PRICE SYSTEM

a means of organizing economic activity. It does this primarily by coordinating the decisions of consumers, producers, and owners of productive resources. Millions of economic agents who have no direct communication with each other are led by the price system to supply each other's wants. In a modern economy the price system enables a consumer to buy a product he has never previously purchased, produced by a firm of whose existence he is unaware, which is operating with funds partially obtained from his own savings. Prices are an expression of the consensus on the values of different things, and every society that permits exchanges among men has prices. Because prices are expressed in terms of a widely acceptable commodity, they permit a ready comparison of the comparative values of various commodities-if shoes are $15 per pair and bread 30 cents per loaf, a pair of shoes is worth 50 loaves of bread. The price of anything is its value in exchange for a commodity of wide acceptability (money): the price of an automobile may be some 50 ounces of gold or 25 pieces of paper bearing the picture of an eminent statesman. A system of prices exists because individual prices are related to each other. If, for example, copper rods cost 40 cents a pound and the process of drawing a rod into wire costs 25 cents a pound, then, if the price of wire exceeds 65 cents, it will be profitable to produce wire; and if the price of wire falls below 65 cents, it will be ruinous to produce wire. Competition, therefore, will hold the price of wire about 25 cents per pound above that of rods. A variety of such economic forces ties the entire structure of prices together. The system of prices can be arranged to reward or penalize any kind of activity. Society discourages the production of electric shoestring-tying machines by the simple expedient of making such a machine's attainable selling price less than the prices of the resources necessary to produce it. Society stimulates people of large athletic promise to learn golf (rather than polo or cricket) by the immense prizes (= prices) that are given to tournament winners. The air in many cities is dirty because no one is charged a price for dirtying it and no one can pay a price for having it cleaned. Additional reading Two good introductory discussions of the nature of value theory and its application to the economy as a whole are Robert Dorfman, The Price System (1964), and Prices and Markets, 3rd ed. (1978). The classic work on the history of economic theory, particularly of value theory, is Joseph Schumpeter, History of Economic Analysis, ed. by Elizabeth Boody Schumpeter (1954, reissued 1986). An excellent brief discussion can be found in George J. Stigler, Essays in the History of Economics (1965, reprinted 1987), especially essays 5, 6, and 12. Three rather advanced works on modern value theory are J.R. Hicks, Value and Capital, 2nd ed. (1950, reissued 1974); Paul A. Samuelson, Foundations of Economic Analysis, enlarged ed. (1983); and J. Hsler and R.-D. Reiss (eds.), Extreme Value Theory (1989), containing conference proceedings. Marc R. Tool, Essays in Social Value Theory: A Neo-Institutionalist Contribution (1986), provides very insightful views.Seminal works in the history of value theory include David Ricardo, On the Principles of Political Economy and Taxation (1817, reissued 1981); F.Y. Edgeworth, Mathematical Psychics (1881, reprinted 1967); Vilfredo Pareto, Cours d'conomie politique, 2 vol. (1896-97); J.R. Hicks and R.D.G. Allen, "A Reconsideration of the Theory of Value," Economica, New Series, 2 parts, 1:52-76,196-219 (1934); R.G.D. Allen, "Professor Slutsky's Theory of Consumers' Choice," The Review of Economic Studies, 3:120-129 (1936); Carl Menger, Principles of Economics (1950, reissued 1981; originally published in German, 1871); Lon Walras, Elements of Pure Economics; or, The Theory of Social Wealth (1954, reprinted 1984; originally published in French, 1874); W. Stanley Jevons, The Theory of Political Economy, 5th ed. (1957); Alfred Marshall, Principles of Economics, 9th ed., 2 vol. (1961), also discussing price; John Weeks, Capital and Exploitation (1981), a study of Marx's labour theory of value; Hermann Heinrich Gossen, The Laws of Human Relations and the Rules of Human Action Derived Therefrom (1983; originally published in German, 1854); and K.K. Valtukh, Marx's Theory of Commodity and Surplus-Value: Formalised Exposition, trans. from Russian (1987). Two good discussions of the more recently popular theories of utility are David M. Kreps, Notes on the Theory of Choice (1988); and Bill Gerrard (ed.), The Economics of Rationality (1993).Among the best modern textbooks in microeconomics are David D. Friedman, Price Theory, 2nd ed. (1990), an introductory text which includes nonconventional applications of price theory; David M. Kreps, A Course in Microeconomic Theory (1990), for intermediate and advanced readership; and Hal R. Varian, Microeconomic Analysis, 3rd ed. (1992), and Intermediate Microeconomics, 3rd ed. (1993), both at an advanced level. William J. Baumol The Editors of the Encyclopdia Britannica Major historical treatises include Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 2 vol. (1776, reissued in 1 vol., 1991); and John Stuart Mill, Principles of Political Economy, 2 vol. (1848, reissued in 1 vol., 1994). Among the best contemporary textbooks are George J. Stigler, The Theory of Price, 4th ed. (1987); F.M. Scherer and David Ross, Industrial Market Structure and Economic Performance, 3rd ed. (1990), which contains a particularly thorough discussion of price-fixing; Paul A. Samuelson and William D. Nordhaus, Economics, 14th ed. (1992); and William J. Baumol and Alan S. Blinder, Economics, 6th ed. (1994), and Macroeconomics, 6th ed. (1994). Frank H. Knight, The Economic Organization (1933, reissued 1967), presents a classic statement of the functions of an economic system. Selected applied analyses include R.A. Radford, "The Economic Organization of a P.O.W. Camp," Economica, 12:189-201 (1945), an account of the evolution of a cigarette-based price system; Milton Friedman and Rose D. Friedman, Capitalism and Freedom (1962, reissued 1982), especially chapters 6-12; W. Vickery, "Pricing as a Tool in Coordination of Local Transportation," in National Bureau of Economic Research, Transportation Economics (1965), pp. 275-296; Joe S. Bain, Essays on Price Theory and Industrial Organization (1972); Reuben A. Kessel, R.H. Coarse, and Merton H. Miller (eds.), Essays in Applied Price Theory (1980); Arthur M. Okun, Prices and Quantities: A Macroeconomic Analysis (1981); and Jack Hirshleifer and Amihai Glazer, Price Theory and Applications, 5th ed. (1992). George J. Stigler The Editors of the Encyclopdia Britannica