Chapter II

THE PRICE SYSTEM



THE CLASSICAL way of thinking in economics came into being through the combination of three ideas, each of which may be represented, with some risk of misunderstanding, by a single word: price, capital, value. These ideas developed simultaneously during the period in which feudalism was giving way to modern commercial society. Consequently it goes without saying that all three were subject to common influences. Whichever one is under immediate consideration, the student finds himself carried back to the contemplation of the larger cultural pattern which was also the matrix of the other two. Nevertheless price, capital, and value are distinct ideas, as distinct as any three ideas of the same community can ever be. Each had its origin in a different part of the common culture and is an expression of the meaning of that particular aspect. The classical concept of value derives from moral philosophy and expresses the notion of human nature and even of nature in general which came to prevail in early modern times. The notion of capital is of commercial origin in the sense of being a symbol of the structure of commercial society. The idea of the price system is also of commercial origin but in the much broader sense of a social mechanism, commercial in character, by which the whole community was variously affected and of which every element in society from king to commoner gradually became aware.

Since each of these ideas is an essential component of the classical tradition, no one can be understood except in terms of the other two. Whichever one is approached first will therefore remain incomplete until the other two have been considered. But a beginning must be made, however arbitrary, and for this purpose various considerations indicate the idea of price. It is the most general both in its origins in the minds of the whole community and in its effects as a theoretical vehicle for the other two. Furthermore, it is uniquely grounded in fact, whereas the other two are to an extraordinary degree fictitious.

Prices have existed and have had both a moral and an intellectual character in all societies though never before to any such degree as in modern commercial society. It is this difference of degree, of course, which accounts for the emergence of a doctrine of price in modern Western society as it also accounts for the development of complementary ideas. But the phenomenon is not a merely quantitative one. To understand the historic significance of price it is not enough to point out the prevalence of prices nor even the prevalence of awareness of price. Sensitive and cautious thinkers have often warned their colleagues against proceeding too casually from the particular to the general, against arguing that what is significant for individuals is likewise significant for society. In this case, however, the trouble with the reasoning which begins by noting the importance of price for individuals and their acute price consciousness and proceeds to argue that price is therefore an important social phenomenon is a matter not of quantity but of quality. It is not enough to establish the importance of price. The question is, What is its importance? What does this so very acute and general price­consciousness signify? The truth is that with regard to price we are conscious of different things. In particular, price has two aspects, related and yet distinct. On one hand pries exist in a pattern or system so pervasive, intricate, and subtle as to challenge understanding; and on the other hand prices have a moral quality of destiny, fate, or providence.

It is this moral quality of price of which individuals in all societies are most keenly aware and to which for this reason teachers most frequently appeal when inducting elementary students into the study of economics, usually without knowing it. Shoppers are concerned about the prices they pay, workers about the wages they receive, farmers about the prices for which they can sell. The point is their common concern. It is obviously a moral concern. The question in the minds of all is one of justice. All that life has in store for them, apparently, is determined by price. The effect of this state of mind is to short­circuit social thinking and even the feeling of social grievance. Mankind has always used the gift of rational thought with the greatest parsimony, looking always for a terminal point beyond which further reflection would be unnecessary. It is the peculiar character of price that it constitutes a terminus to economic thinking. Farmers, we often say, are not interested in sweeping social reforms or economic reconstruction; all they want is "decent prices." The same is true of organized labor: they are incorrigibly preoccupied with getting "decent wages"; while for the consuming public it is "fair prices" and the high cost of living.

In medieval society this state of mind was sublimated into a religious doctrine. The doctrine of "just price," which was the summation of medieval economic thinking, was peculiarly characteristic of the medieval mind; nevertheless, as a number of critics have pointed out only recently, this doctrine left a very deep imprint upon all subsequent economic thinking. It was after all a cost­of­production theory of price. No doubt the correlation between cost price and sale price is an obvious one. Doubtless merchants throughout the ages have countered the protests of their customers by declaring, "I'm giving it to you for just what it cost me" -and what could be more just? But this misses the point. Throughout the ages no great social significance had ever been attached to the mumblings of merchants. By a paradox quite characteristic of medieval mentality, this society which we ordinarily think of as "other­worldly" to a unique degree nevertheless raised the merchants' plea to the level of a doctrine of the church.

Thus it was in medieval thought that price first assumed the role of a social principle. The significance of this development is apparent in the contrast between medieval and ancient economic thinking. We have given short shrift to the economic writings of the ancients, notably those of Xenophon and Aristotle. They contain scarcely any trace of a coherent theory of price; consequently, we say, they are not economics in the modern sense. To be sure, they treat the affairs of the Greek commonwealth as those of a great household and proceed to plan the economic betterment of the community in a fashion which future economic planning may perhaps identify as singularly prophetic. At all events their indifference to price stands in marked contrast to medieval thinking which in spite of all other differences has this close tie with the modern classical tradition.

Even the differences are less than they at first appear. Medieval society did not hew to the line of the just price out of "other­worldliness." All societies are other­worldly, each in its own peculiar way; and few institutions have been more intensely practical than the medieval church. The point is rather that medieval society was feudal and the doctrine of the church was feudal doctrine. But in the twelfth and thirteenth centuries when this doctrine received its final form, medieval society was already facing social revolution. A new instrument of power in the hands of a new social element was already making itself felt, and the established order did its best to strike it down. But its best fell far short of what we now call "total" action. If medieval society, speaking through the church, had interdicted commerce as such and outlawed wealth without reservation, the revolution might have been arrested. But the insidious process of economic change had already gone too far for that by the time the issue became paramount. Not even in the middle ages were men prepared to turn the clock back to medievalism. Commerce and wealth had come to stay. What the doctrine of the church attempted was a compromise, a synthesis not only of St. Augustine with Aristotle but of feudalism with the fuller life and larger horizons of world trade.

Like every compromise this one took the form, "So far shalt thou go and no farther." The merchant and his meanness, money and its power, were to be tolerated on the condition that they should not increase. The specific practices by which merchants increase their wealth and power-forestalling, engrossing, regrating-were outlawed, then as now. But chief reliance rested on the positive and all­inclusive principle of the just price and the mechanism of its enforcement. It is this mechanism which constitutes the greatest apparent contrast to later economic arrangements. In the later age competition became the mechanism of fulfillment of the just price, the function from which it derives its supreme significance. But competition accepts the acquisition of wealth. The fact that a man has made a fortune, even a great fortune, is not under competition proof positive of social way wardness. It may be and presumably is proof of his competitive efficiency. To better oneself is the spirit of the age. It has been identified as the characteristic mentality of the middle class and of middle class society. In apparently complete contrast to all this, medieval doctrine made the acquisition of wealth prima facie evidence that more­than­cost prices had been charged. The intent of the principle of just price was to freeze the orders of society in the proportions they assumed in the middle ages. What was interdicted was neither commerce nor wealth but the increase of commerce at the expense of feudal functions and the acquisition of wealth at the expense of feudal powers.

This effort was of course futile, as futile as giving a child a gun and telling him not to shoot. But what is most important is the fact that it established price as an authentic social mechanism. All that was required, once the principle of just price he'd been laid down, was a slight modification of the machinery of its enforcement, a mere redefinition of what constitutes just price, an elaboration of the theory of competition, to make commerce paramount over feudalism. This elaboration was implicit in the doctrine of price itself. In a very real and literal sense we have medieval theology to thank for the belief in price as an efficacious social mechanism which has long since become one of the deepest moral convictions of Western society.

Important as it is, however, this sense of moral concern for price as an instrument of justice is an insufficient basis for a science of price. The principle of parental authority is not less significant, surely, than that of just price; nevertheless no familial science has developed at all comparable to political economy, and the difference is due in considerable part if not altogether to the failure of family relations to yield a body of laws or system of relationships of an apparently quantitative character resembling at least superficially the quantitative relationships which in early modern times were already giving rise to physical science, as the price system did. To those who still follow the classical way of thinking the recognition of the price system seems to be quite a matter of course, like the recognition of the solar system; but here also there is a great difference. The price system has a meaning for human life and destiny which none but astrologers any longer impute to the solar system. In this respect for all its quantitative character it still resembles the system of family relationships. In truth our traditional economic thinking has occupied a unique place in the hierarchy of the sciences. Considered as a quantitative science, it is the only one which is also a philosophy of life; while considered as a branch of moral philosophy, it is the only one which has been able to establish any claim to consideration as a quantitative science. But this unique character was only gradually assumed. The question is, How? No one would aver that the meaning of price is a physical actuality like the moons of Jupiter at which Galileo peered. In later economic thinking empirical data and theoretical interpretation are so completely fused as to make it difficult for us to distinguish them; but historically the discovery of quantitative relationships and the imputation of meaning to those relationships were quite distinct. Not only was the price system-the quantitative system of pecuniary relationships-discovered first and "interpreted" afterward; the intellectual fascination which the newly discovered system exercised over the minds of social philosophers played an indispensable contributory part in the development of the way of thinking by which Western society later came to be obsessed.

As every student knows, certain "fields" of economics are much older than political economy itself, notably money and banking, public finance, and foreign trade. In each of these fields important discoveries were made and significant monographs were written centuries before political economy emerged as a full­fledged science. Taken by itself each of these developments seems to be more or less accidental, but taken together they have a common character which is immediately apparent. In each case what was discovered was the price nexus, and in each case the discovery resulted pragmatically from the attempt to deal with an immediate and pressing problem of a peculiarly enigmatic character- or so it seemed at the time.

A prince finds himself in financial difficulties. He exercises the power which we still call seigniorage, the power to issue disks of precious metal stamped with his superscription and authorized for use as a medium of exchange in specified amounts. As a matter of course he thinks of all this as his personal affair in a sense difficult for the citizens of modern states to comprehend. What more obvious economy can he effect than to reduce the weight of precious metal in his coinage? He proceeds to do so without let or hindrance. But then, what happens? To his dismay and annoyance he finds himself confronted with what we now recognize as the inevitable consequences of inflation: a general rise in prices extending over his whole currency­area the effect of which is to oblige his ministers of state to lay out in the "expenses of the sovereign" the same weight in precious metal as they did before, though now in increased denominations.

All this is very disconcerting to a sovereign. No overt resistance has been offered. What has transpired is the result of no organized opposition. It has just happened, naturally as it were, and universally; and so the local wise man is summoned and ordered to explain the mystery, in very much the same spirit in which Joseph was called upon to interpret Pharaoh's dream.

What he discovers is a strange and subtle reciprocity by weight and number between gold and goods. The purchasing power of money is indeed a natural phenomenon quite distinct in character from the powers of the sovereign and is determined by the weight of precious metal in relation to the quantities of goods. When the metallic content of a coin is reduced, its purchasing power falls in direct proportion; or, to put the same phenomenon in terms of price, the quantities of goods purchasable by the debased coinage falls, prices computed in terms of the debased coinage subtly rise, so that a constant ratio is maintained between weight of metal and quantities of goods irrespective of the superscription of the sovereign.

All this is quite obvious. Indeed, it is impossible to say when the relation between money and prices first became known. The ancients had an inkling of it, perhaps as early as metallic coinage was first used; and it cannot be said to be fully understood today. Even today economists repeat the aphorism of Queen Elizabeth's minister to the effect that bad money drives out good, although this proposition is plainly false. What "drives out" good money is not bad money but worsening money. There is no more reason why two coinages of different weight should not circulate freely together than guineas and sovereigns or quarters and dimes. It is only a falling currency which breeds inflation. None of the celebrated monographs on money problems which enrich the early literature of economics is wholly satisfactory though all show an extraordinary grasp of the central phenomenon, and this literature would have none but an antiquarian interest except for one circumstance.

What the early monetary studies revealed went beyond the difficulties of the sovereign, even beyond the money mechanism itself. More sharply than ever before they brought into focus the subtlety and pervasiveness of the price system. In every commercial community there exists a market mechanism, informal and unofficial, but so extraordinarily delicate and extensive that its adjustments are transmitted to every itinerant tinker and pedlar, every housewife and peasant, in a fashion calculated to inspire ministers of state with awe and envy. It was this extraordinary system which the authors of the early monetary studies were moved to dramatize. On virtually every page of this pre­economic literature the reader finds clear evidence of the fascination with which these prescient authors contemplated the amazing subtlety of the price system.

The same is true of the literature of public finance. Tax collecting has always been a grievous business. In the ancient folklore of all peoples the tax collector has always been represented as a close relative of the devil, and with considerable justice. Before the age of commerce, wringing taxes from subject peoples was a task so difficult and graceless as to require a special sort of character in which the talents of the secret police were combined with those of the racketeer. Too unsavory for the ordinary public official, the business was commonly farmed out, with the result of adding the exactions and cruelties of gangsterism to the necessities of state. The story of taxes through the ages is virtually one long uninterrupted tale of woe.

The emergence of the modern state marked the beginning of that process of expansion of the functions of government which is still going on, and so greatly enlarged the financial needs of public exchequer. But it also brought a new system of tax gathering. What was new was not any one specific tax. Excise taxes, franchise taxes, tariffs, and the rest have been employed in one form or another since time immemorial; but the growth of commerce vastly increased the yield of every sort of indirect taxation. Much has been written concerning the political importance of the alliance between crown and merchant for the formation of the modern state. At no point was the alliance more potent than in its bearing upon public revenue. In effect the whole merchant class became unofficial and unpaid tax gatherers, as they still are.

The merchants were able to perform this extraordinary function for two reasons. The practice of bookkeeping, which was itself a potent factor in the growth of the new society, made it possible for revenue officers to keep tabs on the merchants; and the price system made it possible for the merchants to pass the taxes on to their customers without informing them that they were being taxed. Thus the incidence of taxation came to be one of the major instruments of government.

Tax shifting of course gives rise to special problems. A tax on fuel or window glass may have widespread effects on health; a tax on fertilizer or agricultural implements may damage the whole economy. Taxes on imports or exports affect the whole community's schedule of consumption and even the level of consumption, and so on. Furthermore, as every modern student knows, these effects are often registered in curious and unexpected ways. The whole subject is so complicated as to have given rise in recent years to a special form of expertise, virtually a profession-that of tax expert.

As these difficulties began to be realized the same thing happened which was also occurring in the field of monetary problems. Sovereigns and ministers who were puzzled by the unexpected consequences of indirect taxation called for enlightenment, and special studies were undertaken in some cases by ministers of state or their subordinates and in others by scholars of demonstrated acumen. The result was the early literature of public finance which constitutes another chapter in the history of economic thought parallel and analogous to that on money; and at no point is the analogy more striking than in the preoccupation of the tax experts with the mysteries of the price system. For it was of course the mechanism of the market which had given rise not only to the anomalies of incidence but to the whole machinery of indirect taxation, so that at this point also the attention of serious students of public affairs was centered upon price.

Meantime the most difficult and insistent problem of all was that of foreign trade. Since nations are rivals virtually by definition it has always seemed axiomatic that one must profit at the expense of another, and in early modern times this "great illusion" was further accentuated by the bullion problem. It will not be necessary to review the pros and cons of mercantilist doctrine on the subject of bullion, favorable balance of trade, and national advantage. Students are now generally agreed that the ideas of the mercantilist writers were not as foolish as they seemed to the followers of Adam Smith; that bullion played a larger part in the statecraft of the sixteenth and seventeenth centuries than it has since, and that for nations unblessed with mines or treasure­laden colonies the sole access to bullion was piracy and its descendant, foreign trade. Under these circumstances the idea of a favorable balance of trade was at least intelligible, however stultifying it may be today.

Doubtless these circumstances were largely responsible for the fact that the demonstration of the reciprocal flow of goods and gold in foreign trade was deferred past the middle of the eighteenth century. Exponents of free trade are accustomed to assume a "normal" situation to begin with. The present situation in which the bulk of the world's monetary gold is sequestered in the United States is so extreme that many students doubt if an even distribution could now be effected by ordinary international trade in the absence of all trade barriers whatsoever, and the same question may well be raised with regard to the Spanish monopoly of gold in the sixteenth and seventeenth centuries. But these circumstances do not bear the whole responsibility for the slow development of the theory of foreign trade. The subject is itself extraordinarily complex. Only when the conception of the price system as an automatically self­adjusting mechanism had already been thoroughly assimilated was it possible for Hume to see not only that money and prices are reciprocal but that gold flows toward a low­price area and is repelled from a high­price area by a process which is reciprocal to the flow of goods toward high­price markets and away from low­price markets.

The effect of this demonstration was greatly to heighten the charm which the price system had already begun to exercise over the minds of social philosophers as a result of the observations of revenue and monetary specialists. In trying to understand the significance of this development we must bear constantly in mind the prior commitment to a philosophy of price which was the heritage of medieval doctrine. There is nothing in the theory of foreign trade, nor in the subtle incidence of taxation and currency depreciation, which establishes any particular price pattern as just. This distinction is an awkward and uncomfortable one for modern minds. Five generations of classical price theory have so completely assimilated the idea of pattern to the idea of justice as to establish in the minds of modern students an all­or­none disjunction: either price has the social significance which classical theory has imputed to it, or it has no significance whatever. In this state of mind we read the early literature of economics and wonder how men who felt the subtle intellectual charm of the price system could still have failed to appreciate its larger significance.

But to deny its significance is not to deny the intricacy of the price system. As these early monographists saw, prices do form an extraordinarily complicated pattern. The adjustments of prices to each other are amazingly delicate and pervasive. A causal nexus does indeed run through the whole universe of discourse of price linking all­ price phenomena together into an integrated causal system. We talk of the laws of supply and demand, but in truth there is only one law: the law of the interrelatedness of all purchases and sales. In economics as in mechanics every action has its equal and opposite reaction. Is this just? Is the solar system just? In economics as in mechanics certain events are more closely related than others. It is possible to some degree to trace certain relationships-between crop prices and sales of fertilizer and agricultural machinery, and that sort of thing. These are the relations with which business men and states men are perennially concerned. Particular business men sometimes manage to learn a great deal about the situations to which their businesses are more intimately related and by which they are more immediately affected; and in recent years research organizations both private and governmental, employing trained analysts-economists, if you will-have learned a great deal about the planetary system of the market. They have learned such things as the relation between transportation costs and the distribution of industry, between volume of imports and the export of particular commodities such as cotton.

All this assumes causality. It assumes that nothing ever happens in the market without a cause or without effects. But it makes virtually no use whatever of the classical way of thinking about price and its significance, or of the theoretical formulas of which that way of thinking has been so prolific. Business men and bureaus of industrial research have formulas. They "watch steel," or car loadings. They devise indices of physical production or of wholesale prices. But they make no use of "indifference curves." They trace relationships between wage movements and wholesale and retail price movements, but not between wages and "productivity."

The distinction is the one which all elementary students are invited to make between "principles" and "problems." As a profession economics has come to consist of two distinct undertakings: one, a large and continually growing series of empirical studies of actual industrial relationships; the other the theory, or social philosophy, of the meaning of economy. The former makes no use of the latter, nor the latter of the former, and the two would have no professional bearing on each other but for one circumstance: it is the "principles" which tell us what to think about the "problems." It is unnecessary for business men to think in this sense, and consequently business men can (and sometimes do) know a great deal about industrial relationships without being economists at all. But economists must think about the bearing of particular industrial situations upon the economy as a whole. To do so they must have some sense of the meaning of the economy as a whole. That is, they must have some way of thinking. No way of economic thinking emerges directly from empirical studies such as those of modern research institutions or those of the early students of money, taxation, and foreign trade. The classical way of thinking in terms of which most economists still interpret the results of their own empirical studies and th'ose of others (who in some cases are not economists, that is interpreters, at all) makes extensive use of the phenomenon of price; but it is not implicit in price.

Price was not "discovered" to have social significance. That is not the lesson of the early monographs on money, taxation, and foreign trade. The significance which eventually came to be imputed to price was implicit in a certain conception of capital and a certain theory of value the origin of which was quite distinct from the discovery of the causal interrelatedness of prices. Nevertheless this discovery was an indispensable condition of the formation of the whole classical pattern of ideas, for it provided the vehicle of the whole system. Price was the catalyst by the action of which the ideas of capital and value were combined.

Two circumstances enabled price to play this role: the moral concern which found expression in the medieval doctrine of just price which strongly disposed the inheritors of this tradition to look to price for a solution of all social problems, and the intellectual fascination which resulted from the discovery that all prices are linked together in an amazingly extensive system of subtle and delicate relationships. The temptation to assume that such a system must have human, social, or moral significance is almost irresistible. To the seventeenth­ and eighteenth­century mind it proved quite irresistible in astronomy and physics no less than economics. The natural sciences have been able to outgrow their former obsession with "the harmonies of nature." If economics has not yet altogether done so, that is due not so much to continued fascination by the intricacies of the price nexus as to the traditional ideas of capital and value for which the harmony of price is indispensable.


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