Will the Real Price Adminstrator Please Stand Up! I. E. Howard

IRVINH E. HOWARD AMERICANS saw a display of na ked arbitrary power in the recent roll-back of aluminum, copper,. and later, steel prices in response to government threats or "persua sion." It brought a warning com ment in The Wall Street Journal (January 5, 1966): "The struc tural steel price increase an nounced in the past few days threatens to usher in a new.era of informal but intensive Presiden tial price control." Government intervention in the pricing process is not new in American history. In fact, it has a long pedigree in antitrust legislaThe Reverend Mr. Howard is assistant editor of Christian Economics and is working toward a doctoral degree in economics at New York University. 46 tion, as recounted by former Fed eral Trade Commissioner, Lowell Mason: As an administrator of two anti trust laws diametrically opposed to each other, it was not difficult for me to accuse everybody at a trade convention with being some kind of a lawbreaker. Either they were all charging everyone the same prices, indicating a violation of the Sher man Act, or they were not charging everyone the same price, a circum stance indicating a violation of the Robinson-Patman Act.

Yet the purpose of the Sherman Antitrust Act was to protect com petition and keep the market free. While the Act was being debated in the Senate in 1890, Senator 1966 WILL THE REAL PRICE ADMINISTRATOR PLEASE STAND Up! 47 Hoar declared: "The great thing that this bill does, 'except afford~ ing a remedy, is to extend ,the common-law principles, which pro tected fair competition' in trade in old, times in England, to' inter national and, interstate commerce in the United States." The legislators sincerely thought that, they'were enlarging freedom again, in 1914 when they passed the, Federal Trade ' Commission A.ct and, the "Clayton Act. The Federal Trade Commission be came an investigative body of which Lowell Mason was an ad ministrator. By forbidding 'dis crimination in price between dif.;, ferent purchasers of commodities, the Clayton Act introduced the contradiction to which Mr. Mason referred.

Cosf-of.Prod,udion Theory of Pric;n,g In 1936, still bent on keeping the market free, the legislators passed the Robinson-Patman Act which, among other things, for bi~s price discrimination in the form of •discounts, rebates, or ad vertising allowances greater than available to competitors. The drafters of this Act reasoned that p~;,ices are discriminatory if they are not matched by like differences in costs. This kind of thinking r~aches back to Adam, Smith, David Ricardo, and to the labor theory of value. Is economic value determined, by the cost of labor involved 'in manufacture? ',Econ omists exploded this tiotiona cen tury ago, and'the gist, of their' re buttal is found in a simple ex ample: "Pearls are', not valuable because men dive' for them, but men dive for them' because they are, valuable." The'price of 'a good - its economic value -is measured by the satisfaction' the economic good brings to the consumer.

For example, what of a theater that charges a lower price for a matinee than for the evening per formance?It is the same show. The costs of producing it are prac tically" the same. Is the theater guilty of price' discrimination by charging·' a lower price in the afternoon? If differences in cost are to be the criterion, the·y are. If the satisfaction of the consumer (demand) is the criterion, they are not. The Robinson-Patman Act foundered upon this misunder standing of the nature of eco nomic value·. Moreover, the history of anti trust legislation in America illus trates another principle empha sized by Dr. Ludwig von Mises namely, that one government in tervention inevitably leads to an other, and that to another, until all freedom of movement is lost in a maze of government regula tions.

48 THE FREEMAN April Serle and Means It was against such a back ground that Adolphe A. Berle and Gardner C. Means set forth their theory of "administered prices." Means' book, Pri6ing Power and the Public Interest. A Study Based on Steel,l contains the most com plete statement of the theory. By an "administered price" these economists mean a price set by administrative action, rather than one resulting from market forces, and held constant over a period of time. They contend that large corporations in oligop olistic markets (few sellers and many buyers) have sufficient con trol of the market to do this. At first, Dr. Means thought he had found the cause of the Great Depression. Large corporations, he argued, held their prices firm and varied their production, laying off men, creating unemployment, and thus worsening the depres sion. In 1939, Dr. Jules Backman published "Price Flexibility and Changes in Production"2 in which he said: "Not so!" He concluded that he could find no clear-cut re1 Means, Gardner C., Pricing Power and the Public Interest. A Study Based on Steel (New York: Harper and Brothers, 1962).

2 Backman, Jules, "Price Flexibility and Changes in Production," The Con ference Board Bulletin, National Indus trial Conference Board, New York, Feb ruary 20, 1939, pp. 45, 51. lationship between specific com modity prices and production changes. hi 1942, Professor Alfred C. Neal joined Dr. Jules Backman in rejecting Means' thesis. In his study, Industrial Conc'entration and Price Flexibility, he com mented: . . . one must be excused for won dering why so much ink has been spilled in· debating these issues when there has been so little theoretical presumption in favor of the conclu sions under dispute. There is, per haps, much truth in Du Brul's re mark that if Mr. Means' thesis had not been useful as a tool of politics, it would have died an early death. 3 Political value it has had! The Berle-Means theory resulted in the Kefauver Committee making a three-year study of steel, automo bile, and drug prices beginning in 1957.

Out of the hearings of this Committee, Dr. Means drew much material for his book, Pricing Power and the Public Interest. In this book, published in 1962, Dr. Means reversed his earlier theory and argued that administered prices cause an inflation. In fact, he coined the phrase, "admin istered inflation," to. describe the inflation in 1955-1958. Professor 3 Neal, Alfred C., Industrial Concen tration and Price Inflexibility, American Council on Public Affairs, 1942, p. 37.

1966 WILL THE REAL PRICE ADMINISTRATOR PLEASE STAND Up! 49 Gottfried Haberler has thoroughly discredited Dr. Means' "adminis tered inflation" in his book, In flation - Its Cau,ses and Cures, 4· but the mere fact that "adminis tered prices" were supposed to have caused a deflation, and then also to have caused an inflation, should have been enough to raise a suspicion regarding the inherent consistence of Means' thesis. Price and Wage Guideposts However, the theory had polit ical value, and politicians were soon to make the most of it. In 1962, the EC'onomic Report to the President suggested wage and price guideposts as a ceiling for increases in wages and prices. In adopting this guidepost. concept, the Council of Economic Advisers were tacitly admitting that they had accepted the theory that prices and wages are administered and are not the result of market forces. Consequently, the conclu sion was soon reached that, since the prices of commodities manu factured by large corporations are determined by management rather than by the market, the govern ment should control the pricing policy. Wages have remained strangely immune to the applica tion of the guidepost standard.

-4I-I'aberler, Gottfried, Inflation. Its Causes and Cures (Washington, D. C.: American Enterprise Association, 1960), p. 40-45. The recent application of the guidepost to aluminum, copper, and steel prices has ignored the fact that the philosophy behind the guidepost concept, the busi ness-administered price theory, has never been proved. In fact, evidence has been accumulating that the relative inflexibility of the prices under discussion has been the result of inflexible wage rates which have been adminis tered by national labor unions, and also stems from other inflexi bilities introduced into the econ omy by government fixed rates, such as freight rates, public utility rates, postal rates, interest rates - to say nothing of agricultural support prices and a host of other government controlled prices. These are "administered prices" indeed! The so-called "administered prices" of pri vate ind ustry are very sensitive to foreign competi tion. Both steel and automobile prices, favorite whipping boys of the Kefauver Committee, have been driven down by foreign com petition since this debate started.

Moreover, metals all face competi tion from substitute materials. While prices in large corporations cannot be determined by an auc tion like securities on the stock exchange, nevertheless, manage ment cannot disregard all the dif ferent kinds of competition its 50 THE FREEMAN April product must face when setting its asking prices. There is much more to competi tion than Berle and Means and their followers are ,villing to ad mit. Not only is there competition between firms within an industry, and companies within a family, such as the General Motors fam ily, but there is competition be tween very different industries. There is also competition from all kinds of substitutes. There is nonprice competition in quality and services. In short, the real world is much more competitive than it is painted by some econ omists. The Magical "3.2" Not only is the "administered price" theory open to question, but the guidepost itself is of doubtful value as a measure of prices. The guidepost is the ratio between total output and total man-hour input. It was devised by economists interested in national economic growth as a rough measure of productivity. Politi cians have applied it to prices and wages.

In 1965, the government arrived at 3.2 per cent as its guidepost. Some statisticians thbught it should be 3.4 per cent and others chose another percentage, but is any percentage trustworthy as a measure of prices and wages? Total output and total man-hour input are only rough estimates and are not precise enough to de termine the specific .price of any thing. Moreover, at best, the guidepost ratio is a five-year mov ing average! How many individ uals or companies are average? The price and wage increases of some should be above and others below that five year average! Nevertheless, the guidepost ra tio was the yardstick the govern ment used in its recent assault upon aluminum, copper, and steel. A price resulting from such dic tation, is an "administered price." The guideposts are supposed to be "voluntary" standards, but as Mr. George Champion, chairman of the Chase Manhattan Bank, has observed, "Always in the back ground is the threat that failure to comply voluntarily with the guidelines would bring measures applied, for the most part, without debate in Congress or legal appeal in the courts."

The Limits of Tolerance The most disappointing aspect of this new development between government and business has been the sheeplike acceptance of gov ernment domination by the busi ness community. "This is no time to be timid of tone or fearful of economic re prisal," Mr. Champion warned. "If 1966 WILL THE REAL PRICE ADMINISTRATOR PLEASE STAND Up! 51 we have men afraid of standing up to the government, then we have the strongest indictment of 'big government' that could ever be imagined. When that happens, economic freedom in our country will be dead." The Berle-Means thesis that large corporations fix inflexible prices has been exploded by com petent economists. Nevertheless, bureaucrats have used the theory to justify government adminis tered prices. Now we see where the "administered price" theorists were going! Now the real price administrator has stood up and has been recognized! + WHAT the investigator saw re minded him of a list of cases on a court calendar: adultery, aliena tion of affections, bigamy, rape, incest, assault upon neighbors and within families.