Institutions and the Significance of Relative Prices

Stanfield, J. R., Journal of Economic Issues

Douglass North's recent work traverses much of the gulf that separates so-called old institutional economics (OIE) and new institutional economics (NIE). To elaborate this assertion, I focus on the particular issue of the significance of relative prices. To do so, I will briefly review the OIE case against the prevalent presumption that price equals value. Thereafter, I will consider aspects of North's work that seem to have a bearing on the issue of the significance of relative prices and by extension on the question of the relation of OIE and NIE.

Of the Identity of Price and Value

It is well known that OIE broadly dissents from the conventional theory of relative prices. This dissent has been aimed to some extent at the empirical issue of bow prices are formed, with OIE asserting the significance of administered pricing in practice in contrast to the competitive market theory of price relationships. But the more fundamental thrust of the OIE dissent has been aimed at challenging the significance of relative prices, however formed. This critical examination has pointed to the socially destructive implications of placing primary reliance upon a self- regulating market process for provisioning. This dissent also insists upon the necessity of rethinking the role of the state in the social economy and of examining the role of non-market economic transactions in general.

Ayres has stated concisely the OIE dissent from the tendency to place undue concreteness upon relative prices [Ayres 1962, 226-8; see also Stanfield, 1986, chap. 2]. First, and commonplace, the relative prices that exist at any time are structured by the prevalent pattern of income and wealth distribution. Second, a given price pattern reflects the judgments people make whether these are "good" or not. Mistaken judgments and preferences for unhealthy and destructive products are recorded in the price pattern. Human beings are socialized to respond in habitual ways to emotional stimuli [Ayres 1961, chap. 4]; therefore wants "are social habits" [Ayres 1962, 84]. The underlying social process also establishes ownership of the capacities to earn income from control of productive resources. Hence, relative prices are culture-bound; to take them as given is to take as given the extant pattern of power and emotional conditioning [Stanfield 1995, chap. 1].

Relative prices may have an accidental and arbitrary bearing upon opportunity costs. To the degree that people do not engage in calculative bargaining in pursuit of maximum real income, relative prices become arbitrary with respect to the logic of scarcity [Polanyi 1944, chap. 6; Lowe 1983, chaps. 5, 6]. Moreover, there may be a systematic thread to the socialization process from whence preferences and capacities derive, that being unequal power and participation. Failure to critically examine the formation of relative prices obscures the underlying structure of power and stratification and the possibility that popular …

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Publication information: Article title: Institutions and the Significance of Relative Prices. Contributors: Stanfield, J. R. - Author. Journal title: Journal of Economic Issues. Volume: 29. Issue: 2 Publication date: June 1995. Page number: 459+. © 1999 Association for Evolutionary Economics. COPYRIGHT 1995 Gale Group.

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