Monopolistic Practices

3. “Rigid Prices” has been receiving so much attention recently.

I define Rigidity as a price that is less sensitive to changes in the conditions of demand and supply than it would be if perfect competition prevailed. 7

Quantitatively, the extent to which prices are rigid in that sense depends on the material and the method of measurement we select and is hence a doubtful matter. But whatever the material or method, it is certain that prices are not nearly as rigid as they seem to be. There are many reasons why what in effect is a change in price should not show in the statistical picture; in other words, why there should be much spurious rigidity. I shall mention only one class of them which is closely connected with the facts stressed by our analysis.

I have adverted to the importance, for the capitalist process in general and for its competitive mechanism in particular, of the intrusion of new commodities. Now a new commodity may effectively bring down the preexisting structure and satisfy a given want at much lower prices per unit of service (transportation service for instance), and yet not a single recorded price need change in the process; flexibility in the relevant sense may be accompanied by rigidity in a formal sense. There are other cases, not of this type, in which price reduction is the sole motive for bringing out a new brand while the old one is left at the previous quotation—again a price reduction that does not show. Moreover, the great majority of new consumers’ goods— particularly all the gadgets of modern life—are at first introduced in an experimental and unsatisfactory form in which they could never conquer their potential markets. Improvement in the quality of products is hence a practically universal feature of the development of individual concerns and of industries. Whether or not this improvement involves additional costs, a constant price per unit of an improving commodity should not be called rigid without further investigation.

Of course, plenty of cases of genuine price rigidity remain—of prices which are being kept constant as a matter of business policy or which remain unchanged because it is difficult to change, say, a price set by a cartel after laborious negotiations. In order to appraise the influence of this fact on the long-run development of output, it is first of all necessary to realize that this rigidity is essentially a short-run phenomenon. There are no major instances of long-run rigidity of prices. Whichever manufacturing industry or group of manufactured articles of any importance we choose to investigate over a period of time, we practically always find that in the long run prices do not fail to adapt themselves to technological progress—frequently they fall spectacularly in response to it 8 —unless prevented from doing so by monetary events and policies or, in some cases, by autonomous changes in wage rates which of course should be taken into account by appropriate corrections exactly as should changes in quality of products. 9 And our previous analysis shows sufficiently why in the process of capitalist evolution this must be so.

What the business strategy in question really aims at—all, in any case, that it can achieve—is to avoid seasonal, random and cyclical fluctuations in prices and to move only in response to the more fundamental changes in the conditions that underlie those fluctuations. Since these more fundamental changes take time in declaring themselves, this involves moving slowly by discrete steps—keeping to a price until new relatively durable contours have emerged into view. In technical language, this strategy aims at moving along a step function that will approximate trends. And that is what genuine and voluntary price rigidity in most cases amounts to. In fact, most economists do admit this, at least by implication. For though some of their arguments about rigidity would hold true only if the phenomenon were a long-run one—for instance most of the arguments averring that price rigidity keeps the fruits of technological progress from consumers—in practice they measure and discuss primarily cyclical rigidity and especially the fact that many prices do not, or do not promptly, fall in recessions and depressions.

The real question is therefore how this short-run rigidity 10 may affect the long-run development of total output. Within this question, the only really important issue is this: prices that stay up in recession or depression no doubt influence the business situation in those phases of the cycles; if that influence is strongly injurious—making matters much worse than they would be with perfect flexibility all round—the destruction wrought each time might also affect output in the subsequent recoveries and prosperities and thus permanently reduce the rate of increase in total output below what it would be in the absence of those rigidities. Two arguments have been put forth in favor of this view.

In order to put the first into the strongest possible light, let us assume that an industry which refuses to reduce prices in recession goes on selling exactly the same quantity of product which it would sell if it had reduced them. Buyers are therefore out of pocket by the amount to which the industry profits from the rigidity. If these buyers are the kind of people who spend all they can and it the industry or those to whom its net returns go does not spend the increment it gets but either keeps it idle or repays bank loans, then total expenditure in the economy may be reduced thereby. If this happens, other industries or firms may suffer and if thereupon they restrict in turn, we may get a cumulation of depressive effects. In other words, rigidity may so influence the amount and distribution of national income as to decrease balances or to increase idle balances or, if we adopt a popular misnomer, savings.

Such a case is conceivable. But the reader should have little difficulty in satisfying himself 11 that its practical importance, if any, is very small The second argument turns on the dislocating effects price rigidity may exert if, in the individual industry itself or elsewhere, it leads to an additional restriction of output, i.e., to a restriction greater than that which must in any case occur during depression. Since the most important conductor of those effects is the incident increase in unemployment—unstabilization of employment is in fact the indictment most commonly directed against price rigidity—and the consequent decrease in total expenditure, this argument then follows in the tracks of the first one. Its practical weight is considerably reduced, although economists greatly differ as to the extent, by the consideration that in the most conspicuous cases price rigidity is motivated precisely by the low sensitiveness of demand to short-run price changes within the practicable range. People who in depression worry about their future are not likely to buy a new car even if the price were reduced by 25 per cent, especially if the purchase is easily postponable and if the reduction induces expectations of further reductions.

Quite irrespective of this however, the argument is inconclusive because it is again vitiated by a ceteris paribus clause that is inadmissible in dealing with our process of creative destruction. From the fact, so far as it is a fact, that at more flexible prices greater quantities could ceteris paribus be sold, it does not follow that either the output of the commodities in question, or total output and hence employment, would actually be greater. For inasmuch as we may assume that the refusal to lower prices strengthens the position of the industries which adopt that policy either by increasing their revenue or simply by avoiding chaos in their markets—that is to say, so far as this policy is something more than a mistake on their part—it may make fortresses out of what otherwise might be centers of devastation. As we have seen before, from a more general standpoint, total output and employment may well keep on a higher level with the restrictions incident to that policy than they would if depression were allowed to play havoc with the price structure. 12 In other words, under the conditions created by capitalist evolution, perfect and universal flexibility of prices might in depression further unstabilize the system, instead of stabilizing it as it no doubt would under the conditions envisaged by general theory. Again this is to a large extent recognized in those cases in which the economist is in sympathy with the interests immediately concerned, for instance in the case of labor and of agriculture; in those cases he admits readily enough that what looks like rigidity may be no more than regulated adaptation.

Perhaps the reader feels some surprise that so little remains of a doctrine of which so much has been made in the last few years. The rigidity of prices has become, with some people, the outstanding defect of the capitalist engine and—almost—the fundamental factor in the explanation of depressions. But there is nothing to wonder at in this. Individuals and groups snatch at anything that will qualify as a discovery lending support to the political tendencies of the hour.

The doctrine of price rigidity, with a modicum of truth to its credit, is not the worst case of this kind by a long way.