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IN
PRIVATE
prices that provides the data necessary for calculation. Many objections are made against their price-mechanism, inter alia that it is unjust,
because it is influenced by the distribution of income, which is itself
said to be inequitable. This. is an ethical, sociological question that
we shall not discuss here. What interests us in this connection is the
potential and actual efficiency of the mechanism which exists irrespective of the form of-society and of the given, but continually changing,
distribution of income. It may be stated at once (we shall revert to the
question later) that the functioning and technical efficiency of the pricemechanism is in our day being undermined.
In spite of this, in the capitalist societies it is still prices, or rather,
price-alterations, that act as the anonymous conductor of the economic
orchestra. They play. the same part as the central authority in socialist
societies. It is price-alterations that keep production and business in
capitalist societies from being conduc~ed "blindly" and "without plan".
It is price-alterations that provide the necessary indications that determine to what alternative uses "scarce resources" shall be allocated in
order to satisfy consumers'. effective demand. It is price-alterations
that indicate what goods, what qualities and what quantities shall be
produced and distributed.
A fall in prices may becaused by severalfactors: on the supply side,
lower costs of production, new inventions, rationalization, greater
competition, and expectation of a development in these direction~~ On
the demand side, lower purchasing power or reduced interest in the
commodity in question, or expectations of lower prices. The causal
relationship is complicated, but the result is easily analysed: falling
prices mean that there is being offered, or expected to be offered, more
of the goods or services in question than the market can or will absofb
at previous prices. Rising prices indicate the opposite.
If prices rise more than costs the result is greater profit. If prices
fall more than costs the result is falling profit. The incentive to expand
or reduce production, activity and demand will thus be increased or
lessened. On the demand side the most important result of rising
prices is a restriction in the number of those who can or want to buy.
(This is not altered by the fact that rising prices and expectation of
higher prices may temporarily stimulate demand and production.)
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Thus an automatic rationing is taking place without the use of rationcards or official directives. This rationing, and the efficacy of pricealterations to restrict and expand consumption, however, vary greatly
with the elasticity of demand of different goods.
Prices, or price-alterations, set in motion forces that tend to bring
about equilibrium and harmony between supply and demand, between
production and consumption. This point of equilibrium is not a constant level. The level itself is constantly shifting, but as long as free
competition1 and free price-formation are not entirely abolished, the
tendency will be this: buyers will outbid each other and sellers will
undersell each other, and both will be stimulated to make the deal, as
otherwise they will risk someone else stepping in (see p. 193). The
gap between actual market price and the "ideal" normal price, where
consumption and production per time-unit are equalized, is likewise
continually changing. The quicker the tendency towards the new
point of equilibrium, the more effectively does the price-mechanism
function. Provided the price-mechanism is allowed to work, even
insignificant and finely graded alterations are registered, which makes
the price-mechanism also a wonderful instrument for making quantitative comparisons.
The ability of price-formation to regulate is not confined to consumption goods, but extends to raw materials, semi-manufactured
goods and means of production at every stage of production. That is
to say, not only.do there exist calculation-data for the factors of production and for consumption goods at every stage of production, but
these data-with the reservations already taken and to be made---simultaneously register (1) the goods for which there is a demand (and
in what quantities and of what qualities) and (2) the scarcity of the
means of production in relation to the uses necessary for the production of the goods demanded. The dry price-datum is really the result
of innumerable computations, measurements and valuations. It
represents the final expression of a conflict between factors so different
in nature as (on the supply side) costs in the form of scarcity of
resources and man-hours used and (on the demand side) subjective
valuation of needs. Professor Louis Baudin has written the following,
almost poetical, description of prices' synthesizing ability:
"It (the price) synthesizes a number of factors, so that there is
difficulty in identifying them and even more in foreseeing them:
IJ. E. Mead has given the following simple definition of perfect competition:
"competition is perfect when two conditions are fulfilled; (1) when there is no
artificial restriction upon the movement of factors of production from occupation
to occupation in search of the highest reward, and (2) when no single unit of control
-i.e. no single individual or company which is deciding to buy or sell somethingcan by its own action appreciably ,affect the price of the things bought or sold".
Economic Analysis and Policy, London, 195 6, p. 96.
THE PRICE-MECHANISM
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THE PRICE-MECHANISM
195
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THE PRICE-MECHANISM
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tastes alter; savings vary both in extent and rate of growth; the
amount of investment varies and so does the pace of technical development.
There are other elements of uncertainty such as political developments, the possibility of alterations in the value of money itself, as
well as developments in the trade cycle (which is partly a result of
these changes and of expectations of their effect). There exists a
~933,
198
THE PRICE-MECHANISM
An additional word or two are still required about the view that
there is an antithesis between production for profit and production to
satisfy needs. If there is any point in this assertion (apart from its
propagandistic value) it must mean that there is presumed to exist
another scale of values than that of the buying public expressed by its
demand. If we try to analyse that scale of values we generally find that
it is a so-called "social scale of values" with the necessities of life at
the top and expensive 'luxury articles at the bottom.
Such an order of preference would, perhaps, be right in a society
where everybody was short of nearly everything. Once the demand
for the necessities of life has been covered, people will, however, be
found to have wishes and needs that vary from individual to individual
and which no "social" scale can cover. In reality these special, individual desires make themselves felt long before the requirements of
the primary physiological needs of life are satisfied. Even the physiological needs vary from individual to individual, and from season to
season. A young man may be prepared to give up his lunch so that he
can take his girl to the cinema; she may be prepared to sacrifice one or
two meals in order to have a permanent wave; while a third may be
ready to do without both girl and lunch in order to hear a symphony
concert.
To use a given piece of ground for grain production is not necessarily a more "social" employment than to use it for a cosmetics factory
or a farm for silver foxes. If there were overproduction of grain the
first use would be quite irrational. Barbara Wootton, who has made
use of an analogous example, says that this belief in an "intrinsic
value" makes every university-trained economist see red, and that this
relativity of all values is "extremely repellent" to non-economists, who
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find it incredible (to take the text-book example) that bread is not in
some absolute sense more valuable than diamonds. Nor are they
satisfied with the concession that existing monetary. values may be
compatible with moral principles or social needs, a concession which,
as she says, "merely leads into the misty spheres of moral philosophy". 1
This tendency to look at prices from a moral aspect is a contributory factor in the present-day trend of so many countries more or
less consciously to prevent the price-mechanism from functioning.
Market-economy is being replaced by valuation by price-regulators,
which leads to values being determined not by the many, but by the
few. The logical and psychological consequences of certain people
having the power to determine values in the economic field is that
they will also arbitrarily determine what is to be regarded as artistically
and scientifically valuable. This retrogression to mediaeval jttsfttmpretium views is, in my opinion, one of the reasons why during the last
decades the world has relapsed so rapidly into conditions of the
Middle Ages in non-economic fields as \vell.
lOp. cit., p. 39.