the price-mechanism in a private capitalist society

8/20/2019 THE PRICE-MECHANISM IN A PRIVATE CAPITALIST SOCIETY

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APPENDIX A

THE PRICE MECHANISM

IN

A PRIVATE CAPITALIST SOCIETY

IN PR IVATE capitalist

societies

i t is the tnore or less free for tnat ion o f

prices

that

provides the data necessary· for calculation. Many objec

tions are made against their price-mechanism,

nt r

li

that

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 irrespec

tive 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 price

mechanism s in our day being undermined.

In spite

of

this,

in

the capitalist societies it is still prices,

or

rather,

price-alterations,

that

act s the anonymous conductor

of

the economic

orchestra. They play. the same

part

s

the

central authority in socialist

societies.

It

is price-alterations

that

keep

production and

business in

capitalist societies from being o n u ~ e blindly and

without

plan .

It

s price-alterations that provide the necessary indications that deter

mine to

what

alternative uses scarce resources shall be allocated in

order to satisfy consumers . effective demand. It

s

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

expe t tion

of

a development in these i r e t i o n ~ ~ On

the demand side, lower purchasing power

or

reduced interest

in

the

commodity in question,

or expe t tions

of lower prices.

The

causal

relationship s complicated, but the result is easily analysed: falling

prices mean

that

there s 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· s 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.)

1


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192 ECONOMIC CALCULATION IN THE

SOC IALIST SOC IETY

Thus an automatic rationing

is

taking place without the use of ration

cards

or

official directives. This rationing, and the efficacy of price

alterations 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 con

stant level.

The

level itself is constantly shifting, but

as long as

free

competition

1

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 quantita

tive comparisons.

The ability of price-formation to regulate is not confined to con

sumption 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 pro

duction and for co ns ump tio n 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

produc

tion

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 th e 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 th e

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 bu y

or

sell

something

can by its own action appreciably ,affect the price

of

the th in gs bought

or sold .

Economic nalysis and Policy

London, 195

6

, p. 9

6

.


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THE

PRICE-MECHANISM

quantities, qualities, possibilities, calculations of interest,

memories, fears, hopes. A price is not only the result

of

statistical

figures.

It

includes all

the

vibrations

of

man's thoughts

and

soul,

since ever they have exercised an influence

on

the

market.

Before continuing, let us just repeat that there to-day in· capitalist

societies·a tendency

to do

away

with

the price-mechanism,

or

at. any

rate to reduce its significance. This tendency takes various forms. That

sector

of the

society's

l i in which activities are undertaken

without

regard to prices and markets, the so-called social sector, is continually

growing. Fear

ofwar, together

with

the policy of isolation adopted

by

the socialist communities, have forced other countries

to put

obstacles

in

the way

of

the international exchange

of

goods

and

services,

which

similarly hampers the free

formation

of prices (to say

nothing of

international division of labour). In addition business men have

usually a tendency

to

interfere

with

the functioninK of the price

mechanism, partly

to

assure themselves a fixed income, partly to

protect vested interests , and partly

to

eliminate competition and

thereby the insecurity inherent in it. The natural tendency

to

take

advantage of monopoly elements and

to

make cartels and price agree

ments has lately

been

strengthened because the authorities

in

some

countries

show

a tendency

to

order the formation

of

cartels, or,

at

any

rate,

to

punish

those who sell cheaply or in other ways follow the rules

of

the

price game. (U.S.A. under New Deal and orway to-day.)

This means

in

fact that we have entered a new phase of economic

development. For there is

a·

great difference between a private

monopoly

or cartel.and a .legal-official one. Where an agreement

regulating competition

is

voluntary,

is as

a rule abolished,

broken

or

modified, when conditions alter.

2

Competition, whose imperfection

has so often been described, has in reality a quite astounding vitality

despite all onslaughts. Competition may be camouflaged and

go

underground, but

is

difficult

to

kill.

If it is

forbidden

to

compete

in

price, there will be competition

in

terms of credit and conditions of

payment. Secret discounts and concessions may be given and even

quite objectionable methods used.

3

Therefore, the actual effect

of

private agreements

to

control com

petition is

not

so great as is usually assumed. The situation, however,

becomes quite different when groups

of

manufacturers and traders

turn

to

the State

to

have a price-reduction forbidden by law. Laws

lLa Monnaie

et

fa

ormation

des Prix

L

Paris,

1936,

p.

591.

ee W. F. Rowe: Market and Men

Study

rtificialControl Schemes in

some

primary Industries London, 1936.

3There was a drastic example of this when

Norges Handelsstands orbund

had

to

decide how many units

go to

the dozen, and pronounce a practice introduced by

certain German firms as improper competition, namely to invoice thirteen units as

a dozen. (See

Handclsstands

Mdncdsskrift NO.9,

1937,

p.

182.)


4/10

194

ECONOMIC CALCULATION IN THE

SOCIALIST SOCIETY

which make alterations

in

price a crime

or

offence punishable

with

large fines are a

much

more effective and lasting method

of

hampering

the functions

of

the price-mechanism, than any private attempts.

The

propensity

to

control and

regulate inherent

in

every govern

ment

similarly tends

to

disturb the function of

the

price-mechanism.

The

last few decades have been characterized

by an

obvious tendency

to

switch from a price- and market-economy

to

interventionism

and

publicly fixed prices, also called valuation-economy .

The

interven

tion of the authorities in the domestic production of goods by means

of controlled prices, and in the international production of goods by

means

of

agreements for quotas and clearing, marks the first stage

in

the

abolition

of

the

right

of

free disposal

of

the

means

of

production

and of the

actual

right of

ownership to them. According

to

the

definition

of sodalism

given, this valuation-economy s an obvious

step towards socialism.

The fact that price-formation and competition are

in

practice

becoming·more

and more

imperfect does not, .

of

course, detract

from

their proverbial efficacy

to

regulate supply

and

demand. We shall

not

embark

on

a discussion

of

the theoretical possibilities

of

perfect com

petition, partly because this

would

involve a discussion of definitions

and terms

which

would take us

too

far away from

our

subject, and

partly because any reference

to

ideal conditions would be irrelevant,

since we are discussing the possibility

of

economic calculation

in

a

socialist community in the world of reality.

On

the other

hand,

it

may be mentioned

in

passing

that

it

is illogical

to

demand

the

substitution of a socialist central authority for

the

price

mechanism

on the

grounds

that the

price-mechanism

s

becoming

more

and

more imperfect, considering

that

this

growing

imperfection

s mainly due to the development towards socialism.

For

all its alleged imperfections the price-formation is still acknow

ledged s one of the chief factors

in

the economic activities

of

the

capitalist sodety and the terms price-society and price-economics

are still used

s

synonyms for capitalist society .

The

importance

of the

price-

and

market-mechanism has even been

affirmed

by

socialist economists.

2

Dr.

Heimann

writing (see also

Chapter IV)

of

the

price-system has said that:

It

records

the

least deviation

in

valuation

with

the accuracy

lSee, inter alia Joan Robinson: Economics Imperfect Competition and the sub

sequent discussion in the EconomicJournal

2The expression socialist

economist

occasionally employed

in

this

book

is in

no

way used

to draw

a distinction between socialist

economics and

bourgeois

economics . As

Sombart

has rightly said, there are correct and incorrect economic


5/10

THE

PRICE MECHANISM

195

of a seismograph, and directly by means of this occasions the

adaptation of the processes of production to the new situation.

The

decisive task of

the

economic system is

to

allocate labour

and capital

to

the

individual branches

of

production

in

pro

portion to the strength of the existing need for their products. In

capitalist economic systems this task is fulfilled by the market,

and no concentration in cartels and trusts can alter it. . . .

The market is what is really economic about the modern

economic system. To

do

away with it would be a leap into the

dark

The

market, of course,

is

to-day capitalist in action. But is

that alone reason enough to abandon it? Is Socialist Thought

going

to

be so unhistorical and

un

dialectic

as

to

take over from

Capitalism only its technological elements

and

its business

organization, and

to do

away

with

its method

of

conducting its

economy? 2

Dr. Heimann considers that price-formation is the real heart and

soul

of

the science

of

economics. He writes:

that

order has been established and maintained

in the

seeming

confusion of atomic industries, and how this effect has been

achieved, this

is

the

real object and kernel

of

economic science.

. . . 3

In

Lamentfor

conomics

Barbara

Wootton

says

that

economic theory

has been too much occupied with markets and equilibria, but

in

her

lan

or

o lan she has given an admirably clear description of the

potential efficacy

of

the price-mechanism.

For

all

her

later reserva

tions about the fairness

of

the market-economy, the price-mechanism

seems to enjoy her entire respect, especially when she says:

Here-

it

may

be

said right away that

no

society which has

attempted to dispense altogether

with

all use

of

the price

mechanism has had any success sufficient to commend it

to

detailed study. 4

theories, and it

is

here

that

the dividing line must be drawn. Nevertheless it is

useful to use the

term

socialist economist of those who thus describe themselves,

and Marxist economists

of

those who base themselves on the Marxist

theory of value.

The

characterization has partly the advantage that

it

leads to

economy in words, and partly prevents the views

of

such economists being dis

missed as coming from liberal economists , Manchester economists ,

orthodox

or

reactionary economists. This may be important in a period, when these

appelations have been invested

with so

much odium that the use of them sometimes

seems to

be

regarded as a sufficient counter-argument in itself.

lMehrwert und Gemeinwirtschaft p 169

2 Sozialisierung in Neue Blatter ur den Sozialismus Tiibingen, 1930, Vol.

PP·25

6

.

3 p cit p. 174, footnote.

4 p

cit p.

55


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96

ECONOMIC CALCULATION IN

T SOCIALIST SOCIETY

And

to

quote Professor A. P. Lerner:

But

even if all decisions about what people should consume

are made by

a

single dictator or by a very small oligarchy which

can reach all decisions by agreement in the council chamber, an

elaborate pricing mechanism will still be necessary

to

make

possible the comparison of

the marginal productivities

of

all

original means of production and intermediate products in all

stages of the manufacture of all commodities in order

to

achieve

the purely technical maximization

of

the

output of

commodities

in the proportions decided upon.

and

The

proposition that I wish

to

establish is that when the State

has decided what it

is going

to do as

to

fulfilment or non-fulfilment

of individuals choice, setting up its

own

system

of

priorities,

it

will not be able to achieve its ends with any reasonable degree

of efficiency without the use·

of

a price system. 2

(Dr. Lerner on the price-mechanism is also quoted on p. 147.)

Dr. Felix Weil is

of

the

opinion that

fictitious, arbitrary prices are a

worthless gamble (see. p.

18

I),

while

Leon Trotsky

succinctly

puts

it

that

economic accounting is unthinkable without market

relations .

3

When the demands

of

producers and middle-men for raw materials,

intermediate goods and means

of

production are met in the capitalist

society,

the

former owners of the goods

and

means of production

receive their share of the product. This

does

not mean that demand

for consumer goods unilaterally determines the value of means of

production

and goods at earlier stages of production. There exists an

interrelationship which

is

not confined

to

prices and incomes. The

price

of

the product sold·

is

only one of the factors

with

which pro-

ducers and middlemen must calculate. There are,

in

addition, various

costs. (See Chapter II.)

Besides taking into consideration those data which are already given,

a business

man

will, to a greater

or

lesser extent, also have regard to

the future. The

longer

the period of production and turn-over, the

greater attention he will have

to

pay to the possibility of future changes

and

thus

of

increased risk.

In

a progressive dynamic society

with

democratic rights the possibilities of such changes are both numerous

and heterogeneous. Populations change both

in

size and composition;

l Economic Theory and Socialist

Economy

in

Review conomic Studies

1934-35, p. 60.

2S

ee

A Rejoinder in Economic Theory and Socialist

Economy

in

Review

conomic Studies 1934-35, p.

5

2

•

3S

ee

Soviet Economy in anger New York, 1933, p. 33


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THE

PRICE-MECHANISM

197

tastes alter; savings vary both

in

extent and rate of growth;

the

amount of

investment varies and so does

the

pace of technical develop

ment.

There are

other

elements

of

uncertainty such

political develop

ments, the possibility

of

alterations

in

the value

of

money itself,

well

developments in the trade cycle (which is partly a result of

these changes

and

of expectations of their effect). There exists a

reciprocal relationship between several of these factors, which are

themselves dependent on expectations about· the future.

The anticipated attitude of competitors will also play its part; so that

estimation of others expectations also becomes a market-determining

factor. To what extent

such

expectations will have any influence, the

extent

to

which they will

behased on

irrelevant factors· such season

of the year, state of the weather, glandular secretions.or emotions like

fright and hope, cannot be stated

with

any certainty, since the expecta

tions vary in kind and strength from one individual

to

the other, and

even with the same individual from period to period.

We shall not discuss here the interesting question of whether or

not

the economist should concern himself

with

motives of reason and

emotion, and with the ethical or unethical motives that lie behind

price-reactions and .market phenomena,

or

whether he should he

content

to

stick

to

the final price-data.

The fact that price-determining motives and factors are varying and

of many kinds, the fact that in all societies, irrespective of structure,

estimates of the future contain elements

of

uncertainty, and the

fact

that the price-mechanism in our time is being more

and

more restricted

in

scope, should

not

obscure the fact that

it

is the price-mechanism

which plays the part of the great conductor in the capitalist economy.

Further, it must he stressed that in capitalist societies there do exist

markets where, despite more

or

less· imperfect competition,·prices

are quoted that form a basis

for

economic calculation. Prices not only

for consumer goods, but also for natural assets, raw materials, inter

mediate goods and means of production of all kinds, and

not

only

spot

but also

forward

prices.

Forward

prices make

it

possible

not only

to

measure uncertainty

in

regard to the future,

but

also to

eliminate it.

Price-formation also makes itself felt

in

respect

of

man-power. Here,

its ability to regulate is, however, smaller.

This

is

not

only due· to

monopoly tendencies

through

labour unions, but because man-power

differs

in

certain important respects from other objects dealt in.

It

is

enough

to

mention its slow rate

of

reproduction. (It takes from

lSee,

inter alia

Ludwig von Mises: Grundprobleme

der Nationalok onomie

Jena,

pp. 168-

16

9.


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198 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY

fifteen to sixteen years before a new-born child becomes old enough

to

work, and in

addition it is

doubtful whether

changes in wage-rates

influence

the

birth-rate.) Another factor is

the low

mobility of man

power, partly due

to

emotional

and

psychological factors (dislike

of

breaking

up a home and

of

leaving home and country), and partly to a

political tendency towards self-sufficiency and isolation expressed

in

the

growing number of obstacles

put

in the

way

of both emigration

and immigration.

The

importance

of

price-formation is also limited where it comes to

credit, loans and the right to dispose of capital. Special factors enter

into

play

when

it

comes

to

the formation

of

price

for

capital. A

detailed discussion

of

this

problem would

result in a full-scale dis

cussion

of the theory

distribution

and the

trade cycle, upon

whichwe

cannot embark here, but the

question

of interest has

been

touched

upon

in Chapter VII. Here

must suffice to state

that

competition is

less perfect, or, rather, still

more

imperfect,

when

it concerns credit,

than

when it concerns goods, but

that

interest rates exist

in the

capitalist societies given data.

Many

objections have been raised against private capitalism and the

price-mechanism. They will be dealt

with

in Appendix B; but there is

one

that directly concerns the price-mechanism and should be dis

cussed here.

We refer to the objection that in capitalist societies prices are used

as indicators of profitability. People produce for profit, it is said.

This statement is correct. If

the

commodity to be produced,

or

resold,

is

not

demanded at a price that covers costs, it will not be

produced

or

bought

at that

price.

On

the other hand,

to

imply that production

for profit does

not

mean production to satisfy needs, is entirely false.

The contrary

is the case. The

producers and

traders every effort is

directed towards anticipating and satisfying the needs the buyers,

in

the last resort the needs of the public, such as they are expressed

in

effective demand. The success of

producers

and traders will depend

on

their

ability to

do

this. Their

ability to

anticipate correctly will

decide whether the result will be profit or loss, which

in

the

long run

will

decide

whether they

can stay

in

business

or

not.

IProfessor Boris Brutzkus goes so far

to say that the

producer and

trader in a

capitalist country, strictly speaking, does not need to keep

books

or to calculate, as

prices

will

give him all necessary indications. If he does

no t take

heed

of

prices,

he risks losing his fortune and his position. In socialist countries where the state is

the only owner of the means of

production

and the only distributirig agency, this

automatic

purging

process does

not

exist, so that, as Brutzkus says,

economic

calculation is

of

far greater significance in the socialist,

than

in

the

capitalist society .

conomic Planning in Soviet ussia

p.

II.)


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T

PRICE MECHANISM

In the discussion

of

the merits and de-merits of the price-mechanism

it has been maintained that market economy is democratic , inasmuch

as every penny used for voluntary purchases represents a vote cast in

the great election of what the public wants. This is a graphic,

but

misleading metaphor The voting is not democratic;

nor

is it based

on

the principle of equality.

The

voting

is

not by heads,

but

according to

the

number of voting-papers, .or banknotes. is the amount of

pur-

chasing

power

at his disposal which determines the degree to which the

individual consumer can influence the type

and

size of production. It

may be said that this is unjust, but that is a moral judgment that we

cannot go

into

here and which does not affect the price-mechanism s .

efficacy for regulating production

and

sales according to effective

demand at any given· time and at any given distribution

of

income.

(See p 94, footnote

2

An

additional word or two are still required

about

the view that

there 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, in

dividual desires make themselves felt

long

before

the

requirements

of

the primary physiological needs

of

life are satisfied.

Even

the physio

logical 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 neces

sarily 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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ECONOMIC CALCULATION IN THE SOCIALIST S OCIETY

find it incredible (to take the text-book example) that bread s

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,

s she says, merely leads into the misty spheres ofmoral philosophy .

1

This tendency

to look

at prices

from

a moral aspect s a contri

butory 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 s

that

they will also arbitrarily determine

what

s

to

be regarded

s

artistically

and scientifically valuable. This retrogression to mediaeval jttsfttm-

pr t um 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

s

\vell.

l p

cit

p. 39.

the price-mechanism in a private capitalist society

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