II. Conformity or Contradiction?

As I DO NOT WISH TO REPEAT OBVIOUS THINGS, I DO NOT STOP TO INQUIRE whether “control” is an influential factor in the determination of prices, generally speaking, and more particularly in distribution. This I consider to be an accepted fact, settled long ago among all modern economists. My first question, therefore, is whether this influence of control asserts itself in conformity with, or in contradiction to, the economic laws of price, or whether it counteracts and invalidates the theoretical laws of price, or whether it harmonizes with these.

This question is analogous to one that had to be asked, once upon a time, in the field of production of economic goods:

Is the admitted ability of man artificially to increase the production of goods a power that asserts itself apart from and in contradiction to the natural laws, or something that can take effect only within and in compliance with the natural laws of production?

As is known, everybody agrees, in regard to this question, that the “power of man over nature” can be exerted only in harmony with the laws of nature and in strict conformity to them. And I am convinced that once the question before us is explicitly and clearly stated, an analogous consensus of opinion will be easily arrived at: namely, in the problems of price and distribution, “power” (Macht) is evidently not asserted apart from or in contradiction to but within and in conformity with the economic laws of price. Let us first elucidate this with a few familiar illustrations in which the element of power is particularly patent.

There is first the case of usury: What is it that gives to the usurer that “control” over his victims which is at the bottom of the familiar “extortionate” usury prices? Nothing else than those very same factors which the allegedly “pure economic” theory of marginal utility furnishes us in its price formula: it is the urgent want of the borrower, which, but for the usurer, would go unsatisfied; it is the satisfaction of the most pressing wants that depend on the services obtained from the usurer.

As a result of this, moreover, the subjective value, determined by the corresponding utility, and therewith the upper limits of the possible prices, are being moved up. And since the borrower finds no aid from any competition among the suppliers of money who would have to underbid each other, there are equally absent all those more subtle price-restricting elements which, in the case of free competition, determine the valuation of the competitors to be contended with on the supply side.⁵ The usurer, through his inflexibility, thus obtains the power to raise his price to almost the extreme upper limit, which corresponds to the high subjective valuation of the hard-pressed borrower.

Or there is the typical case of monopolies. Each owner of a complete monopoly has the “power” to fix the price of his product at any point he pleases. He again owes that “power” to the existence of certain classes of demand of the highest intensity on the part of people whose urgent wants and high purchasing power combine toward creating a correspondingly high intensity of demand, together with the factor just explained, that the absence of competitors does not establish any lower limits likely to interfere with their taking advantage of the most intense demand among the buyers.

But the fact that the monopolist’s “power” is rooted in these very economic factors will also determine certain familiar and oft-explained limitations: the monopolist can, after all, never fix the price at a point higher than that close to the valuation of the highest, most intense class of demand, and, moreover, what is still more important, he must always reckon with the restriction of the quantity that can be sold at the higher price. He can, in other words, never escape the economic law according to which the price is fixed at the intersection of supply and demand, at that, point where equal quantities are offered and taken. Since he can arbitrarily determine amount and intensity of the supply which he may wish to offer, he may select that point of intersection at a low or at a high point on the scale of possible prices; but the higher that point is, the smaller will become the number of those remaining on the demand side, and the smaller will be the quantity to be disposed of at that point.

The monopolist thus never has unlimited control; he merely has the choice within the laws of price of different “economically possible” price levels. He can select that price at which the combination of profit for each article, and the number of articles to be sold at that price, are likely to promise the greatest total profit, but he cannot exert his “power” in any other way than in conformity with the laws of price, for it is his behavior that establishes the “price law,” namely the conditions of the amount offered at a given price level, but never can he counteract the laws of price.

The same as shown in these typical illustrations will probably always be true, whenever any kind of so-called “economic power” is applied, for it is this kind of power only that concerns our problem, not physical force or direct compulsion. Highway-robbery or extortion, force of arms or enslavement would, of course, belong to an entirely different category. But the exertion of economic control never introduces any new element into the determination of price that had not previously found a place in the purely theoretical laws of prices.

What conclusions are to be drawn from these facts in regard to our problem, I shall discuss later. For the present, let me refer to an important distinction that should be made in this connection between the influence of economic “control” and “non-economic motives.”

For, while the effects of the latter may be contrary to, or conflicting with, the economic laws of price, the exertion of control must always be in conformity with them. Where non-economic motives, such as generosity, philanthropy, class or race-hatred, national sympathies and antipathies, vanity, pride, and so forth play their part in the fixing of prices and distribution, they may lead to prices at variance with, or contradictory to those to be expected according to the price-law formula. Whoever is moved by non-economic, outside considerations like friendship or humanitarian impulses to make a gift to the other party of the bargain, may as a buyer consent to a price that will exceed his subjective valuation and as a seller be content with a price far below his own valuation of the goods; or who, from patriotism or national prejudice, wishes to buy only from his compatriots, may consent to prices higher than those offered by their competitors in foreign countries.

This disturbing effect of noneconomic motives conflicting with the price laws is based on the familiar fact that the economic laws of price apply and claim validity only so long as the conditions on which they are based really prevail by themselves alone, without outside interference; analogous to the physical law of gravitation which holds true only under the assumption of the exclusive effect of gravitation, as exists for instance in a vacuum, while any interfering disturbances, such as friction or buoyancy as exercised by a balloon loaded with gas, would cause phenomena of motion contradictory to the law of gravitation. As distinct from that, the price-determining influences emanating from economic “control,” or preponderance of “power,” always remain within and in conformity with the formula laid down by economic theory: they never form an exception to, but always an application of the economic law of price.

From this there follow two things that are of significance to our problem: first that we neither should nor even can make any reservation as to the validity of the economic laws of price and distribution, when the influence of power comes into play. We need not, in regard to them or the non-economic motives, resign ourselves to the view that out economic laws are valid only so long as no such influence intervenes, as in the case of non-economic motives, that they hold good only in an imaginary world in which such influences are absent, but not in the world of realities in which social power plays a role more pronounced day by day. Nor should we take that resigned view, which would greatly diminish the usefulness of our theoretical laws and reduce their general validity, that our economic laws need not explain this or that case at all.

And then, this leads to the second conclusion: whoever wishes adequately to set forth the influences of social control in the explanation of price determination should not case aside those laws operating with so-called “purely economic” factors, but he should accept and develop them. He must not accuse them, as does Stolzmann in regard to the laws of price and distribution developed by the marginal-utility theory, of considering the effects of “natural factors” only, so that these theories would have to be discarded or rejected before one could adequately present the effects of social influences; no, indeed not; we should accept these laws and develop them through a careful analysis in those directions in which social forces actually become operative, when we try to formulate their effects on price fixation and distribution. Our task is not to discard but to develop these allegedly “purely economic” laws of distribution. The fact that economic control cannot affect the conditions of distribution in any other way than through the medium of the categories of “marginal utility” and “subjective value” is indeed not a remote conclusion, and has been explicitly stated here and there in the past, thus for instance, not so long ago by Schumpeter, who attacked a vague statement by Professor Lexis in his theory of distribution, referring to the influence of power, with these words:

The reference to the relative strength of economic power in itself does not explain anything. For if one asks what constitutes economic power the answer can only be: the control over certain goods. And it is only from the economic function of these goods and the subsequent formation of value that a real explanation can be derived.⁶

Is this not just as if somebody were to argue that the speed of a steamship depends not upon the power of her engines in relation to the resistance to be overcome, or the weight to be propelled, etc., but on the number of rotations of the propellers, which, in turn, of course, depends exclusively upon the power of the engines?

Nor does that explanation do justice to what Stolzmann has stated at several other places in his writings to be the relation between the natural and the social “category”; namely, that natural factors operate as “conditions” or “premises,” merely determining the possible limits, whereas within these limits and premises it is the social factors that really “determine” and “decide” matters.

Now it is quite true that, at first, the effect of economic factors is essentially that of delimiting the margins of the price; the subjective valuations of buyers and sellers merely determine the upper and lower price limit. But even this “setting” of “limits” may stiffen into actual “fixing” of prices, whenever and wherever the limits from above and below become so numerous and so closely placed that they reduce the interval to a small zone or even to one distinct point, as is generally the case with intense and at the same time perfect competition among many individuals. Nor does “control,” on the other hand, ever “determine” anything. It can at best exercise a “constraining” influence, where economic delimitations establish the margin.

He who deals with a needy purchaser, in the absence of competition, has the “power” to fix the price at any point of the probably wide range located between the value of the urgently needed goods to the anxious buyer as the upper limit, and the value of the same article to the not-anxious seller as the lower limit. But at what exact point of this extensive range the price will ultimately be fixed is not determined by the relative “power” alone, for with equal “power” the philanthropist will make an entirely different price to the poor man than with the usurer. Or there may be different degrees of skill in bargaining, or in sizing up the position of the other side, of perseverance, of patience, of disregard for public opinion, of defiance or fear, even in case of equal objective “power,” which will move the price to a very different point of the scale.

But when the “relative power” of the two parties seems to fix the price at a quite definite point of the scale, it certainly has again been nothing else than the coincidence of a majority of “restrictive influences” that narrow down the limits from both sides to such an extent that the price level itself appears to be “determined” thereby. Nor is any other outcome to be expected, for since, as shown before, “economic power” can become effective only through the intermediary determinants of the theoretical price formula, and since these determinants can again fix the price only through a consecutive delimitation, it is obvious that “power” can equally determine prices in no other way than through the fixation of limits; it does not possess any independent “pricefixing capacity,” as distinct from this “restricting” or “limiting” ability.

From this it will become clear why, in the discussion of these questions, the old terms of “purely economic” or “legal-historic” categories, as Rodbertus called them, or of “natural” and “social” categories, as applied by Stolzmann, are not sufficient. These terms may have served a purpose in their time. At least they have, roughly speaking, indicated certain distinctions which should also be kept in mind, and they have been particularly helpful, towards the elimination of the old, one-sided view that there are only “natural laws” operative in our economic life. But in the theoretical explanation of the phenomena of price and distribution they do not play that role which their authors ascribe to them.

They fail to draw a straight and clear line of demarcation between social phenomena, because these are always permeated by both factors. A certain amount of the “historical-legal” or “social” element is sure to be present in all economic phenomena. There is no room left for an opposite, “purely natural” category. There literally exists no price nor any form of “distribution” (except perhaps highway-robbery and the like) without containing at least some legalistic-historical aspect. For, in every civilized community, there must always exist some social order that will apply when two members of that society get into contact with each other, and thus determine the nature of that contact. It is, therefore, either saying too little or too much, when anyone claims the phenomena of distribution for the “social,” as distinct from the “natural,” category; or it is but an empty truism, which, in its very concept, applies to every singly economic or social phenomenon, for obviously a Robinson Crusoe could not even so much as “barter” with himself.

One member of a society can only trade with another if both can acquire ownership of the goods to be exchanged under the existing social order. Any statement attempting to express more than that truism is too far-reaching. Thus Rodbertus shoots way beyond the mark, when with that peculiar emphasis he defines interest on capital as being the typical fruit of the existing social order, and denies its “purely economic” justification. And Stolzmann equally shoots beyond the mark, when he holds that the “social category” alone “determines” distribution, and when he falsely accuses our theory of distribution of teaching purely natural laws of distribution, because it also does justice to the economic foundations of social power. A closer analysis of social power, however, must inevitably lead straight across the line of demarcation between the “social” and “natural” categories; power is present on both sides of the line.

Social “control” is not an abstraction or a distilled product in which the influence of the purely social category is reflected as such. Nor are the explanations given by the marginal-value theory—which Stolzmann calls extremely “naturalistic”—an unmixed distillation of only the natural and purely economic influences. Instead they always take into consideration certain characteristics of the existing, or an assumed, economic order. With proper elaboration they will be found capable of expressing the entire influence of social power, but even so, it remains true that prices are determined more or less accurately by the subjective valuations based on the marginal utility. And it remains equally true that the value of productive goods depends on nothing else but the value of the products to be obtained from them. In the last analysis, therefore, the value of the factors of production depends on the share of the product attributable to each factor in the productive process.

“Social control” and “social category” are thus not synonymous. The latter term, like its antithesis “natural” or “purely economic” category, has been so confused and misconstrued that I would prefer to dispense with its use altogether in the interest of a clear presentation. Where I did use these terms in this or in previous writings, I did so, not because they form part of my own vocabulary, but rather because I could not well avoid altogether the use of a generally accepted term. In order to make myself understood, I had above all to use the language of those whose opinion I was discussing. Nor have I failed at earlier occasions to make reservations in this respect.

And now I shall try to submit a few thoughts concerning the direction in which the old economic theory will have to be developed so as to embrace systematically in its teachings the influence of “control” (Macht, or “outside power”).

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⁵ See Positive Theory, 3d Ed. Chapter IV.

⁶ Review in Vol. 21 of Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 1912, p. 284; similarly also Oswald versus Liefmann in Zeitschriftjur Sozialwissenschaften, N.F.