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Archive for January, 2009

On Prices

Posted by Alex M Thomas on 21st January 2009

This is a part of a series which aim at elucidating the notion of ‘prices’ in various periods in history and according to various economists (mainly heterodox). What do prices convey? How are prices formed? Is there any mechanism underlying the formation of prices or is it random in nature? Is there a possibility of finding ‘natural laws’ which determine prices?

In reality, we often come across various kinds of prices – wholesale price, retail price, administered price, maximum retail price (mrp), etc. In economics, neoclassical theories posit that prices are determined owing to the interaction or intersection of supply and demand. What prices are they talking about? These are prices which are abstract in nature. Theorising is done for practical purposes; therefore, theoretical entities are constructed in order to understand the ‘real’ world. Does the demand-supply theory enlighten us? Does it provide an approximation of price formation in reality? Or does it only tell us about a special set of commodities? In the secondary market which carries trading in shares, prices are formed according to the demand and supply. But, would it be right to say that prices of automobiles, mobile phones, eatables, etc are fixed by the same mechanism? Wouldn’t it be the producer who fixes theprice taking into account the cost of producing and transporting it, over which she/he charges a percentage as profit?

Keeping these questions in mind, let us move on to the issues pertaining to ‘prices’ in period between 12th and 16th centuries. The period is roughly before the period known as the mercantile period. The establishing of a ‘just price’ was a significant issue then. Actually, this debate goes back even to the time of Aristotle. Prices then has more to do with ethics and morality than with objective mechanisms of equilibrium or competitive conditions. Now, it is clearly seen how ‘economic theory’ rationalities a lot of price hikes by providing the reason that ‘demand is more than supply’. I ask the question which prevailed in early centuries: is such a price rise just? How does one say that it is rational for prices to increase when there in excess demand? Where does the rationale come from? Economic theory! Who constructs these theories? And what are the implications? Who does it benefit?

In the earlier centuries, trading or exchange was carried out only by a few people. People exchanged after their needs were met. According to Thomas Aquinas, just price was the price that prevailed in the markets in the absence of fraud or monopolistic practices. This conception is reminiscent of the underlying power structure which prevailed at time. ‘Just’ did not necessarily mean just. And, this period was characterised by a lot of political interventions (especially, in Italy). Some other writers considered as ‘just’ that price which allowed producers to maintain a standard of living befitting their position in society. That is, the cost structure was determined by social stratification.

In the debates on ‘price’, references to utility and rarity was abundant. Another price – the legitimate price also prevailed. It referred to the price which was fixed in any transaction agreed on by the participants freely. Again, the ‘freedom’ here is questionable. For, liberal authors argue that the transaction carried out by a CEO and a wage labourer is ‘just’ because both of them are freely participating. Surprisingly, the origin of property rights is seldom mentioned.

To conclude, this is a post inspired by the sub-disciplines of economic history and history of economic thought, which is rapidly vanishing from the departments of economics.

Reference

1) Roncaglia, A (2005), The Wealth of Ideas: A History of Economic Thought, CUP.

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