A reply to the PIAF (Alejandro Ramos' term meaning "Post Identified As
Follows," used to enable us to keep track of threads under the new
cyberregime):
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From: owner-ope-l@galaxy.csuchico.edu on behalf of Allin Cottrell
Sent: Wednesday, October 22, 1997 11:18 AM
To: ope-l@galaxy.csuchico.edu
Subject: [OPE-L:5630] Re: ope-l: Deer-hunting
Allin: "What you are saying is that the prediction of a sector's
aggregate price conditional on its value alone is not, in
general, the same as the prediction conditional on both
value and organic composition. But no, that is not what's
called bias. To take a more familiar econometric example,
suppose consumption is a increasing function of disposable
income and a decreasing function of the rate of interest.
Then the prediction of consumption based on income alone
will in general not be the same as that conditional on both
income and the interest rate; and further, the prediction
based on income alone will systematically overstate
(understate) consumption for periods of high (resp. low)
interest rates. That does not make income a 'biased'
predictor of consumption: it produces the right prediction
at the average interest rate."
Allin's analogy implies that a sector's aggregate value produces the right
prediction for aggregate price when the *sector's* composition of capital is
at its average level (and other things, such as monopoly returns, are at their
average level). This, however, is not the case. So the analogy is invalid.
I do believe that this failure of aggregate values to predict
aggregate prices -- even after nonsystematic deviations are eliminated --
means that values are a biased estimator of prices.
Andrew Kliman