[OPE] Milton Friedman and the concept of price

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Sat Jul 05 2008 - 15:34:07 EDT

Recently I was reading in Milton Friedman's book Price Theory, a widely used textbook on the subject. Unlike many Marxists, Friedman is very aware that economics is "a social science... concerned primarily with those economic problems whose solutions involve the cooperation and interaction of individuals." (p. 2). In other words, he is very aware that markets cannot exist without a large amount of cooperation between people, although of course he is unable to theorise this substantively, insofar as his economic actors are assumed to function according to self-interest in commercial gain only.

But anyway here is an interesting quote from his book:

"...members of a changing society also face the problems of affecting the volume of resources and changing the ways in which they can be utilized. This is, of course, problem 4, the problem of economic maintenance and progress. The relevant price for solving this problem in a free-enterprise exchange-economy is the interest rate, which provides an incentive for owners of capital to maintain their capital or add to it." (p. 10). 

What is interesting here is that uncle Miltie defines the interest rate as a "price". But conceptually the interest rate, although it can be expressed mathematically as a number, is not a price, it is a price relationship. The number just symbolises a relationship in this case. You can argue that a sum of money which represents an amount of interest is a "price", but the interest rate itself is not a price, but a price relationship, a relationship between different prices, namely the relationship between the price of an asset and the price of the volume of interest it yields, which can be computed in various ways with various assumptions of course (net interest, gross interest, real interest, expected interest, foregone interest, and so forth). What you see here is that uncle Miltie in his enthusiasm about the marvellous world of prices makes a very simple theoretical error already at the very start of his treatise, just as Marx erroneously assumes for a start, that the common quality which permits the exchange comparison must be labour-time (I could just as well argue that the common quality is that the exchanged objects have prices, so this is arbitrary, as stated). 

Now if this is supposed to be economic theory, it just isn't very good. Once you analyse the price form correctly, or if you prefer, the "phenomenology" of prices, I think you can prove very straightforwardly that a theory of value is always implied, there need not be a lot of fuss about that. More or less on this basis, you can also deduce surplus value as a presupposition of profit and so on. Conventionally, economics distinguishes between "objective" theories of value (e.g. the LTV) and "subjective" theories of value (e.g. marginal utility) but even this is obviously an error, since value, insofar as it also presupposes a relationship between valuing agents and objects of value, has both objective and subjective aspects, and indeed what matters precisely is the relationship between those; the whole problem is on what theoretical foundation you theorise that relationship, that is the difficulty, and it permits of various different answers, some better than others. 

Friedman elucidates his idea of the rate of interest as a price further on, in his theory of capital:

"Consider a piece of land yielding $1 a year indefinitely and let "the" relevant interest rate be 5 percent. Then the price of the piece of land will be $20, or in terms used more frequently in Britain than the United States, twenty-year's purchase. This brings out the key nature of the price: the number of years' service flow from a permanent source of services that it takes to buy the source itself" (ibid., p. 285).

Leaving aside theoretical difficulties with this argument, the imputed price (or, in fact, the valuation) of an asset is said to be simply proportional to the profit which it is expected to yield -  the value of the asset is valued according to the income obtained from it, as financiers are obviously likely to do. What is spectacular here is, however, that the same people who argue this, make a great fuss of Marx's transformation procedure! The ideological effect of conflating a price with a price relationship is that it enables Miltie to argue that the economy can be totally regulated by prices only, and that we do not need to inquire further into what determines price relationships, other than analysing demand curves, supply curves and cost curves. 

You might say, what a terribly obscure critique this is, but actually it is the basis for further theories of socialist allocative justice for example. In fact, right now, many economists have given up much of economic theory as hopelessly contradictory and they just study empirically how people actually use prices, in various schools of thought. Again, that might be practically sufficient, but obviously an integrated theory provides far more explanatory and predictive potential. Plus of course, the so-called "practical" theories after a while lead to economic disasters, which affect very large numbers of people, although other make money from them.

Marx somewhat pretentiously declared that "for thousands of years people tried to get to the bottom of the value form, without succeeding in understanding it" and he claims that for the first time he has revealed its true meaning. But in reality his explanation is still incomplete, since the various forms that prices take, are a further development of the value-form. Marx admittedly does realise that, for example he talks about the transformation of values into prices of production, suggesting that these prices are a further development of the forms of value, but, because he hasn't really developed the price form in a theoretically adequate way, a lot of confusion about his economic theory results, so that what the real relationship is between prices and values still remains unclear. Well, I think it is possible to solve that problem, if you analyse more systematically what prices are anyway. The whacky thing in economics is that actually on this very simple matter, the economists cannot even agree, and they moot all sorts of theories about how prices as such should be understood!


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