13. Administered Prices

do not really compete. They start with an ideal of "pure competition" and they find that the sales man agers in the larger companies fall far short of it. In this imaginary "pure competition," there would have to be a large·number of little companies, all selling just about the same product. Nobody would have any control over the price he could charge. "The market" would be a thing in itself. Producers would simply sell for all they could get, everything they could produce at that price. If the competition in such a market was "pure" enough, nobody would even use salesmen, put out advertising or use brand names. Selling in such a market would be something like selling 80 x 80-count print cloth in the Worth Street market, or even like selling a thousand shares of "Steel" "at the market," or 10,000bushels of March wheat on the Chicago Board of Trade. The political objection, in this ideal, seems to be that any industry that falls short of it can be criticized as practicing "impure" or "imperfect" competition. And that sounds like monopoly-or "monopolistic competi tion." It's illegal. For the opposite, or negative, of competition, is monopoly. But the number of indus99 100 ADMINISTERED PRICES tries which sell by this ideal "pure competition" is almost, if not, totally nonexistent.

Thus, one of the President's three Economic Advisors recently told a Congressional Committee: Where three or four large firms control 70 per cent or 80 per cent of the market, each manager . . . restrains his impulse to grow when business is booming and keeps his expansion within limits which will protect the market price. When prices weaken, each reduces his production and em ployment rather than his price, confident that each of the others will do likewise. That may be prudent and it may be good business . . . but it is not . . . competitive busi ness. . .. Inherent in [this] administered-price situation is the failure of the forces of competition to work effectively, and the remedy must be found by attacking the structure of the industry .... 1 But the figures don't seelll to bear this out. Ten years ago a government economist made a careful study of 407 separate manufacturing industries, as to price, output, and degree of concentration. 2 He took his figures chiefly from the U. S. Census of Manufactures, for two separate periods: the decline between 1929 and 1933 and the recovery between 1933 and 1937. He did not find that it was so.

"... There appeared," he said, "to be no strongly marked relation between... concentration . . . and . . . quan tity and price behavior; high and low concentration and large and small changes in price and quantity appeared to gether almost as if by chance . . ." 3 A Boston economist has since then gone over the same question. He went the government man one further and looked into sellers' "unit direct costs." His con clusion was 4 ". • • that concentration cannot, as alleged, be considered to exercise a significant influence during depression on either price behavior, production behavior, ADMINISTERED PRICES 101 or price-production behavior for individual industries taken separately. . ." In the middle 1930's an economist in the U. S. Depart ment of Agriculture set a style in Washington economic thinking with a pamphlet which said that the hard times of the 1930's were mostly because industry was getting more concentrated and managers in concentrated indus tries preferred to cut production instead of cutting prices.5 This fast became economic "party-line" in Washington. President Roosevelt used the idea in his 1938 message asking Congress to look into "the concen tration of economic power in American industry." And it is what Dr. Clark·was saying in 1949.

Said Dr. Means, "The basic cause for the failure of a laissez-faire policy is . . . [that the] shift to adminis tration has brought . . . inflexible administered prices which disrupt the workings of the market. . . ." 6 But while Washington economists and politicians promptly bought this idea, N ew York economists quickly swarmed over it. And they soon found what seem to be errors. A well-known economist, Dr. Rufus Tucker, pointed out that Dr. Means had "made no attempt to compare price movements in the present depression with those in previous depressions," and that "if he had . . . he would have found that rigid prices always existed; that to a very large extent they were characteristic of the same articles of which they are now characteristic, and that there is even very strong reason to believe that a hundred years ago, when John Stuart Mill was writing his "Principles of Political Economy," rigid prices were proportionally more numerous and more important to the consumer than now ...7 The fact is that rigid prices have always been important.

102 ADMINISTERED PRICES Were the classical economists aware of that fact? . A study of their texts makes it impossible to· doubt that they were. Adam Smith very plainly stated "that the price of linen and woolen cloth is liable neither to such frequent nor to such great variations as the price of corn [wheat], every man's experience will inform him." ... there is strong reason to believe that competition has more nearly approached the theoretical ideal in recent years than . . . in the time of Smith and Mill. . .. It was . . . common knowledge that wages did not fluctuate with the price of commodities; that manufactured goods and agricultural goods did not move to gether; that the price of bread . .. did not change as much as the price of wheat . . . Naturally, the records show that prices of manufactured goods remain unchanged for months at a time, while prices of farm products vary daily. . .. Manufacturers are com pelled to announce in advance what they expect to charge, frequently before they have any product ready for sale.

They have to inform their salesmen and dealers and in some cases the buying public. They print price lists and adver tisements. Necessarily prices so announced cannot be changed frequently. . . . . . . Whether the discovery by certain economists and politicians of a phenomenon that was common and gener ally known in the eighteenth century is justification for discarding an economic system . . . is a question every economist must answer for himself. In my opinion it is no more important . . . than the discovery by Moliere's bourgeois gentilhomme that he had been speaking prose all his life. Administered prices are perfectly consistent with active competition. They have been common and in fact neces sary in certain types of industry for centuries. Throughout our history some prices have changed rapidly, others at longer intervals. . .. These differences in price-behavior have not been the effect of monopolistic practices or large scale operations, but of differences in the nature of costs.