Tweet [1]
… is from page 267 of the 1990 Transaction Publishers reprint of W.H. Hutt [2]‘s 1936 book, Economists and the Public [3] (bracketed remarks added by Don Boudreaux):
To [L.T.] Hobhouse a ‘competitive’ value (presumably what we would call ‘natural scarcity value’ or ‘value under competitive institutions’ [or simply, “market price”]) appeared to be a perfectly arbitrary thing. He seemed to assume that its causal basis had little connection with society’s needs or aspirations. He was oblivious of consumers’ sovereignty. He thought that competition simply expressed the results of ‘bargaining power’ which was the possession of the economically ‘strong’. This is still the view of most ‘sociologists’ and political scientists when they venture (as, of course, the almost always do) into the sphere of economic relations.
Sadly, what Hutt says here about L.T. Hobhouse and the sociologists and political scientists of the first half of 20th century remains no less true in the first half of the 21st century. The fact is that even today most non-economists have no coherent theory of prices; therefore, most people regard prices as arbitrary impositions, usually by sellers upon buyers (but, in the case of the price of labor, by buyers upon sellers). That’s a lousy theory of prices, one that poorly explains reality.
Champions of minimum wages, of course, are exemplars of such poor price ‘theorists.’
Perhaps one factor on this front that has changed in the 80 years since Hutt wrote the above words is that many economists today are equally poor price theorists. The reasons for this sad fact are probably many, but I here offer two likely ones. First, the increasing attention to econometrics has come at the expense of time and effort devoted to mastering price theory. (How many are the young economists today who even know of Armen Alchian [4], much less have read anything by this great price theorist?) Second, Keynesian aggregates – which were launched in earnest in the same year as Hutt wrote the above words – drew attention and effort away from economists’ felt need to understand the nuances of microeconomic price formation.