Academic journal article Journal of Economic Issues

Institutions and the Significance of Relative Prices

Academic journal article Journal of Economic Issues

Institutions and the Significance of Relative Prices

Article excerpt

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 perceptions of the good life are distorted, debilitating, and even dangerous [Galbraith 1973; Dugger 1989; Stanfield 1995, chaps. 1,4].

Given this dissent from the significance of relative prices, OIE tends to shed much of the conventional economic reluctance toward microeconomic intervention. If the general scheme of prices have an arbitrary bearing on the effective disposition of resources, little qualm need be felt about collective intervention to alter a particular relative price pattern.

Of North

There is much in North's basic approach to commend his work to OIE, which I must survey with desperate brevity. His transactional analysis of human cooperation [North 1990, vii] need not be restricted to calculated competitive exchange. There is room for socially embedded transactions in his discussion [North 1990,34-5 and 55-6; see also Polanyi 1944; Stanfield 1986]. His discussion of the need for formal third-party enforcement "in a wealth-maximizing world" with "impersonal exchange" is close to Polanyi's concept of a disembedded market economy [North 1990, 57]. …

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