Front Page Titles (by Subject) Money and Price-Economics - The Economic Point of View
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Money and Price-Economics - Israel M. Kirzner, The Economic Point of View 
The Economic Point of View: An Essay in the History of Economic Thought, ed. with an Introduction by Laurence S. Moss (Kansas City: Sheed Andrews McMeel, 1976).
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Money and Price-Economics
In a chapter on the role of money in definitions of economics, mention should be made of the part that it has played in the emergence of so-called “price-economics.” In the literature of the second and third decades of this century there was a lively discussion of whether economics should deal with subjective utilities, with welfare itself, or whether it should deal only with the external manifestation of those utilities, with objective prices. The “price-economists” attempted to avoid reference to the underlying motives, desires, and satisfactions that are reflected in market prices. They rejected “explanations” of prices that invoked these subjective concepts. They conceived of economics as concerned, not with the causes of human behavior, but with its consequences as seen in the patterns of prices. Pareto, Cassel, Davenport, and Mitchell are representative of this line of thought. Writers such as Fetter and Viner in the United States, on the other hand, were among those who saw price-economics as an inadequate means of understanding the operations of the market and insisted on the need to dig below the surface phenomena of prices for their explanation.31 It is not necessary for present purposes to go further into the origin and causes of the emergence of a price-economics. In so far as it represents a distinct outlook on the nature of economic phenomena, price-economics can be largely subsumed under the catallactic view of the subject, especially under that conception of the latter that stresses the purely functional relationship between different prices.32
What is of relevance to the present chapter is the degree to which the presence of a general medium of exchange and the identification of economic activities with those involving such a medium may have contributed to the price-economics line of thought. Prices are the corollaries of acts of exchange. Every act of exchange, by definition, is associated with a definite ratio according to which the goods are exchanged against each other. The phenomenon of price is one with a peculiar fascination of its own, especially when the whole structure of prices—the interrelationships between different prices in the same market and between prices at different times—is grasped. It is not difficult to understand the temptation to treat these ratios as “things” in themselves, moving in accordance with their own “laws of motion,” rather than as the manifestations of acts of human choice. The part played by money in the market has only heightened this temptation.
Money prices make possible a system of rational calculation in which any economic decision is influenced by all the relevant factors. The producer and the consumer are alike guided by money prices to adjust their actions in the most advantageous way to the real conditions of the market. In the discussion over the possibility of rational economic calculation of gain and cost in a socialist economy, one fact has emerged with overwhelming unanimity. It is almost universally conceded that in an economy without prices, real or “quasi,” there is no means of judging the economic wisdom or folly of any action. Every prospective buyer or seller, if he is to act in a rational way, must be able to compare his prospective situation at the completion of the transaction with his present situation. This involves the comparison of innumerable “economic quantities” with one another: those actually under his control initially, those to be brought under his control through the transaction, and those possibilities of control which his initial position enables him to command through alternative transactions. The expression of market prices in terms of money is an inestimable boon to the solution of this complex problem. As a common medium of exchange for all marketable goods, money fuses all the alternatives confronting the marketer into an immeasurably simpler chain of decisions. The money price paid for one good expresses succinctly, and more convincingly than is ever conceivable in a barter transaction, a preference for this good over a definite set of alternative goods.
The implications of these well-recognized considerations for the construction of a theoretical “price system” in which the relative movements of different prices are to be reduced to all-embracing “laws” are obvious enough. A conception of a price structure ultimately depends on the sensitivity of each part of the structure to changes in other parts. When changes in prices in one area do not generate related price movements throughout the economy because of undefined “frictional” forces clogging the system, then the concept of “laws” of price movements becomes less and less realistic. The introduction of a monetary numeraire to describe the relationships among the prices in such a system is more than a matter of convenience. The assumption of rational behavior, guided by prices, which the concept of a system of prices postulates would be almost wholly untrue in a barter economy. Besides the extraordinary difficulty that would be entailed in the exposition of a system of barter prices, there would be the more serious objection that the loosely knit relationships that would perforce exist between barter “prices” would make the recognition of any “system” of such prices of negligible significance.
To present the matter briefly: in a market without money prices exchange ratios are of a type almost completely analogous to the transformation functions under which a Crusoe economy operates. In a Crusoe economy no analysis is possible without explicit assumptions regarding subjective categories that price-economics is anxious to avoid. The attempt to see economics as a system of laws governing the movements of prices that are the consequences of human behavior must depend on a common monetary denominator.33 The possibility, of course, exists that improved means of calculation could enable rational comparison of alternatives to take place without guidance by external market prices. But this possibility would destroy the entire field investigated by price-economics. From a point of view that sees economics as essentially concerned with prices, it has been asserted, for example, that if linear programming could set up a system of shadow prices to guide managers, the borderline of economics might need to be reviewed.34 In so far as the signals of shadow prices are not available and guidance must be sought in money prices, it is the preoccupation of economic activity with money that made possible the idea of an economics that could be “positive,” disregarding the realm of dim mysteries of feelings and dealing with definite, observable market prices.
[]See, e.g., V. Pareto, “On the Economic Phenomenon,” International Economic Papers, No. 3, p. 190; H. J. Davenport, “Fetter's ‘Economic Principles,’” Journal of Political Economy, March, 1916; W. Mitchell, The Backward Art of Spending Money, pp. 232–233, 256–257; J. Viner, “The Utility Concept in Value Theory and Its Critics,” Journal of Political Economy, 1925, p. 659.
[]At least one writer explicitly identified the position of the “priceeconomists” as the “catallactic point of view” (Carl Parry, “A Revaluation of Traditional Economic Theory,” American Economic Review [Supplement, 1921], p. 123.)
[]For a discussion of the restriction of price-economics to monetary phenomena see F. A. Fetter, “Davenport's Competitive Economics,” Journal of Political Economy, June, 1914, pp. 554 ff.
[]See above, ch. I, n. 4.