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Saturday, August 18, 2012

Other Enigmas of Economics

Once we have become aware of the element of the mysterious and the problematical in the economic process in which we ourselves are engaged, we are alerted as well to the enigmatic aspects of all the individual parts of the process. Once we have begun to ask questions and have sloughed off the naive unconcern of the unphilosophical man who regards all these things as “given,” our intellectual curiosity pushes us ever deeper into the thickets of economics. What about “interest,” for example? Here is one of the biggest conundrums of economics and one which will no doubt appear as disconcerting at first sight to the modern tenderfoot as it did to the writer in his own youth. Or again: how many are there who regard money as something self-evident, something on which it is unnecessary to waste much discussion? They know what money is in its concrete form of coin and bank note and that one must have it to survive, but that is the end of the matter for them. It requires a serious monetary disturbance, such as the inflationary crises which developed in some countries after both World Wars, to bring home to people what irreplaceable services are rendered by a healthy monetary system, what fecund and also destructive forces lie hidden in those pieces of paper and those small discs of metal which are passed so nonchalantly from hand to hand. Then, even the uninitiate can see some point in reflecting on the meaning of money. And when once this act of reflection has commenced, how quickly comes insight into and appreciation of the mysteries and the problems which lie hidden here. It is then that the realization comes that money is not something natural and self-evident, but a human invention, and as such an historical phenomenon which acquires significance only at a certain stage of economic development, namely, that of an advanced society founded on the market and the division of labor.
Let us take a step further, leaving aside for the moment the broader interrelationships of economic life (whose problematical aspects are really not so difficult to discern) and confine our attention to a single banal fact, selected at random. Assume that we have a pencil costing $.05 and a watch costing $50. Whence comes this difference in price? There are three possible explanations. First: the two prices are simply the result of chance. Chance, clearly, plays a role in the formation of prices as anyone will attest who has ever attended an auction or paid some exorbitant price in an Eastern bazaar. And there is little doubt but that on most of our imperfectly organized markets the formation of prices takes place within a more or less wide range of indeterminacy. Yet no one would seriously maintain that price formation is governed only by the capricious play of chance. It would, at any rate, be difficult to make such an assertion about the pencil and the watch. There is too great a difference between the two prices and too little likelihood of supposing an inversion of the prices. Experience proves that, in reality, prices of all commodities are coordinated in a single system in which each individual price tends to remain stable for a considerable period of time, varying only within relatively narrow limits; a marked change will occur only for good and sufficient reasons.
A second explanation is that prices are arbitrarily set by the public authorities. It will be at once evident that this explanation does not apply in our case nor to our experiences, though we are all familiar with a few instances in which the authorities have fixed prices. In wartime, of course, the exception becomes the rule and an elaborate apparatus of price control is set up by the government to prevent a rise in the prices of vitally needed commodities (ceiling price policy). Even in normal times, there are many prices which are fixed (institutional prices). Examples are theatre tickets, taxi fares, etc. But it is precisely our wartime experiences with price control which have made at least one thing clear: a government which fixes prices too far below the level they would have reached in the absence of the official regulations will encounter increasing resistance, ending in complete defiance. It is well to remember that even in these instances of compulsory price fixing, the fixing is linked to factors which have nothing to do with compulsion or chance. It is these factors which provide the last and most satisfactory explanation: prices are formed in accordance with inherent social necessities. The elucidation of such price formation is one of the chief tasks of economics.

Economics of the Free Society

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