Chapter 16. Prices.
1. The Pricing Process.
In an occasional act of barter, in which men who ordinarily do not resort to trading with other people
exchange goods ordinarily not negotiated, the ratio of exchange is determined only within broad margins.
Catallactics, the theory of exchange ratios and prices, cannot determine at what point
within these margins the concrete ratio will be established.
All that it can assert with regard to such exchanges is that they can be effected only
if each party values what he receives more highly than what he gives away.
The recurrence of individual acts of exchange generates the market step by step with the
evolution of the division of labor within a society based on private property.
As it becomes a rule to produce for other people's consumption, the members of society
must sell and buy.
The multiplication of the acts of exchange and the increase in the number of people offering
Banking or asking for the same commodities narrow the margins between the valuations
of the parties.
Indirect exchange and its perfection through the use of money divide the transactions into
two different parts, sale and purchase.
What in the eyes of one party is a sale is, for the other party, a purchase.
The divisibility of money, unlimited for all practical purposes, makes it possible to determine
and the exchange ratios with nicety.
The exchange ratios are now, as a rule, money prices.
They are determined between extremely narrow margins.
The valuations on the one hand of the marginal buyer and those of the marginal offeror who
abstains from selling, and the valuations on the other hand of the marginal seller and
those of the marginal potential buyer who abstains from buying.
The concatenation of the market is an outcome of the activities of entrepreneurs, promoters,
speculators and dealers in futures and in arbitrage.
It has been asserted that catallactics is based on the assumption, contrary to reality,
that all parties are provided with perfect knowledge concerning the market data and are
therefore in a position to take best advantage of the most favorable opportunities for buying
and selling.
It is true that some economists really believe that such an assumption is implied in the
theory of prices.
These authors not only failed to realize in what respects a world peopled with men perfectly
equal in knowledge and foresight would differ from the real world, which all economists
wanted to interpret in developing their theories.
They also erred in being unaware of the fact that they themselves did not resort to such
Such an assumption in their own treatment of prices.
In an economic system in which every actor is in a position to recognize correctly the
market situation with the same degree of insight, the adjustment of prices to every change in
the data would be achieved at one stroke.
It is impossible to imagine such uniformity in the correct cognition and appraisal of
of Changes in Data, except by the intercession of superhuman agencies.
We would have to assume that every man is approached by an angel, informing him of the
change in data which has occurred, and advising him how to adjust his own conduct in the most
adequate way to this change.
Certainly the market that catallactics deals with is filled with people who are, to different
The more enterprising and brighter individuals take the lead, others follow later.
The Schroeder individuals appreciate conditions more correctly than the less intelligent,
and therefore succeed better in their actions.
Economists must never disregard in their reasoning the fact that the innate and acquired inequality
of men differentiates their adjustment to the conditions of their environment.
The driving force of the market process is provided neither by the consumers nor by the
by the owners of the means of production, land, capital goods and labor, but by the
promoting and speculating entrepreneurs.
These are people intent upon profiting by taking advantage of differences in prices.
Quicker of apprehension and farther sighted than other men, they look around for sources
of profit.
They buy where and when they deem prices too low, and they sell where and when they deem
Profit Seeking Speculation is the driving force of the market, and the driving force
as it is the driving force of production.
On the market, agitation never stops.
The imaginary construction of an evenly rotating economy has no counterpart in reality.
There can never emerge a state of affairs in which the sum of the prices of the complementary
factors of production, due allowance being made for time preference, equals the prices
Changes of the products and no further changes are to be expected.
There are always profits to be earned by somebody.
The speculators are always enticed by the expectation of profit.
The imaginary construction of the evenly rotating economy is a mental tool for comprehension
of entrepreneurial profit and loss.
It is, to be sure, not a design for comprehension of the pricing process.
The final prices corresponding to this imaginary conception are by no means identical with
the market prices.
The activities of the entrepreneurs or of any other actors on the economic scene are
not guided by consideration of any such things as equilibrium prices and the evenly rotating
economy.
The entrepreneurs take into account anticipated future prices, not final prices or equilibrium
and Prices.
They discover discrepancies between the height of the prices of the complementary factors
of production and the anticipated future prices of the products, and they are intent upon
taking advantage of such discrepancies.
These endeavors of the entrepreneurs would finally result in the emergence of the evenly
rotating economy if no further changes in the data were to appear.
The operation of the entrepreneurs brings about a tendency toward an equalization of
prices for the same goods in all subdivisions of the market, due allowance being made for
the cost of transportation and the time absorbed by it.
Differences in prices which are not merely transitory and bound to be wiped out by entrepreneurial
action are always the outcome of particular obstacles obstructing the inherent tendency
toward Equalization.
Some check prevents profit-seeking business from interfering.
An observer not sufficiently familiar with actual commercial conditions is often at a
loss to recognize the institutional barriers hindering such equalization.
But the merchants concerned always know what makes it impossible for them to take advantage
of such differences.
Statisticians treat this problem too lightly.
When they have discovered differences in the wholesale price of a commodity between two
cities or countries, not entirely accounted for by the cost of transportation, tariffs
and excise duties, they acquiesce in asserting that the purchasing power of money and the
level of prices are different.
Sometimes the difference in price as established by price statistics is apparent only.
The price quotations may refer to various qualities of the article concerned.
Or they may, complying with the local usages of commerce, mean different things.
They may, for instance, include or not include packing charges.
They may refer to cash payment, or to payment at a later date, and so on.
On the basis of such statements, people draft programs to remove these differences by monetary
measures.
However, the root cause of these differences cannot lie in monetary conditions.
If prices in both countries are quoted in terms of the same kind of money, it is necessary
to answer the question as to what prevents businessmen from embarking upon dealings which
are bound to make price differences disappear.
Things are essentially the same if the prices are expressed in terms of different kinds
of money.
For the mutual exchange ratio between various kinds of money tends toward a point at which
there is no further margin left to profitable exploitation of differences in commodity prices.
Whenever differences in commodity prices between various places persist, it is a task for economic
history and descriptive economics to establish what institutional barriers hinder the execution
of Transactions, which must result in the equalization of prices.
All the prices we know are past prices.
They are facts of economic history.
In speaking of present prices, we imply that the prices of the immediate future will not
differ from those of the immediate past.
However, all that is asserted with regard to future prices is merely an outcome of the
Understanding of Future Events.
The experience of economic history never tells us more than that, at a definite date and
definite place, two parties, A and B, traded a definite quantity of the commodity A against
a definite number of units of the money P.
In speaking of such acts of buying and selling as the market price of A, we are guided by
I apply a theoretical insight, deduced from an a prioristic starting point.
This is the insight that in the absence of particular factors making for price differences,
the prices paid at the same time and the same place for equal quantities of the same commodity
tend toward equalization, namely a final price.
But the actual market prices never reach this final state.
The various market prices about which we can get information were determined under different
conditions.
It is impermissible to confuse averages computed from them with the final prices.
Only with regard to fungible commodities negotiated on organized stock or commodity exchanges
is it permissible, in comparing prices, to assume that they refer to the same quality.
Apart from such prices negotiated in exchanges and from prices of commodities the homogeneity
of which can be precisely established by technological analysis, it is a serious blunder to disregard
differences in the quality of the commodity in question.
Even in the wholesale trade of raw textiles, the diversity of the articles plays the main
role.
A comparison of prices of consumers' goods is mainly misleading on account of the difference in quality.
The quantity traded in one transaction, too, is relevant in the determination of the price paid per unit.
Shares of a corporation sold in one large lot bring a different price than those sold in several small lots.
It is necessary to emphasize these facts again and again because it is customary nowadays
to play off the statistical elaboration of price data against the theory of prices.
However, the statistics of prices is altogether questionable.
Its foundations are precarious because circumstances, for the most part, do not permit the comparison
of the Various Data, Their Linking Together in Series, and the Computation of Averages.
Full of zeal to embark upon mathematical operations, the statisticians yield to the temptation
of disregarding the incomparability of the data available.
The information that a certain firm sold at a definite date, a definite type of shoes
for six dollars a pair, relates a fact of economic history.
A study of the behavior of shoe prices from 1923 to 1939 is conjectural, however sophisticated
the methods applied may be.
Catallactics shows that entrepreneurial activities tend toward an abolition of price differences
not caused by the costs of transportation and trade barriers.
No experience has ever contradicted this theorem.
The results obtained by an arbitrary identification of unequal things are irrelevant.
2.
Valuation and Appraisement
The ultimate source of the determination of prices is the value judgments of the consumers.
Prices are the outcome of the valuation preferring A to B. They are social phenomena, as they
are brought about by the interplay of the valuations of all individuals participating
in the operation of the market. Each individual, in buying or not buying, and in selling or
not selling, contributes his share to the formation of the market prices. But the larger
the market is, the smaller is the weight of each individual's contribution. Thus the
structure of market prices appears to the individual as a datum to which he must adjust
his own conduct.
The valuations which result in determination of definite prices are different.
Each party attaches a higher value to the good he receives than to that he gives away.
The exchange ratio, the price, is not the product of an equality of valuation but, on
the contrary, the product of a discrepancy in valuation.
Appraisement must be clearly distinguished from valuation.
Appraisement in no way depends upon the subjective valuation of the man who appraises.
He is not intent upon establishing the subjective use-value of the good concerned, but upon
anticipating the prices which the market will determine.
Valuation is a value judgment expressive of a difference in value.
Appraisement is the anticipation of an expected fact.
It aims at establishing what prices will be paid on the market for a particular commodity,
or what amount of money will be required for the purchase of a definite commodity.
Valuation and appraisement are, however, closely connected.
The valuations of an autarkic husbandman directly compare the weight he attaches to different
means for the removal of uneasiness.
The valuations of a man buying and selling on the market must not disregard the structure
of market prices.
They depend upon appraisement.
In order to know the meaning of a price, one must know the purchasing power of the amount
of money concerned.
It is necessary, by and large, to be familiar with the prices of those goods which one would
like to acquire, and to form on the ground of such knowledge and opinion about their
and their future prices.
If an individual speaks of the costs incurred by the purchase of some goods already acquired,
or to be incurred by the purchase of goods he plans to acquire, he expresses these costs
in terms of money.
But this amount of money represents in his eyes the degree of satisfaction he could obtain
by employing it for the acquisition of other goods.
The valuation makes a detour.
It goes via the appraisement of the structure of market prices, but it always aims finally
at the comparison of alternative modes for the removal of felt uneasiness.
It is ultimately always the subjective value judgments of individuals that determine the
formation of prices.
Catallactics, in conceiving the pricing process, necessarily reverts to the fundamental category
Theory of Action, the preference given to A over B.
In view of popular errors, it is expedient to emphasize that catallactics deals with
the real prices as they are paid in definite transactions and not with imaginary prices.
The concept of final prices is merely a mental tool for the grasp of a particular problem,
The emergence of entrepreneurial profit and loss.
The concept of a just or fair price is devoid of any scientific meaning.
It is a disguise for wishes, a striving for a state of affairs different from reality.
Market prices are entirely determined by the value judgments of men as they really act.
If one says that prices tend toward a point at which total demand is equal to total supply,
one resorts to another mode of expressing the same concatenation of phenomena.
Demand and supply are the outcome of the conduct of those buying and selling.
If, other things being equal, supply increases, prices must drop.
At the previous price all those ready to pay this price could buy the quantity they wanted
to buy.
If the supply increases they must buy larger quantities or other people who did not buy
before must become interested in buying.
This can only be attained at a lower price.
It is possible to visualize this interaction by drawing two curves, the demand curve and
and the supply curve, whose intersection shows the price.
It is no less possible to express it in mathematical symbols, but it is necessary to comprehend
that such pictorial or mathematical modes of representation do not affect the essence
of our interpretation, and that they do not add a wit to our insight.
Furthermore, it is important to realize that we do not have any knowledge or experience
Concerning the Shape of Such Curves. Always what we know is only market prices, that is,
not the curves but only a point which we interpret as the intersection of two hypothetical curves.
The drawing of such curves may prove expedient in visualizing the problems for undergraduates.
For the real tasks of catallactics, they are mere by-play.
3. The Prices of the Goods of Higher Orders
The market process is coherent and indivisible. It is an indissoluble intertwinement of actions
and reactions, of moves and counter-moves. But the insufficiency of our mental abilities
enjoins upon us the necessity of dividing it into parts and analyzing each of these
Parts Separately
In resorting to such artificial cleavages, we must never forget that the seemingly autonomous
existence of these parts is an imaginary makeshift of our minds.
They are only parts.
That is, they cannot even be thought of as existing outside the structure of which they
are parts.
The prices of the goods of higher orders are ultimately determined by the prices of the
Goods of the First or Lowest Order, that is, the consumer's goods.
As a consequence of this dependence, they are ultimately determined by the subjective
valuations of all members of the market society.
It is, however, important to realize that we are faced with a connection of prices,
not with a connection of valuations.
The prices of the complementary factors of production are conditioned by the prices of
of the Consumer's Goods.
The factors of production are appraised with regard to the prices of the products, and
from this appraisement their prices emerge.
Not the valuations, but the appraisements are transferred from the goods of the first
order to those of higher orders.
The prices of the consumer's goods engender the actions resulting in the determination
of the prices of the factors of production.
These prices are primarily connected only with the prices of the consumer's goods.
With the valuations of the individuals, they are only indirectly connected, namely through
the intermediary of the prices of the consumer's goods, the products of their joint employment.
The tasks incumbent upon the theory of the prices of factors of production are to be
be solved by the same methods which are employed for treatment of the prices of consumers goods.
We conceive the operation of the market of consumers goods in a two-fold way.
We think on the one hand of a state of affairs which leads to acts of exchange.
The situation is such that the uneasiness of various individuals can be removed to some
of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money
kept in motion by the exertion of the promoting entrepreneurs, eager to profit from differences
in the market prices of the factors of production and the expected prices of the products.
The operation of this market would stop if a situation were ever to emerge in which the
sum of the prices of the complementary factors of production, but for interest, equaled the
the prices of the products, and nobody believed that further price changes were to be expected.
Thus we have described the process adequately and completely by pointing out positively
what actuates it and negatively what would suspend its motion.
The main importance is to be attached to the positive description.
The negative description resulting in the imaginary constructions of the final price
and the Evenly Rotating Economy is merely auxiliary.
For the task is not the treatment of imaginary concepts, which never appear in life and action,
but the treatment of the market prices at which the goods of higher orders are really
bought and sold.
This method we owe to Goessen, Carl Menger and Boehm-Bawerk.
Its main merit is that it implies the cognition that we are faced with a phenomenon of price
Price Determination inextricably linked with the market process.
It distinguishes between two things, a, the direct valuation of the factors of production
which attaches the value of the product to the total complex of the complementary factors
of production, and b, the prices of the single factors of production which are formed on
in the market as the resultant of the concurring actions of competing highest bidders.
Valuation as it can be practiced by an isolated actor, Robinson Crusoe or a socialist board
of production management, can never result in a determination of such a thing as quotas
of value.
Valuation can only arrange goods in scales of preference.
It can never attach to a good something that could be called a quantity or magnitude of
value.
It would be absurd to speak of a sum of valuations or values.
It is permissible to declare that, due allowance being made for time preference, the value
attached to a product is equal to the value of the total complex of complementary factors
of production.
But it would be nonsensical to assert that the value attached to a product is equal to
the sum of the values attached to the various complementary factors of production.
One cannot add up values or valuations.
One can add up prices expressed in terms of money, but not scales of preference.
One cannot divide values or single out quotas of them.
A value judgment never consists in anything other than preferring A to B.
The process of value imputation does not result in derivation of the value of the single productive
agents from the value of their joint product.
It does not bring about results which could serve as elements of economic calculation.
It is only the market that, in establishing prices for each factor of production, creates
What's the conditions required for economic calculation?
Economic calculation always deals with prices, never with values.
The market determines prices of factors of production in the same way in which it determines
prices of consumers' goods.
The market process is an interaction of men deliberately striving after the best possible
removal of dissatisfaction.
It is impossible to think away or to eliminate from the market process the men actuating
its operation.
One cannot deal with the market of consumers' goods and disregard the actions of the consumers.
One cannot deal with the market of the goods of higher orders while disregarding the actions
of the entrepreneurs and the fact that the use of money is essential in their transactions.
There is nothing automatic or mechanical in the operation of the market.
The entrepreneurs, eager to earn profits, appear as bidders at an auction, as it were,
in which the owners of the factors of production put up for sale land, capital goods and labor.
The entrepreneurs are eager to outdo one another by bidding higher prices than their rivals.
Their offers are limited, on the one hand, by their anticipation of future prices of
the products, and, on the other hand, by the necessity to snatch the factors of production
away from the hands of other entrepreneurs competing with them.
The entrepreneur is the agency that prevents the persistence of a state of production unsuitable
to fill the most urgent wants of the consumers in the cheapest way.
All people are anxious for the best possible satisfaction of their wants, and are in this
sense striving after the highest profit they can reap.
The mentality of the promoters, speculators and entrepreneurs is not different from that
of their fellow men.
They are merely superior to the masses in mental power and energy.
They are the leaders on the way toward material progress.
They are the first to understand that there is a discrepancy between what is done and
what could be done.
They guess what the consumers would like to have and are intent upon providing them with
these things.
In the pursuit of such plans they bid higher prices for some factors of production and
lower the prices of other factors of production by restricting their demand for them.
In supplying the market with those consumers' goods, in the sale of which the highest profits
can be earned, they create a tendency toward a fall in their prices.
In restricting the output of those consumers' goods, the production of which does not offer
chances for reaping profit, they bring about a tendency toward a rise in their prices.
All these transformations go on ceaselessly and could stop only if the unrealizable conditions of the evenly rotating economy and of static equilibrium were to be attained.
In drafting their plans, the entrepreneurs look first at the prices of the immediate past, which are mistakenly called present prices.
Of course, the entrepreneurs never make these prices enter into their calculations without
paying regard to anticipated changes.
The prices of the immediate past are for them only the starting point of deliberations leading
to forecasts of future prices.
The prices of the past do not influence the determination of future prices.
It is, on the contrary, the anticipation of future prices of the products that determines
the state of prices of the complementary factors of production.
The determination of prices has, as far as the mutual exchange ratios between various
commodities are concerned, no direct causal relation whatever with the prices of the past.
The allocation of the non-convertible factors of production among the various branches of
of Production, and the amount of capital goods available for future production are
historical magnitudes.
In this regard, the past is instrumental in shaping the course of future production and
in affecting the prices of the future.
But directly, the prices of the factors of production are determined exclusively by the
anticipation of future prices of the products.
The fact that yesterday people valued and appraised commodities in a different way is irrelevant.
The consumers do not care about the investments made with regard to past market conditions
and do not bother about the vested interests of entrepreneurs, capitalists, landowners
and workers who may be hurt by changes in the structure of prices.
Such sentiments play no role in the formation of prices.
It is precisely the fact that the market does not respect vested interests that makes the
people concerned ask for government interference.
The prices of the past are, for the entrepreneur, the shaper of future production, merely a
mental tool.
The entrepreneurs do not construct a fresh, everyday, erratically new structure of prices,
or allocate anew the factors of production to the various branches of industry.
They merely transform what the past has transmitted in better adapting it to the altered conditions.
How much of the previous conditions they preserve and how much they change depends on the extent
to which the data have changed.
The economic process is a continuous interplay of production and consumption.
Today's activities are linked with those of the past through the technological knowledge
Man has within his reach only two aids.
of Past Events and his Faculty of Understanding.
Knowledge about past prices is a part of this experience and, at the same time, the starting
point of understanding the future.
If the memory of all prices of the past were to fade away, the pricing process would become
more troublesome, but not impossible, as far as the mutual exchange ratios between various
commodities are concerned.
It would be harder for the entrepreneurs to adjust production to the demand of the public,
but it could be done nonetheless.
It would be necessary for them to assemble anew all the data they need as the basis of
their operations.
They would not avoid mistakes which they now evade on account of experience at their disposal.
Price fluctuations would be more violent at the beginning.
The essential fact is that it is the competition of profit-seeking entrepreneurs that does
not tolerate the preservation of false prices of the factors of production.
The activities of the entrepreneurs are the element that would bring about the unrealizable
state of the evenly rotating economy if no further changes were to occur.
In the world-embracing public sale called the market, they are the bidders for the factors
of production.
In bidding, they are the mandatories of the consumers, as it were.
Each entrepreneur represents a different aspect of the consumer's wants, either a different
commodity or another way of producing the same commodity.
The competition among the entrepreneurs is ultimately a competition among the various
possibilities open to men to remove their uneasiness as far as possible by the acquisition
of consumers' goods.
The decisions of the consumers to buy one commodity and to postpone buying another determine the
prices of factors of production required for manufacturing these commodities.
The competition between the entrepreneurs reflects the prices of consumers' goods in
the formation of the prices of the factors of production.
It reflects in the external world the conflict which the inexorable scarcity of the factors
The Pricing Process is a social process.
It is consummated by an interaction of all members of the society.
All collaborate and cooperate, each in the particular role he has chosen for himself in the framework of the division of labor.
Competing in cooperation and cooperating in competition, all people are instrumental in bringing about the result, namely the price structure of the market,
The allocation of the factors of production to the various lines of want satisfaction and
the determination of the share of each individual.
These three events are not three different matters.
They are only different aspects of one indivisible phenomenon, which our analytical scrutiny
separates into three parts.
In the market process, they are accomplished uno actu.
Many people pre-possessed by socialist leanings, who cannot free themselves from longing glances
at socialist methods, speak of three different processes in dealing with the market phenomena,
the determination of prices, the direction of productive efforts, and distribution.
A limitation on the pricing of factors of production.
The process which makes the prices of the factors of production spring from the prices
If the production of a product requires two or more absolutely specific factors, only
a cumulative price can be assigned to them.
If all factors of production were absolutely specific, the pricing process would not achieve
more than such cumulative prices.
It would accomplish nothing more than statements like this.
As combining 3A and 5B produces one unit of P, 3A and 5B together are equal to 1P, and
The final price of 3A plus 5B is due allowance being made for time preference equal to the
final price of 1P.
As entrepreneurs who want to use A and B for purposes other than the production of P do
not bid for them, a more detailed price determination is impossible.
Only if a demand emerges for A or for B on the part of entrepreneurs who want to
To employ A or B for other purposes, does competition between them and the entrepreneurs
planning the production of P arise, and a price for A or for B comes into existence,
the height of which determines also the price of B or A.
A world in which all the factors of production are absolutely specific could manage its affairs
with such cumulative prices.
In such a world, there would not exist the problem of how to allocate the means of production
to various branches of one's satisfaction.
In our real world, things are different.
There are many scarce means of production which can be employed for various tasks.
There, the economic problem is to employ these factors in such a way that no unit of them
Problems should be used for the satisfaction of a less urgent need, if this employment
prevents the satisfaction of a more urgent need.
It is this that the market solves in determining the prices of the factors of production.
The social service rendered by this solution is not in the least impaired by the fact that
for factors which can be employed only cumulatively, no other than cumulative prices are determined.
Factors of production which can be used in the same ratio of combination for the production
of various commodities, but do not allow of any other use, are to be considered as absolutely
specific factors.
They are absolutely specific with regard to the production of an intermediary product
which can be utilized for various purposes.
The price of this intermediary product can be assigned to them cumulatively only.
Whether this intermediary product can be directly aperceived by the senses, or whether it is
merely the invisible and intangible outcome of their joint employment, makes no difference.