1. The Price System

The market process moves between two poles: the supply of factors of production and the demand for consumer goods. Insofar as this process is solely determined by the principle of exchanging real goods (including labor expenditures), the people demanding consumer goods and the people providing factors of production are necessarily identical. No economic subject can obtain a consumer good from the exchange economy who has not supplied a factor of production in return—thus the image of a circulation within the economy. The individual owners of factors of production make them available to the economic process and receive in exchange consumer goods. Insofar as the owners of factors of production (laborers) are dependent for their economic existence on attaining a return from their labors, it simultaneously becomes possible for them to continue to take part in the economic process, to again supply their factors of production, and to repeatedly obtain a share of the products. There is, of course, no reason to assume that this economic circulation will display a perennial repetition of one and the same process. Even if an economic actor repeatedly makes his factors of production available in order to attain a share of the product, within the fluctuations of the economy it can always happen that, on the one hand, the factors of production an individual owns change or, on the other hand, that the share he receives of the returns from the economic process changes, even if his supply of factors of production remains the same. There can be various reasons for such changes which we cannot treat in detail here. For certain reasons, however, it will now be necessary for us to attempt to explain the course of the economic process independently of such possible changes. Only in this way will it be possible for us to accurately describe two far-reaching and important principles of economic processes which are strict laws in the framework of such a “static” economy²¹ while, if one enriches the picture of the economy by including such changes and brings it closer to reality, they only have an effect as “tendencies.” Nonetheless, the significance of these principles, even if they only appear as tendencies, justifies that we now grant more space to their rigorous derivation.

For factors of production as well as for products, prices will develop on the market; and in an exchange economy, the more the process of employing factors of production to produce consumer goods is divided in horizontal and vertical directions (whereby the various partial production processes are interconnected through exchanges), the greater will be the number of prices which develop in the market. In a free market, the formation of each of these prices is determined by the intersection of supply and demand. The principles that are valid here are presented in the general law of prices. Here we are satisfied with the most general formulation: If the supply is structured such that it increases with increasing prices, while the demand decreases with increasing prices, then there can only be one price at which the supply is equal to demand. With free competition on both sides, the “economic selection principle of price rivalry” will determine the price height. In addition, a necessary connectivity of various prices will be noted, a connectivity so tight that all prices appear as a single system in which each individual price is dependent on every other. For one thing, there is a connectivity of prices in a vertical direction; that is, there exists a connection between the prices of products and the prices of factors of production that has been expressed by the law of costs. Second, a connectivity of prices also exists in a horizontal direction. It results from the fact that various goods can replace each other in the economic process and be reallocated from one use to another. This relationship has been expressed by the principle of substitution.

It is important here that this principle of the connectivity of prices be related clearly to the general principle of price formation. Since every price formation in the free market can only be explained in terms of supply and demand, the horizontal and vertical connectivity of prices can only result from the fact that the supply of and demand for a good are dependent in some way on the prices of all other goods. The doctrine of the connectivity of prices is thus essentially a doctrine of the determinateness of specific supply and demand configurations. It will have to be shown that under certain circumstances, regardless of the existence of a price that equilibrates supply and demand of a good, supply and demand of this good will have to change because of the relationship between this price and other prices. It should be clear from the beginning that here one will be dealing with the supply and demand of products.

Let us point out briefly that for economic theory, the transition from viewing isolated price formations to viewing the connectivity of prices implies fulfilling the requirement of being systematic. This is the only possible way of analyzing the economy as a whole. Individual movements are exclusively formations of single prices determined by supply and demand, and only when it is possible to trace these movements in all their effects until a picture emerges in which each phenomenon is co-determined by every other, and in which the law-governed nature of the whole follows from the determining forces of each part, is the task of presenting the entire economic cosmos fulfilled. It is the duty of every science to create a coherent system. To fulfill this task means, however, to hammer this system out of the laws determining its parts.