2 - Gardiner Means' doctrine of administered prices

Summary

As a graduate student, Means was taught that the economy was a self-regulating machine which ensured that, in the short term, all national resources were fully utilized, international trade was always in balance, and the general price level varied directly with the money supply; and, in the long term, economic waste was eliminated, income distributed according to the marginal productivity principle, and the effective use of resources realized. He was also taught that these macro results were predicated on the economy being inhabited by small competitive owner–worker enterprises which employed little fixed capital, made a single good, and produced a negligible share of market output; and on the profit motive which, by compensating the owners for risking their capital and managing their enterprise, was the guiding force in directing the enterprises' economic activity. Most importantly, it was impressed upon Means that for the economy to be self-regulating, the coordination of all economic activities – and, thus, the making of industrial policy – had to occur in the market and was predicated on all prices and wage rates being perfectly flexible.

While he thought neoclassical economic theory was clearly relevant to the British economy of Smith and Ricardo's time, to the American economy prior to 1840, and to the economic activities of the oriental bazaars, Means found it completely irrelevant to the American economy of the twentieth century where the large corporate enterprise was the “representative firm,” the ownership and control of the corporate enterprise rested with different individuals, thus undermining the effectiveness of the profit motive to increase social welfare, and the corporate enterprises had the market power to administer both their wage rates and market prices.