Freeman

ARTICLE

The Bogey Of "Administered Prices"

SEPTEMBER 01, 1959 by MURRAY N. ROTHBARD

 Dr. Rothbard is a consulting economist in New York City.

Among the perennial critics of Big Business, one favorite charge is pressed, whether times are good or bad: prices are too high. If there is a depression, then Big Business is keeping prices too high and thus causing unemployment; if a boom is underway, then Big Business’ raising of prices is pri­marily responsible for the price "inflation." These charges assume that, in some way, large businesses have been able to repeal the law of supply and demand, and have themselves assumed a highhanded dictation over the prices they can charge, or "administer."

There are many fallacies and in­consistencies in this approach. For example, if Big Business is caus­ing inflation by suddenly and wickedly deciding to raise prices, one wonders why it hadn’t done so many years before. Why the wait?

If the answer is that now mone­tary and consumer demand have been increasing, then we find that we are back in a state of affairs determined by demand, and that the law of supply and demand hasn’t been repealed, after all. Then, there have been many fine statistical studies, demonstrating that the "administered" prices have not increased more than the others and did not remain rela­tively higher than others during depressions. But one critique of this bogey has been particularly neglected, and this is a philosophic one. Is there any sense at all to the concept of "administered" prices?

This concept is generally devel­oped as follows: Consider the in­dividual wheat farmer (as in the old days of free competition in farm products, that is). He has no "control" over the price of his wheat. He must go to the estab­lished wheat market and sell the wheat at whatever price is offered. He must take it or not sell hiswheat. On the other hand, take, for example, General Motors. It produces cars, and then decides what price it will charge; it doesn’t have to accept a price set on some general car market. Therefore, General Motors has "control over"—administers—its selling price.

Posted Prices a Convenience

To some extent, this is a prob­lem of being misled by the super­ficial matter of who posts the price on any particular market. The con­sumer who buys stockings from Macy’s or Gimbel’s does not, we can be sure, feel controlled or "administered" because the prices of the stockings are posted beside them on the counters. He would, in fact, feel quite put upon if he had to make the price-offer himself. Indeed, the evolution from the haggling of the oriental bazaar to the "one-price" posting of stores today is almost always considered by the consumer as an important and welcome time-saver, enabling him to obtain information quickly about the markets for the goods he wishes to buy. The one-price sys­tem in no way interferes with the quiet, effective working of con­sumer demand in determining prices and the allocation of pro­ductive resources.

But there is still more to be said. For it is not true that the farmer was forced to sell at the wheat market and there only. On the contrary, if he didn’t like the price offered him there, he was perfectly free to take his wheat elsewhere. If he could persuade some other buyer, outside the regular market, to buy his wheat for a higher price, there was noth­ing to stop him from making the sale. The fact that it would be highly unlikely for him to find a buyer willing to pay above the regular market price is beside the point.

But the Customer Decides

The point is that every seller, in a free society, whoever he is, has absolute control over the price he charges for his commodity. If I wish to set a price of $2,000 an hour for my services as a consult­ing economist, I am perfectly free to do so. I, the farmer, and Gen­eral Motors all have this degree of control.

But this is all the control any of us have. The farmer can charge whatever he wants, but (in the free market) he cannot force any­one to buy his goods at that price. Neither can I, and neither can General Motors! All of us sellers are in the same boat. We have ab­solute control over the price we ask for our services, but we have no control whatever over the price the buyer is willing to pay. If we set our prices too high, people will not buy our products.

And so every producer, what­ever his field, is constantly en­gaged in trying to discover his market, in trying to determine how much buyers are willing to pay for his product. And we each set our prices, in the real world, according to our estimates. The fact that the farmer has his mar­ket all ready and waiting for him and General Motors does not, is a purely institutional matter which in no way alters the principle. The point is that both producers can set any price they wish, but neither can compel a sale. And, therefore, either no price or all prices are "administered," depend­ing on how you choose to define the term.

But whichever way the term is used, if it is used at all, there is no justification for singling out Big Business or any other area and saying that its prices are "ad­ministered."

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September 1959

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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