The Bogey Of "Administered Prices"
SEPTEMBER 01, 1959 by MURRAY N. ROTHBARD
Dr. Rothbard is a consulting economist in
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we find that we are back in a state of affairs determined by demand, and that the law of supply and demand hasn’t been repealed, after all.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."