of a particular stock or bond are held by a few owners, the conditions of a free market may be lacking.

In contrast to these relatively free market conditions for seasoned securities, new security issues cannot usually operate on the basis of a free market. Such large blocks of a stock or bond issue are initially held by the issuing corporation and subsequently by the underwriting syndicate that a free market cannot be expected. For a time the syndicate almost necessarily dominates the selling side of the market and is in a position to "break" the market. The economic implications of the process of new security flotation have received so little attention that it is not possible to indicate clearly the structural significance of the lack of a free market in the period of initial flotation.

Unlisted securities usually have a somewhat less broad market than listed securities and are therefore more subject to control for periods of time by a particular buyer or seller. Often administered prices appear in this field as a particular firm specializes in a certain issue, offering to buy at a price which is held constant for considerable periods of time. The same firm is likely to establish a selling price constant for periods of time. The difference in the fixed buying and selling price constitutes the equivalent of a commission for handling the securities and taking the risks of maintaining the market.

Transactions involving private and commercial and other loans appear to run the whole gamut of market conditions. While there is little evidence of concentration in relation to the market on the part of either lenders or borrowers in the main financial centers when large sums and ample security are involved, the small local borrower is usually faced with only a small number of potential lenders. The extent to which lending terms are administered by the lender, re bargained between the lender and the borrower, or are made in the free market, cannot be set forth here, but it is well known that administered terms are set by the lender so far as a large body of small businesses and borrowers are concerned, and that the terms often remain constant for months or even years at a time. How significant this is to the structure of the whole economy is a problem which has received little attention and yet may be important. The foregoing survey of the degree of concentration in the three main markets-goods, labor and securitieshas blocked out the areas in which the market mechanisms facilitate the organization of resources through free market prices and the areas in which the market operates through prices which are not currently set by the interaction of a large number of independent buyers and sellers. In spite of its crudeness, the survey has shown that outside of the prices of agricultural products and listed securities, the bulk of prices, including labor rates, are not established in free markets. This is an

essential structural characteristic of the American economy. The fact that such a large proportion of prices are made in markets in which there is a relatively high degree of concentration of buying, of selling, or of both, is an essential key to an understanding of the behavior of prices and of the organizing function played by the market mechanism in the American economy. It means that the market mechanism plays a smaller role in the organizing of resources than would be the case if the bulk of prices were made in free markets and points to the larger role played by administration and by the other organizing influences yet to be discussed. Coordination through Canalizing Rules

The framework of laws, rules and customs which canalize human activity without dictating it are so familiar that their organizing influence is often little realized except as some sharp change is made such as the adoption of a new canalizing law or the widespread breaking of an old custom. Yet in practice they are probably as essential to the effective organizing of resources as are administration and the market mechanism. Consider how much the American one-price system of retail buying and selling contributes to effective retail distribution, yet it is only a matter of an accepted custom. Or the great aid to the organizing of production which is given by the standard rules of double-entry bookkeeping which are mostly a matter of custom though sometimes codified into law for such types of activity as railroad or utility operation. Essential to the effective working of many of the organized markets are the marketing rules by which transactions are guided but not determined. The laws which require the fulfillment of contracts and laws which limit the theft or destruction of physical wealth are essential to the organization of modern industry. All of these constitute examples of working rules by which human. activity is guided into more productive channels.

Not all the laws, rules, and customs are solely canalizing in character. Some dictate specific action, as when an income-tax law requires a specific payment or a safety regulation, as interpreted by a regulating agency, requires the demolition of an unsafe building. Laws which call for specific performance are administrative in character though they may also have a canalizing influence.

On the whole, the bulk of laws, rules, and customs. are primarily canalizing. By setting up barriers to particular actions they narrow down the range of discordant activities and thereby encourage activities on the part of individuals, enterprises, and government units which mesh with each other in a more organized fashion than would be possible in the absence of their canalizing influence. The zoning ordinance which limits new factory construction to one part of a city

and separates residential from commercial areas does not require anyone to build a new factory but only requires that if a new factory is built it should be built in the manufacturing area, not in the residential or commercial area. Such an ordinance can thus produce a more organized development of a city without administering that development. It canalizes city development without dictating specific performance.

Relatively little analysis has been made of the organizing influence of canalizing rules in the field of economic activity. Studies have been made of the way laws come into being, the way government institutions develop, and the way individuals holding political positions acquire those positions or are displaced, but relatively little attention has been given to the organizing influence which laws have on economic activity. Until more extensive analyses have been made, it is not possible to indicate clearly the role played by canalizing rules. Yet such work as has already been done indicates clearly that laws, rules, and customs do play a major role in making the separate activities of millions of individuals mesh into the organized activity of the American economy.

43

Coordination through Accepted Goals

The fourth major organizing influence, that of accepted goals, has received even less study than canalizing rules yet it is clear that it plays a significant role in the organization of the use of resources. When two or more people agree to accomplish a certain objective it is often possible for their action to be coordinate simply because each one acts in terms of the logic implicit in the accepted goal. In such a simple action as moving a table across a room, if two men agree on this action, each one almost automatically takes hold of the end of the table nearest to him. Only if neither is nearer one end than the other do they waste effort by both grabbing for the same end of the table. In the complex life of every day, reliance is constantly being placed on the logic of accepted goals to guide individuals so that their separate activities fit together. A meeting is to be held, a big contract is to be filled, or a boat is to be docked. With only a minimum of specific instructions, the individuals directly responsible for any one of these activities will take up their appropriate positions and carry forward their respective functions. The man on

A few studies of the character suggested have been made as John R. Commons, The Legal Foundation of Capitalism; James C. Bonbright, Valuation of Property; and Berle and Means, The Modern Corporation and Private Property.

79418°-39-9

the pier does not have to be told to catch the first coil of rope thrown out from the boat as it comes close to the pier, draw in the slack, and drag the following hawser over the appropriate capstan. His training allows him to follow the logic of the situation as it develops, drawing in the successive hawsers, perhaps receiving directions from time to time with respect to · particular details of action but, on the whole, carrying out those actions implicit in docking the boat which are appropriate to his position. Each other member of the pier crew is likewise guided to a greater or less extent by the logic of the job in hand. With a minimum of explicit direction, the organized activity of tying the ship up at the pier is carried forward. In situation after situation which could be analyzed, organization is to a significant extent the result of the acceptance of some explicitly recognized goal though in more complex situations its influence is usually combined with that of the market mechanism, administration, and canalizing rules, the different influences in combination producing the organized result.

So little study has been given to the part of the organizing influence of accepted goals in economic matters that it is not possible to set forth their role in the organizational structure of the whole economy. It is well recognized that in times of war the national unity growing out of the widespread acceptance of the single war objective does act as an organizing influence. In peace times there may be similar though less clearly discernable results growing out of the acceptance of national goals. Until analyses along this line have been developed, the role of accepted goals which is so important to the organization of activity in lesser spheres cannot be set forth as it effects the organizational structure of the whole economy.

Regardless of the exact role of accepted goals, there can be little question that the four factors discussed above, administration, market mechanism, canalizing rules and accepted goals, are of major significance for the organized use of resources. Together they constitute the main influences which make the separate activities of the millions of workers in the nation combine into an organized whole. Each concrete situation usually involves a combination of these influences, sometimes in one proportion, sometimes in another. These influences in combination provide the organizational structure of the whole economy and the relative roles which each plays gives its specific character to the organizational structure of the American economy.

Introduction

In the preceding chapter the market mechanism has been emphasized as a major coordinating influence. This coordination is brought about through the series of exchanges between economic units. These in turn are in large measure governed by prices which act as a mediator in apportioning resources and benefits. It is the purpose of this chapter to examine the behavior of prices in order to develop the structure of prices through which the market operates to influence the use of national resources. Following the procedure of earlier chapters, the price structure will be considered first in terms of the interrelationship of prices as of a given time, then in terms of the trends of change, and finally in terms of their sensitivity to depression.

Prices fall into three major categories according to the three main types of transactions which they govern-goods, manpower, and securities. The first,

goods prices, involves primarily the products of productive activity, including capital goods as well as consumption goods and both commodities and services. The second category involves primarily the employment arrangements whereby individuals agree to work under administrative direction for a wage or salary. The contractual wage or salary rates enter into the price structure as the price for manpower. The third category, that of security prices, refers primarily to the legal instruments representing the prospect of future money returns in such forms as interest and dividends.1

1 These legal instruments often involve more or less contingent threads of control over productive enterprises, as in the case of voting stock, or over instruments of production, as in the case of a farm mortgage, but their main characteristic from the point of view of price is their prospect of bringing in money to the purchaser in the future. At their initial sale, securities may bring capital to productive enterprise or funds to be spent on current consumption, whereas in subsequent sales the interest and controls represented by the security are transferred from one holder to another at a price. In either case the essential nature of the transaction is the payment of money currently for the prospect of receiving money in the future.

INDEX 160

140

120

100

RETAIL PRICES

In order to cover the essentials of the price structure, it would be necessary to outline the structure of prices in the goods market, the structure of wage and salary rates, and the structure of security prices, and to follow through the interrelations among these three structures. The Relation Between Goods Prices, Labor Rates, and Security Prices

A rough indication of interrelation between prices in the three main price fields can be obtained by comparing price indexes representing price behavior in each field. In chart I, crude indexes are given of the changes in goods prices at retail,2 in labor rates, and in security prices. An examination of this chart indicates that retail prices and labor rates tend to fluctuate fairly closely together for short periods, both rising sharply in the war years from 1915 to 1920 and then falling together in 1921 and 1922, falling again from 1930 to 1933 and rising from then to 1937. This close relation between fluctuation in hourly labor rates and fluctuations in retail prices holds for both hourly wage rates and salary rates but neither appears to fluctuate closely with wholesale prices. This is made apparent in chart II, which gives indexes for each of the four items separately and shows wage and salary rates fluctuating fairly closely together while wholesale prices show much more violent fluctuations in the war period than do retail prices.

Though labor rates and retail prices tend to fluctuate roughly together for short periods, labor rates have increased fairly steadily in relation to retail prices. This is shown in chart III, which gives the relation of hourly

2 As an index of retail prices, the Bureau of Labor Statistics Inder of the Cost of Living, is used to reflect goods prices because it is probably more typical of goods prices as a whole than an index of wholesale prices or a composite of wholesale and retail prices. In the first place the cost of living is on the whole more comprehensive than an indexof wholesale prices. It includes the prices for many commodities and services which do not pass through the wholesale markets, such as the professional services of doctor and dentist, the personal services of barber shops, amusements, and house rentals. It also reflects in the price of retail commodities not only the price for the function of retail distribution but to some extent the wholesale prices of the commodities distributed at retail. On the other hand, it misses the goods sold at wholesale but not passing through the retail markets, such as capital equipment and construction goods. In the second place, both the wholesale and retail indexes probably exaggerate the flexibility of prices because they tend to be made up of more standard commodities which, on the whole, fluctuate in price more than nonstandard goods. This exaggeration of flexibility is probably inherent in the creation of price indexes. In order to construct an index of prices it is almost essential to employ the prices of relatively standard products to typify the prices in whole industries. Yet in most industries the standard products are, on the whole, more flexible in price than the less standard products. Thus cotton yarns and standard cotton sheeting, print cloth and similar standard fabrics are used to typify the cotton textile industry. These are items all of whose prices are relatively flexible. But approximately 20 percent of the value of products of the cotton textile industry is made up of specialty products such as draperies, plush, velvet, surgical dressings, woven labels, which are relatively less flexible in price. For most industries it is easier to obtain continuous price series for standard products than for specialty products and the price of a standard product seems a more appropriate item in a price index than the price of any single specialty product because it is likely to represent a larger proportion of the total product of the industry. The same exaggeration likewise tends to arise in the cost of living index, though since the items in the cost of living index are, on the whole, less flexible than wholesale prices the exaggeration of flexibility is probably not so great.

labor rates to retail prices. Taking the index of retail prices as 100,3 the index of labor rates increased fairly steadily from 78.8 in 1913 to 126.5 in 1937. Both the retail price index and the labor rate index are too crude to allow a precise measurement of the increase in the real buying power of hours of labor, but they point to a very real and fairly continuous increase since 1913. This increase does not necessarily mean that annual incomes have increased but only that an hour of labor can buy more goods.

The increase in hourly labor rates in relation to retail prices presumably reflects, for the most part, such of the gains from technical improvement as have been passed on to the consumer in the form of either lower prices or higher labor rates. Just how far the gains from technical improvement have actually been passed on and how far they have been retained by producers cannot be determined without intensive research, but it is clear that in very considerable magnitude the gains have been passed on. In the main this has resulted from the individual producer's effort to expand his markets, from price competition among producers, and from the pressure of organized labor to increase its hourly wage rates.

Both indexes being based on 1926-29 as 100.