Business: The No. 1 Phrase

The No. 1 phrase now used in every economic argument is “administered prices.” It crops up in union charges that business fails to cut prices in response to slackened demand, instead reduces volume and employment. It turns up in management charges that unions have set wages so high that wages, in effect, administer prices, keeping them high. Like an insistent musical theme, the phrase recurs in high-level talk that the Government may have to restore wage and price controls to keep down inflation. Where did the phrase originate? What does it mean?

Father of the expression is Dr. Gardiner C. Means, economist and author of The Structure of the American Economy. In 1935, while on the staff of the Department of Agriculture in Washington, Means published a study of price trends in the Depression to which he gave the title: “Industrial Prices and Their Relative Inflexibility.” In it Means said that the classical Adam Smith laissez-faire free market, in which prices are set by a constant interplay of supply and demand, did not exist. In place of Smith’s market-price theory, Means offered his administered-price theory. Said he: “An administered price is a price set by someone, usually a producer or a seller, and kept constant for a period of time and for a series of transactions. The opposite is a market price that fluctuates on the basis of supply and demand.” Later Means amplified his definition by blaming administered prices on bigness in business. Wrote he in 1939: “While many factors influence price insensitivity, the dominant factor is the administrative control over prices which results from the relatively small number of concerns dominating particular markets.”

Waste of Breath. Ever since then, the phrase has been a stick to whack business, whatever the provocation. In the Truman Administration many theorists in Washington charged that the steel companies were administering steel prices too low just to keep out competition that would come in if prices rose to a point attractive to new investment. Now the argument has shifted 180°. The steel companies and others are accused of administering steel prices too high, not reducing them to encourage greater sales and employment.

Most economists of stature smile at the administered-prices argument. John Kenneth Galbraith, Harvard economist, author of the currently popular The Affluent Society, and in no sense an apologist for business, takes the line that a large amount of administered pricing is inherent in the modern economic system. Says he: “Those who deplore it are wasting their breath. The problem is to understand it and to live with it.” The overlooked truth that Galbraith and others come back to is that businessmen today cannot operate on prices that run up and down like a boiler-room thermometer. They have to have prices stable over a period of time. They make labor contracts that run for years, buy raw materials on contracts that run for years, develop and launch new products that take years to pay off.

Built-in Protectors. From the public’s standpoint this is not necessarily bad. It quite often leads to a windfall for the consumer. In recent Senate hearings on administered prices, Chrysler President Lester Lum (“Tex”) Colbert recalled that in 1946-49 the prices of most new automobiles were substantially below what the market would bear. Apart from such temporary side effects of price stability, many leading economists contend that having administered prices in a large part of the economy is a real advantage. According to Professor Alvin H. Hansen of Harvard, if businessmen cut prices at every breath of recession—and also wages—not only would national income and purchasing power shrivel but the uncertainty would discourage buying. The result, says he, could well be no increase in sales, and needless hardship.

The real issue in administered prices is whether they are administered in an interplay by management and labor that takes account of the public good. Although there is always a minority that wants Government to administer prices and wages, there is also a substantial and so far dominant opinion that the economy is so constructed that over-reaching price administration is automatically punished. Not only is the seller who gouges the public inviting another company to invade his industry but industries compete with each other for the disposable sales dollars. Over and above this, countries compete; e.g., when U.S. auto prices get too high, foreign cars come in. Citing the hard fight the aluminum industry has waged to expand markets by cutting prices, Irving Lipkowitz, Reynolds Metals Co. economist, says that the U.S. economy now has its own “built-in safeguards for consuming industries and the public.”