to demand without trying to sell something first. Does this type of trader exist in the real world? Yes, it does, and we call the demand from such a trader the non-supply related demand. Supply-Related Demand and Non-Supply Related Demand. A supply related demand is the demand whose payment is supposed to be covered — not necessarily in advance but soon — by a corresponding sale. A non-supply related demand is the demand whose payment is not supposed to be covered by an immediate sale, though perhaps in a very long future, this payment should still be covered. A typical example of supply related demand is consumption demand, which is supposed to be covered by consumer income coming from the selling of endowments. Another example is production demand, e.g., labor, material, etc., whose payment is supposed to be covered by selling commodities on which they are used in production processes. The nonsupply related demand is the autonomous demand in the usual sense. In the traditional equilibrium framework, there is no such distinction. 2 As we shall see later, these two types of demand play different roles in the market exchange process and hence the distinction turns out to be necessary. Constraints for Economically Sensible Supply-Related Demand. Demand always means a financial pay-out and hence for an agent it is a loss in his wealth. Thus before he pays out, the agent must make sure whether his pay-out is economically sensible. Then what do we mean by an economically sensible pay-out or an economically sensible demand? For supply-related demands, two constraints must be posited. I. Financial Constraint: The agent must have financial resource to pay for his purchase, as demand. 2 . Paul Davidson (1992) remarks that in this sense "Keynes's taxonomy provides an inherently more general theory."(pp. 458)
II. Expectational Constraint: The agent must expect that he can sell the related supply so that the revenue from this selling can cover his current demand As to the financial constraint, where the financial resource comes from is not important. It can come from either previous selling or from credit. In the modern credit system, this constraint ms to be somewhat easily satisfied However this does not mean that the constraint does no exist. For example, income identification is often required by banks to issue a credit card Nevertheless this is only a necessary constraint, not sufficient. Even if a producer has sufficient idle cash, he will not demand those inputs used to produce the commodity that cannot be sold Similarly, a consumer will not plan his consumption demand without knowing whether he can (or cannot)or how much he can sell his endowments. We will find that trad itional equilibrium analysis lacks a consideration exactly on this constraint The Expectation as to Sales. We now focus our attention on the expectation constraint. This constraint itself means that before paying for the supply related demand an agent should expect that he can sell the related supply. Then where does the expectation come from? To make things clear, we may define an expectation function, g(N Above S is the expected sale; N is the information available to the agent, cond tional on which the expectation is derived. The major problem then becomes what is the information N? One should note that in traditional equilibrium analysis, the information N is only about price any rational expectations models, agents are only concerned with the future expected price, on which they rely to make their decisions. 4 This ind icates that agents have full-confidence that 3. In this sense, forming an expectation, as we mentioned early (see footnote 1), may also be regarded as a selling activity 4. Muth's original model (1961)is certainly such an example, others, e.g. Lucas(1972), Frydman(1982)among others
7 II. Expectational Constraint: The agent must expect that he can sell the related supply so that the revenue from this selling can cover his current demand. As to the financial constraint, where the financial resource comes from is not important. It can come from either previous selling or from credit. In the modern credit system, this constraint seems to be somewhat easily satisfied. However this does not mean that the constraint does not exist. For example, income identification is often required by banks to issue a credit card. Nevertheless this is only a necessary constraint, not sufficient. Even if a producer has sufficient idle cash, he will not demand those inputs used to produce the commodity that cannot be sold. Similarly, a consumer will not plan his consumption demand without knowing whether he can (or cannot) or how much he can sell his endowments. We will find that traditional equilibrium analysis lacks a consideration exactly on this constraint. The Expectation as to Sales. We now focus our attention on the expectation constraint. This constraint itself means that before paying for the supply related demand an agent should expect that he can sell the related supply. 3 Then where does the expectation come from? To make things clear, we may define an expectation function, (1) S = g(N). Above S is the expected sale; N is the information available to the agent, conditional on which the expectation is derived. The major problem then becomes what is the information N? One should note that in traditional equilibrium analysis, the information N is only about price. In many rational expectations models, agents are only concerned with the future expected price, on which they rely to make their decisions. 4 This indicates that agents have full-confidence that 3 . In this sense, forming an expectation, as we mentioned early (see footnote 1), may also be regarded as a selling activity. 4 . Muth's original model (1961) is certainly such an example, others, e.g. Lucas (1972), Frydman (1982) among others
at given or expected prices they can sell their output as much as they want. 5 Once they have such confidence, they certainly need not concern themselves with the ordering of their activities However an agent who reveals such a fully confidence within an uncertain economy can hardly be regarded as rational or intelligent, whether he is selfish(reflected by his optimization process) I thus argue that the expected sale cannot be determined only by price information. N must contain quantity information. The following, which I believe to be very common in practice, is my own suggestion Information Used for Expectation For consumers. working contracts tenures. etc Fo f information takes the form of contracts, orders, etc, the expect ation function is very easy to define. What is said in contracts (or orders) is exactly what is expected. If information comes from past sale, the expectation function will depend on the pattern by which agents form their expectation. The models of adaptive expectation, learning and even rational expectation might be applied here, but the information, from which the expectation is derived, should also contain the quantity(the past sale) Demand Determination, a Backward Exposition. We are now ready for my backward exposition of the way demand is determined. It seems that the best way to do this is to put forward a set of questions to a series of agents s. "the output as much as they want"is certa inly referred to the optimum output derived from the agents optimization process given the expected prices 6. Else where( Gong, 1993, 1994b), I call such a revealed behavior as"full-confidence expectation"with its meaning and relation to the neoclasical system explained in detail
8 at given or expected prices they can sell their output as much as they want.5 Once they have such confidence, they certainly need not concern themselves with the ordering of their activities. However an agent who reveals such a fully confidence within an uncertain economy can hardly be regarded as rational or intelligent, whether he is selfish (reflected by his optimization process) or not.6 I thus argue that the expected sale cannot be determined only by price information. N must contain quantity information. The following, which I believe to be very common in practice, is my own suggestion. Information Used for Expectation For consumers: working contracts, oral promises tenures, etc. For producers: orders past sales. If information takes the form of contracts, orders, etc., the expectation function is very easy to define. What is said in contracts (or orders) is exactly what is expected. If information comes from past sale, the expectation function will depend on the pattern by which agents form their expectation. The models of adaptive expectation, learning and even rational expectation might be applied here, but the information, from which the expectation is derived, should also contain the quantity (the past sale). Demand Determination, a Backward Exposition. We are now ready for my backward exposition of the way demand is determined. It seems that the best way to do this is to put forward a set of questions to a series of agents. 5 . "the output as much as they want" is certainly referred to the optimum output derived from the agents' optimization process given the expected prices. 6 . Elsewhere (Gong, 1993, 1994b), I call such a revealed behavior as "full-confidence expectation" with its meaning and relation to the neoclasical system explained in detail
Let's start with the agents who, as a group dubbed as a, are currently buying the supply- lated demand. We may suppose that this group has a representative to whom we can ask the following questions Step I Questions to A. the Current Supply-Related Demander Question: Why do you buy these commodities? Answer: Because we expect that we can sell out the related supplies of these comm Question: Why do you expect you can sell out these related supplies? answer: Because we have information Question: What is it? A nswer Well, some are orders and contracts. Some are oral promises. Others are relatively uncertain. For example, last month one of us sold out 29835 units of his commod ity. He thus guesses that this month the sale will go somewhat above that, because we are now in holiday season Next let,'s dub b as those who, as a group, sent the above information to A, more specificall engage their buying activities with A. Note that B's buy ing activities had already taken place last month, or at least before A's buying activ ities. We may assume that what the b's bought are again the supply-related demand. Thus we ask the similar questions to their representative Step II: Questions to B the Supply-Related Demander to A Question: Why did you buy these commodities from A? Answer: Because we expected that we could sell out their related supplies Question: Why did you expect you could sell out these related supplies? Answer: Because we have information Quest Answer: Well, some were orders and contracts. Some were oral promises. Others were relatively uncertain. For example, in the month before the last, one of us sold out 234 units of his commod ity. He thus guessed that last month the sale would also be around that We can in the same way dub c as those agents who demand B's goods. Again their buying activities with B must take place before B's buy ing activities with A. Similar questions can also
9 Let's start with the agents who, as a group dubbed as A, are currently buying the supplyrelated demand. We may suppose that this group has a representative to whom we can ask the following questions: Step I: Questions to A, the Current Supply-Related Demander Question: Why do you buy these commodities? Answer: Because we expect that we can sell out the related supplies of these commodities. Question: Why do you expect you can sell out these related supplies? Answer: Because we have information. Question: What is it? Answer: Well, some are orders and contracts. Some are oral promises. Others are relatively uncertain. For example, last month one of us sold out 29835 units of his commodity. He thus guesses that this month the sale will go somewhat above that, because we are now in holiday season. Next let's dub B as those who, as a group, sent the above information to A, more specifically, engage their buying activities with A. Note that B's buying activities had already taken place last month, or at least before A's buying activities. We may assume that what the B's bought are again the supply-related demand. Thus we ask the similar questions to their representative. Step II: Questions to B, the Supply-Related Demander to A Question: Why did you buy these commodities from A? Answer: Because we expected that we could sell out their related supplies. Question: Why did you expect you could sell out these related supplies? Answer: Because we have information. Question: What is it? Answer: Well, some were orders and contracts. Some were oral promises. Others were relatively uncertain. For example, in the month before the last, one of us sold out 234 units of his commodity. He thus guessed that last month the sale would also be around that. We can in the same way dub C as those agents who demand B's goods. Again their buying activities with B must take place before B's buying activities with A. Similar questions can also