Gardiner Means on Administered Prices

Gardiner C. Means was a US Institutionalist economist and researcher who did important early work on administered prices.

Means (1972) was a study of the empirical evidence on administered prices written towards the end of his career.

Means (1972: 292) first noted that the simultaneous occurrence of recession and inflation in the early 1970s (the beginning of stagflation) presented a problem to neoclassical price theory based on marginal cost or marginal revenue, but presented no such problem to administered price theory.

Administered price theory was developed in the early 1930s, and noted how many industrial prices are deliberately set by private businesses, tend to be relatively inflexible with respect to demand changes, and during recessions tend not to fall to the same extent as flexprices (Means 1972: 292).

In fact, during a business expansion or recession, it is entirely possible for an administered price to

(1) remain unchanged;

(2) move cyclically but to a far lesser extent than flexprices, and

(3) move counter-cyclically.

The crucial point is that administered prices generally show relative inflexibility with respect to flexprices (Means 1972: 294).

Means drew on the data compiled by a US National Bureau of Economic Research report on price movements during a number of business cycles called The Behavior of Industrial Prices (Stigler and Kindahl 1970).

After correcting the misunderstanding of administered price theory contained in the report, Means demonstrated how its data provided a strong empirical confirmation of the administered price thesis.

Means’ conclusions are worth quoting:

“... the actual behavior of administration-dominated prices … tends to differ so sharply from the behaviour to be expected from classical theory as to challenge the basic conclusions of that theory. However well the theory may apply to market-dominated prices, it would not seem to apply to the bulk of the administration-dominated prices in the sample or to that part of the industrial world which they typify. Until economic theory can explain and take into account the implications of this nonclassical behavior of administered prices, it provides a poor basis for public policy. The challenge which administered prices make to classical economics is as fundamental as that made by the quantum to classical physics.” (Means 1972: 304).

Administered price behaviour in real world economies really does lead to revolutionary conclusions for economic theory: so much of neoclassical economics and Austrian economic theory simply collapses and must be abandoned once one understands its implications.

Disequilibrium prices are deliberately created and maintained by fixprice enterprises in a vast swathe of the economy, simply because they prefer it that way. Such businesses are not generally in the habit of using flexible prices as their normal method of clearing supply, or equating demand with supply.

Even if many markets were deregulated or government interventions ended, with administered prices dominating modern economies, the private sector itself would no doubt still overwhelmingly shun the flexible price system required in the ideal and almost utopian vision of neoclassical price theory and Austrian economics.

For example, massive coercion and force would be needed to make private businesses conform to flexible price setting based on supply and demand curves, but how could Austrian ideologues accept this as a policy when they demand laissez faire as the solution to everything? Of course, they could not, and they would have to face the reality that market price setting largely does not work in the way they think it does.


BIBLIOGRAPHY
Means, G. C. 1972. “The Administered Price Thesis Reconfirmed,” American Economic Review 62: 292–306.

Stigler, G. J. and J. K. Kindahl. 1970. The Behavior of Industrial Prices. New York.