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.