Contributions to Political Economy (1983) 2, 23-38

ADMINISTERED PRICES IN THE CONTEXT OF

CAPITALIST DEVELOPMENT*

JAMES A..CLIFTON
Chamber of Commerce of the United States, Washington, D. C.

INTRODUCTION: THE NEOCLASSICAL DEBATE

The economic meaning and effects of administered prices have been subjects of debate
ever since the 1930s, when Gardiner Means first introduced the 'administered price doc-
trine'. The doctrine held that price administration by large corporations was an entirely
new institutional phenomenon and that it caused price rigidity in the market. Debate
over the years has been incessant, seemingly without resolution within the neoclassical
framework of perfect and imperfect competition. Research has centred around the
empirical question of relative price inflexibility. Conservatives have denied the wide-
spread existence of price rigidity while liberals have argued that administered prices
and price rigidity are modern attributes of monopoly power. Means himself used evi-
dence of infrequency of price changes to prove the existence of administered prices.
Relative price inflexibility was alleged by Means not to have existed before price admin-
istration by large firms.
It is surprising that his assertion went unchallenged because the relative inflexibility
of prices of manufactured goods by comparison with agricultural goods extends back
into the nineteenth century at the origin of America's industrialisation. Evidence pre-
sented by Bezanson, Gray and Hussey (1936) and Humphrey (1937) is conclusive on
this point. Yet administered price systems were pioneered by General Motors between
1920 and 1924. They did not exist in the nineteenth century.
In Europe, furthermore, Kalecki (1943) put forth a plausible theory explaining the
difference between the two types of price formation in agriculture and manufacturing
and used this in his macroeconomic models. Different conditions of supply to the market
stemming from differing conditions of production explained relative price inflexibility
in his view.
Three competing positions came to characterise the debate on administered prices
in the economic literature and the U.S. Congress. The first and most popular was that

*The views expressed in this paper are those of the author alone. They are not intended to represent the
policy of the Chamber of Commerce of the United States.

0277-5921/83/010023 + 16 803.00/0 © 1983 Academic Press Inc. (London) Limited

24 J. A. CLIFTON

they are a modern attribute of monopoly power, a result of market concentration, a

new example of price fixing behaviour by the firm which assures an above average rate
of return on capital. This position was set forth most forcefully by Galbraitb (1957)
in U.S. Senate hearings and was elaborated by such authors as Blair (1972). Especially
in his later work on inflation, Means also alluded to the market concentration doctrine.
The fact that the classical theory of monopoly did not predict price rigidity did not deter
the political popularity of this interpretation in the depressed economic conditions of
the 1930s. Sweezy's kinky oligopoly demand curve reconciled price rigidity with the
classical theory, and administered prices became part of the whirlwind of imperfect and
monopolistic competition that swept the profession.
The second position on administered prices was that of the Chicago school, as repre-
sented by Stigler. This work focused on refuting the empirical evidence on price rigidity.
It is best represented by the work of Stigler and Kindahl (1970) and Quails (1979).
The Chicago school's position that market prices do generally fluctuate in circumstances
of price administration is correct insofar as it goes and has gained credance during the
1970s as the market concentration doctrine has been successfully challenged in work
by Demsetz (1973) and others. Yet the question of what administered prices represent
as an institutional phenomenon remains unanswered. Chicago has been content to leave
it unanswered, perhaps because it believes the existence of flexible market prices
renders the institutional issue unimportant.
The third position in the debate was that of Means himself. He maintained correctly
that administered prices were an entirely new institutional phenomenon. Berle and
Means (1932) and later writers such as Marris (1964) associated it with a managerial
revolution which created a separation between ownership and control of the modern
corporation and altered in certain fundamental respects the way capitalism worked. Price
rigidity was in Means' view the most important alteration, but the fact of the new insti-
tution and its managerial context stood on its own as a phenomenon to be explained,
quite apart from relative price inflexibility. Means understood the existence of the new
phenomenon better than any of his contemporaries.
Any objective appraisal of Means' original 1934 memorandum makes it clear that he
was extremely wary of identifying administered prices with monopoly power. In his own
words:

Administered prices should not be confused with monopoly. The presence of administered prices
does not indicate the presence of monopoly nor do market prices indicate the absence of monopoly.
. . . In general monopolised industries have administered prices, but so also do a great many vigor-
ously competitive industries in which the number of competitors is small. The bulk of the adminis-
tered prices shown below are in competitive industries. (Chare for 747 items from the Bureau
of Labor Statistics Wholesale Price Index follows, showing a bi-modal distribution in the
frequency of price changes.) (1962, pp. 78-79).

While he did allude to some form of market power explanation in early and later writings
in certain passages, there are an equal number of disclaimers that administered prices
did not indicate monopoly. This ambiguity is highlighted in his Legal Implications of
Economic Power (1960) where he expressed an overall dissatisfaction with neoclassical
 ADMINISTERED PRICES 25

theory for its inability to 'deal adequately with market power in the presence of compe-
tition' (1962, p. 161). This criticism applied to the imperfect competition framework
for in Means' view the pricing calculus first introduced by General Motors was very
different from that derived from monopoly theory.
Instead of developing a link between administered prices and the theory of monopoly,
Means devoted the better part of his life to developing a theory of administered prices.
He never succeeded, in part because he did not recognise that one cannot have a theory
of administered prices as such. One can only have a comprehensive alternative to the
neoclassical theory of price within which the institutional phenomenon of price adminis-
tration can be explained.
This paper pursues an interpretation of administered prices that is based on the classi-
cal theory of price as refined by Marx and Sraffa. By way of historical illustration it
focuses direcdy on the original system as developed by Donaldson Brown at General
Motors Corporation in the early 1920s.
I will argue that this administered price system was the first systematic estimate of
normal price by the firm in the evolution of capitalism. It became the modern insti-
tutional means by which 'market prices are regulated by prices of production' in the
corporate economy. Such administered prices may exist under either competitive con-
ditions or monopoly, but their distinctive feature is their role as the centre of gravity
around which market conditions fluctuate. As used by corporations today, administered
prices serve two functions. First, they are used to promote market stability, a sophisti-
cated form of the impartial auctioneer which assures a 'dynamic tatonnement' in the
ongoing process of investment and growth. Second, as an integral part of financial con-
trols used by the general corporate office, administered prices relate price policy in the
markets served by the firm to investment policy in an objective way, and serve to control
production activity across the wide expanse of activities of modern corporations in the
interests of capital.
The present paper focuses only on the construction and use by die firm of ex ante
estimates of normal price. To maintain, as I do, that such a price is the centre of gravity
for die market requires a further argument about competition between firms that is only
summarised here. After all, it is from competition in the market that estimates of normal
price and the attainable long run rate of return on capital are derived by the individual
firm.

GM's ADMINISTERED PRICE SYSTEM

A synopsis of Donaldson Brown's own explanation of his system of price administration
is important because it sets straight much misstatement of fact about administered prices
that has accumulated over the years in economic literature. His three seminal articles
were published in 1924 in Management and Administration, an accounting journal.
Brown called his system a 'method of price analysis'. It was used primarily to evaluate
the return on investment of current operations under varying market conditions in rela-
tion to the corporation's long run expected rate of return. It was also used to compare
the current and expected state of market conditions for each product with the normal,
26 J. A. CLIFTON

long-run state, as estimated by a set of standards. T h e system was based on Brown's

insight that a price policy is also the embodiment of a financial policy.
The estimate of normal (or equilibrium) 1 market conditions was transmitted as the
'base price policy' of the corporation from the general corporate office to the operating
division. Base prices were calculated from historical data covering as many business
cycles and different market conditions as experience allowed. From such data the normal
characteristics o f the market were calculated. Standard volume was an average pro-
duction rate which was used as the basis for estimating standard costs. From this 'factory
cost' a profit margin embodying the 'economic return attainable' was added to arrive
at the base price.
Brown designed his system in a way that enabled him to distinguish movements along
the supply curve of a product from shifts in the supply curve, though he did not articu-
late it in this fashion. Changes in unit costs due to a shift in the supply curve required
re-evaluation of the base price policy while changes in unit costs caused by movements
along a supply curve as volume fluctuated did not. Price administration effectively
solved for GM's purposes the identification problem in econometrics, distinguishing a
change in supply from a change in demand.
The standard ratios and percentages developed for price analysis should be compared currently
with the actual ratios and percentages. Variations of actual figures from the standards are to be
expected, and may result from one or more of a variety of cases, as for example,
1. Normal seasonal accumulation of finished product carried in stock.
2. Temporary lack of balance in productive inventories due to transportation tie-ups, machine
break-downs, or other causes.
3. Unusually heavy commercial expenses due to intensive sales campaigns.
These would constitute temporary variances and would not necessitate a revision of standards.
On the other hand, variances might exist by reason of changes of permanent character, such as
the following:
1. Increased fixed investment ratio due to the construction of additional plant for the purpose
of manufacturing parts previously purchased from outside sources of supply.
2. Increased inventory ratio due to a change in policy with regard to carrying finished products
in inventory, or to permanent changes in transportation conditions, or in relations with
suppliers.
Such changes would require a revision of the related standards and should be anticipated when
possible.
Since standard volume and economic return attainable play so important a part in the calculated
price, a continuing observation of all conditions involved in their determination in essential (1924,
April, p. 421).

Comparisons of actual unit costs with standard costs and of actual market prices with
base prices was important not only for the price policy given to an operating division.
Of more direct importance to the general corporate office, the method was the basis
for investment policy by the corporation.
The availability of additional capital for expansion is dependent upon an expectation of the average
rate of return obtainable. If actual conditions, as interpreted, demonstrate that a previously

'References will be made to corresponding neoclassical concepts throughout the paper for the sake of clarity
and distinction by enclosing them in parentheses.
 ADMINISTERED PRICES 27

expected average rate of return upon capital employed in a given operation is no longer obtainable,
the result may be a deliberate restriction upon further expansion, or even a curtailment of volume
with release of capital for employment in more profitable channels. The analysis of price is just
as important from the standpoint of indicating the rate of return obtainable upon capital employed
as from the standpoint of determining the prices which should be established upon the product.
The method of price analysis described in the preceding articles has the important attribute of
segregating questions of policy from those of administration, and of facilitating the analysts and
interpretation of price as bearing fundamentally upon matters of financial control (1924, April,
pp. 417^418).

Monitoring the return on investment as market conditions fluctuated was accomplished

by calculating the return to capital at different volumes at the base price, what was called
the 'standard return' at various levels of output. Actual returns were compared with
the standard return to see whether the long run objective embodied in the economic
return attainable was being met in the current market conditions.
Brown stressed that the calculation of a base price was for comparative purposes only
with actual market prices and not a dictation of a specific price to the market. Base
prices, if correct as policy, were the center of gravity around which actual prices fluc-
tuated in greater or lesser degree and frequency.

While competitive conditions and other practical considerations ordinarily are the chief determi-
nants of the price which shall be charged for a product, nevertheless comprehensivefinancialpoli-
cies are necessary in business organizations which employ large amounts of capital. The
pronouncement of a basic pricing policy, in terms of the economic return attainable, should be
understandable as a policy, and should not be misapplied as a dictation of specific price. In other
words, the impracticality of frequent adjustment of prices must be recognized, necessitating the
maintenance of prices which at times may be above, and at other times below the base price equiv-
alent. With due allowance for deviations of this nature, the method of price analysis affords a
means not only of interpreting actual or proposed prices in relation to the established policy, but
at the same time affords a practical demonstration as to whether the policy itself is sound. If the
prevailing price of product is found to be at variance with the base price equivalent, other than
to the extent due to temporary causes, it must follow that prices should be adjusted; or else,
in the event of conditions being such that prices cannot be brought into line with the base price
equivalent, the conclusion is necessarily drawn that the terms of the expresed policy must be
modified (1924, April, pp. 421-422).

The same point was made in another of Brown's articles, in a section entitled 'Base
Price in Relationship to Actual Price'.

The base price represents a pronouncement of basic policy and should be applied in continuing
comparisons with actual prices... General correspondence between prices thus indicated and
actual prices established from time to time demonstrates a state of co-ordination between the pro-
nounced policy and administrative practice, and affords a verification of an expectancy of a given
average rate of return upon capital employed (1924, March, p. 286).

In Brown's system of price administration market prices could be 'set' at the base price
level and a quantity adjustment mechanism used to clear the market of surpluses or
shortages at any given time. Such a price policy did not constitute price fixing because
for it to be sustainable over any period of time such a price had to be a correct estimate
of normal price in the first place!
28 J. A. CLIFTON

General Motors' method of price analysis derived from a broader system of financial
controls, the heart of which was Donaldson Brown's concept of the economic return
attainable. This yardstick enabled the general corporate office to manage the interests
of capital without getting involved in administration of any operating division directly.
Following the logic of classical political economy, it is not coincidental that the first
article in Brown's series focused on the 'economic return attainable' from operating div-
isions, while the second article presented his method of price analysis. The conclusion
of his third and final article states:
It becomes apparent, therefore, that the analysis of price in accordance with the method outlined
is closely interwoven with the matter of financial control, since the expression of price policy,
in terms of rate of return attainable on capital employed, is the most significant factor bearing
upon the question of availability of capital for purposes of operation (1924, April, p. 422).

Central to the calculation of the economic return attainable, and therefore to the profit
margin added to standard costs, was the relationship between the rate of growth of sales
and a given price policy.
A monopolistic industry, or an individual business under peculiar circumstances, might maintain
high prices and enjoy a limited volume with very high rate of return on capital, indefinitely, at
the sacrifice of wholesome expansion. Reduction of price might broaden the scope of demand, and
afford an enlargement of volume highly beneficial, even though that rate of return on capital might
be lower. The limiting considerations are the economic cost of capital, the ability to increase
supply, and the extent to which demand will be stimulated by price reduction.
Thus it is apparent that the object of management is not necessarily the highest attainable rate
of return on capital, but rather the highest return consistent with attainable volume, care being
exercised to assure profit with each increment of volume that will at least equal the economic
cost of additional capital required (1924, February, p. 197).

It was the average, long-run return on a long-lived asset that was measured by the econ-
omic return attainable, not the temporary highs or lows in profits associated with fluctu-
ations in volume over the business cycle. Standard volume, as used in the calculation
of standard costs, was also the basis upon which average capital turnover was figured
and the economic return attainable calculated.
Forecasts of sales, earnings and capital requirements were critical to Brown's system
of price administration since expansion had to be based upon capital available and
directed into the areas of greatest expected return. The forecasts in turn were dependent
upon a price policy 'since the factor of sales expectation is necessarily dependent upon
the question of price' (1924, February, p. 197). But price policy required a determi-
nation of the economic return attainable. This problem, in which the rate of profit must
be determined at the same time as the prices of commodities, is set forth with admirable
clarity by Sraffa (1960). General Motors practical solution to it was summarised by
Brown:
An acceptable theory of pricing must be to gain over a protracted period of time a margin of
profit which represents the highest attainable return commensurate with capital turnover and the
enjoyment of wholesome expansion, with adequate regard to the economic consequences of fluc-
tuating volume. Thus the profit margin, translated into its salient characteristic rate of return on
capital employed, is the logical yardstick by which to gage the price of a commodity with regard
to collateral circumstances affecting supply and demand (1924, February, p. 197).
 ADMINISTERED PRICES 29

Since the economic return attainable was based upon average, normal market conditions,
it provided a policy benchmark with which to compare actual returns at any time. Such
continuing comparisons were the basis for financial control by the corporation over its
operating divisions. The analysis told the general corporate office, for example, when
it was necessary to tighten operating procedures to assure a satisfactory rate of return.
Comparison of the actual rate of return with the corporation's expected return provided
the basis for investment or disinvestment in any particular operation.
Twenty-five years after their discovery, an American Economics Association sym-
posium on administered prices acknowledged that they were a phenomenon in search
of a theory. One of the sorrier chapters in the history of economic thought has been
the anempt to explain Donaldson Brown's innovation with the neoclassical theory of
perfect and imperfect competition. Indeed, the history of the debate is a case study in
the severe limitations of neoclassical economics to the understanding of even the most
elementary economic concept — normal price. Administered prices were in the first
instance confused by Means with the allegedly new phenomenon of relative price inflexi-
bility in the market. While such cyclical rigidity was itself the result of differing con-
ditions of production as between agricultural goods and industrial manufactures, it was
mistaken as a modern attribute of monopoly power in the whirlwind of imperfect and
monopolistic competition. Price administration, which was developed to consolidate the
internal control of newly formed general corporate offices over formerly independent
operating divisions, was misinterpreted as market power. In turn this view blinded econ-
omists from seeing the actual role administered price systems did come to play in the
market, that of regulating the market toward its normal condition (tdtonnement and mar-
ket stability). It is to these themes and the explanation of administered prices that I
now turn.

ADMINISTERED PRICES AND MARKET BEHAVIOUR IN THE CONTEXT OF

CAPITALIST DEVELOPMENT
In a paper published in the Cambridge Journal of Economics (Clifton, 1977) I maintained
that capitalism is a continually unfolding process in history. This view is based on Marx's
perception of modes of production in history, each with distinct laws of motion of its
own. The classical economists and Marx assumed in their theories that these laws oper-
ate in their pure form. As Marx pointed out, however, 'In reality there exists only
approximation; but this approximation is the greater, the more developed the capitalist
mode of production and the less it is adulterated and amalgamated with survivals of
former economic conditions' (1967, p. 175).
In this view, free competition in the market is an omnipresent feature of capitalism
that becomes more intense with capitalist development, not less intense. I highlighted
the relationship between the growth and diversification of the firm and the gradual
emergence of conditions of free capital mobility in the contemporary economy.
I did not show in the earlier analysis how the institutional conditions of free capital
mobility were associated with, indeed dependent upon, the emergence of prices of pro-
duction as distinct empirical estimates by the firm. As characterized by Marx, 'The price
30 J. A. CLIFTON

of production is regulated in each sphere, and likewise regulated by special circum-

stances. And this price of production is, in its turn, the centre around which the daily
market-prices fluctuate and tend to equalize one another within definite periods' (1967,
p. 179.) But such prices came into being only at an advanced stage of development.

What competition, first in a single sphere, achieves is a single market value derived from the
various individual values of commodities. And it is competition of capitals in different spheres,
whichfirstbrings out the price of production equalizing the rates of profit in the different spheres.
The latter process requires a higher development of capitalist production than the previous one.
(1967, p. 180.)

The system of price administration first developed at General Motors and later adopted
by most large corporations was the first institutional emergence of prices of production
in capitalist development. That, in my view, is the real significance of administered
prices.
This is a far more modest conclusion than the great claims that have been made for
administered price systems in the past, in large measure because the viewpoint does
not associate the development of administered price systems with any revolutionary
change in the nature or operation of capitalism, whether identified as a managerial rev-
olution or a transition to monopoly. It differs fundamentally from the view evident in
the writings of Galbraith, Baran and Sweezy, Berle and Menas, Blair and Kalecki, and
embodied in the industrial organisation paradigm.
Administered price systems are indicative of a mature stage of capitalist development
in which the abstract concept of prices of production for the first time has a concrete
institutional counterpart in the base price estimates that are the cornerstone of adminis-
tered price systems. This position is consistent with the point of view that capitalism
is a continually emerging process in history rather than a mode of production with two
distinct phases in its development, competition followed by monopoly.
Prices of production in classical theory are competitive prices associated with an econ-
omic process tending to equalise the rate of return on capital across different areas of
production. This concept of competitive adjustment differs sharply from the neoclassical
concept of a perfectly competitive equilibrium price. In classical theory, such a price
is a centre of gravity which regulates market prices in an active process of competitive
rivalry between firms, whereas in neoclassical theory it represents a static equilibrium
state between supply and demand produced by an absence of any and all rivalry.
Further, in classical theory prices of production are influenced by and inseparable from
the investment behaviour of the firm, whereas in neoclassical theory, prices are derived
from an analysis of pure exchange devoid of investment behaviour and growth.
The preceeding synopsis of Donaldson Brown's method of price analysis reveals that
it resembles the classical theory of competitive prices, not the neoclassical theory of
perfect competition. Base prices incorporated not only considerations of normal long-
run market conditions, but also considerations of investment, what he termed the
'interests of capital'. Through application of the economic return attainable to the analy-
sis and control of production, and ther allocation of capital by the firm, GM's price
policy was actually dominated by the investment behaviour of the corporation.
 ADMINISTERED PRICES 31

The supply of capital whether from retention of earnings or from a sale of securities, is dependent
upon the promise of a satisfactory rate of return, which in turn is determined by the profit margin
in relationship to capital turnover. This relationship is symbolized by the base price. A deviation
in prevailing price from the base price equivalent may afford a practical demonstration that a
previously assumed economic return attainable is erroneous, and thus lead to a limitation upon
the supply of capital for expansion. This method of price analysis, therefore, supplies the basis
of a pricing policy which is the embodiment of afinancialpolicy (1924, April, p. 417).
In regard to the market, it was the question of the regulation of market price by
normal price (tdtonnement) with which Brown was concerned in order to stabilise the
business over short run cycles. Tdtonnement has received exhaustive treatment in the
neoclassical literature under Walrasian conditions of pure exchange, and it is recognised
that the device of an 'impartial auctioneer' is required to ensure tdtonnement. In
my view, price administration came to be the institutional basis by which a 'dynamic
tdtonnement' operates in the economy, which is characterised by ongoing production
and investment as well as exchange. Those who manage price administration in the
corporation are the institutional analogue to the abstract concept of an impartial
auctioneer in Walrasian theory.
Base price estimates are based upon independent data from the market. In turn, they
enable managers to regulate, not dictate, market prices by evaluating market conditions,
and responding accordingly. Deviations of market price from the base price were so
central a part of Brown's thinking that he listed six explicit circumstances under which
market prices should deviate from normal price along with seven circumstances calling
for a modification of base price because of changes in market conditions (1924, March,
p. 286; April, p. 417).
It is important to stress that actual estimates of normal price did not exist before
Brown's method of price analysis was developed in the early 1920s. Normal price unlike
market price was a purely abstract concept of economic theory and did not play a visible
role in the operation of markets.
The genius of Brown's system was not merely that it provided a center of gravity
for the regulation of the market, however. It also regulated the allocation of capital
towards areas of higher expected long run returns and away from areas of lower returns.
Price administration, as the instititutional embodiment of prices of production,
strengthened the competitive adjustment process emanating from investment behaviour.
This method of allocating capital through price administration is described by Brown
in the following passage:
As the non-controllable expenses influence the profit margin, so thefixedportion of the investment
influences the rate of return on capital. It is therefore, not possible to compare directly the rate
of return on capital actually realised or expected with the economic return attainable, since the
latter represents an average rate of return to be realised over a period including both good and
poor years, and is not the rate to be aimed at in a given year... It is essential, therefore, to be
able to calculate readily the return on capital at different volumes of business at the base price;
in other words, to determine what may be called the standard return at various volumes with
which actual or expected return may be compared (1924, April, p. 420).
A recent textbook presentation of normal price is a good point of comparison with
Brown's own system, and with the explanation of administered prices just set forth.
32 J. A. CLIFTON

Firms in manufacturing industries are price makers, or as Joan Robinson observed, 'the prices
of manufactures in the nature of the case are administered prices'. Prices in competitive industries
can be viewed as being set in order to recover costs and earn a 'fair' or 'normal' rate of profit.
This is the minimum rate or return on the value of the investment thatfirmsin this line of activity
must expect to be able to earn in order to continue investing. The setting of a 'normal' price
requires estimates of the firm's costs and its average rate of sales over the expected economic
life of its plant (Asimakopulos, 1978, p. 280).
What is missing in this discussion is an explanation of the important role adminstered
prices play as a stabilising centre of gravity in the market. There is the false connotation
that the firm fixes prices in the market rather than stabilising or regulating the market
at its normal level.
In Brown's original system standard volume was derived from the history of market
conditions on average. From this, total factory costs were determined including raw
material and labour costs, manufacturing expense and commercial expenses. The rate
of turnover on fixed and working capital was next computed as a percentage of annual
factory cost of production at standard volume. For purposes of illustration the following
standards were used (1924, March, p. 286):

Investment in plant and other fixed assets $15,000,000

Practical annual capacity 50,000 units
Standard volume, % of capacity 80
Standard volume equivalent 40,000 units
Factory cost per unit at standard volume $1000
Annual factory cost of production at standard volume $40,000,000
Ratio of investment to annual factory cost of production 0 • 375

A similar standard ratio was established for working capital both as a percentage of
factory cost and as a percentage of annual sales.
Using an economic return attainable of 2096 that was based on past and expected
market conditions, base price was then calculated as a percentage of factory cost.
In summary, the method of the price analysis pioneered by Brown took market
conditions as an independently given datum from which base price was calculated. The
fact that base price is administratively estimated and may become the actual market price
occasionally, that it may regulate the market, does not at all imply price fixing, as so
many economists have misinterpreted the procedure to imply. Rather, it implies the sys-
tematic nature of competition and the tendency for market prices to be regulated by
that force.
In a forthcoming paper I will show that this competitive behaviour among corpor-
ations, specifically among their general corporate offices, can be represented by a
general theory of competitive value which combines the Sraffa system (1960) and the
work on sacrificing behaviour pioneered by Simon and by Cyert and March. Competitive
resource allocation is depicted by Sraffa's system of joint product equations interpreted
 ADMINISTERED PRICES 33

Summary illustrating the method of price analysis

Standards

Ratio to sales Ratio to factory cost

Gross working capital 0150 0-250

Fixed investment 0-375
Total investment 0 150 0-625
Economic return attainable — 20%.
Multiplying the investment ratio
by this, the necessary net profit
margin is arrived at 0 030 0125
Standard allowance for commercial
expenses, 796 0 070
Gross margin over factory cost 0 100 0125
(a) (b)
Selling price, as a ratio to factory
cost 1+b 1+0- 1 2 5
1-250
5
1-a 1-0- 100

From Brown (1924, March, p. 286).

as a set of organisational interdependences. Each equation represents the normal (or

equilibrium) condition of a firm, the inputs it uses and the markets in which it sells.
This enables the identification of organisational structure for each firm, which bears
on considerations of internal capital mobility and interindustry competition, and of
market structure.
Competition between firms is in the first instance conducted on a plane of financial
yardsticks in which each general corporate office compares itself as being above or below
the average financial condition of other firms. This average is the basis of a satisfactory
(or unsatisfactory) level of overall performance. In this view competition between
general corporate offices for shares of value and surplus value dominates the general
process of competitive resource allocation and may be seen as being determinate. Com-
petition among businesses in particular markets may then be seen as influencing the
individual prices of commodities within boundaries established by the general process
on the basis of corporate policy.

ADMINISTERED PRICES AND FINANCIAL CONTROL

In the discussion of Donaldson Brown's concept of the 'economic return attainable',
I have alluded to the role price administration played in financial control within the cor-
poration. Some focus on this aspect of price administration is necessary because it was
the primary function of his method of price analysis. Regulation of market price was
a very secondary function.
34 J. A. CLIFTON

In the slump of 1920 it became apparent to the top management of General Motors
Corporation that tighter financial controls over operating divisions had to be developed
if the corporation was to survive. G M had been first organised as a holding company
in 1908 and by 1910 had acquired about 25 companies in automobile-related fields. Yet
the corporation in the following decade was not operated as a single, coordinated manu-
facturing firm. The loyalties of management in the general corporate office were divided
between the interests of the corporation as a whole and considerations of operating detail
in one or more specific divisions, a situation which hindered objective evaluation of those
divisions relative to corporate interests.
Operating divisions were trying to preserve their former status as independent firms
and were reluctant to turn over cash to the corporation's treasury for allocation in the
best interest of GM. Yet they were not at all reluctant to draw on the corporation for
finance.
The general corporate office had not by 1920 fully developed its own identity as only
representing the interests of capital, which Brown defined as protection of capital
employed and return on investment. These tensions between the corporation and its
operating divisions culminated in a financial crisis in the Spring of 1920, best described
by Alfred P. Sloan, Jr.
These three emergency problems — overruns on appropriations, inventory runaway, and the
resulting cash shortage — exposed the lack of control and co-ordination in the corporation . . . (In)
the absence of a system for control of appropriations, each division manager got his maximum
request satisfied, without real effort on the part of the corporation to evaluate or to reconcile
the total amount of all requests with the available funds. This, together with overruns on appro-
priations and the inventory rise, represented a drain in available funds which had to be met in
some way. To get the money we sold common stock, debenture stock, and preferred stock, though
not so easily or in such amounts as we expected; and before the year 1920 was out we had to
borrow about $83 million from banks. From then through 1922 we charged against income of
the corporation about $90 million for extraordinary write-offs, inventory adjustments, and liqui-
dation losses, an amount equal to about one-sixth of the total assets of the corporation. Financial
control was not merely desireable, it was a necessity (1964, pp. 118—119).

The pressing need to consolidate financial control over the operating divisions and
to curtail their independence of operation led to the system of price analysis later termed
'administered prices' by economists and management scientists. The system enabled top
management to evaluate the effectiveness of operations without being directly involved
in line responsibilities. It enabled the general corporate office to concern itself solely
with the interests of capital for the first time. As Sloan explained Brown's procedure:
That key, in principle, was the concept that, if we had the means to review and judge the effective-
ness of those operations, we could safely leave the prosecution of those operations to the men
in charge of them. The means as it turned out was a method of financial control which converted
the broad principle of return on investment into one of the important working instruments for
measuring the operations of the division... In other words, Mr. Brown developed the concept
of return on investment in such a way that it could be used to measure the effectiveness of each
division's operations as well as to evaluate broad investment decisions (1964, pp. 140-141).

It is central to stress this relation of price administration to financial control. Adminis-

tered prices have been viewed by economists as a phenomenon of exchange whose
 ADMINISTERED PRICES 35

influence does not extend beyond the market. When the question of price administration
and economic power has been raised, it has been raised incorrectly as one of market
power, rather than of the increasing control of finance over production activity. The
failure to comprehend this relation is, I believe, one reason why economists have con-
ducted a seemingly endless and utterly confusing debate about this issue. The important
function that price administration does play in markets as a centre of gravity cannot
be understood or recognized before recognising the primary relation of price adminis-
tration to capital in production.
Administered price systems were developed so that the interests of capital could be
represented in a more direct, deliberate and forceful manner than in earlier stages of
capitalism. As Sloan's discussion makes clear, they became necessary once the firm began
to extend across several industries and markets. The gross investment decision could
not be based on actual market conditions and the prospect of speculative short-term
gain. Given the huge amounts of capital at risk, it required an estimate of the normal
circumstances of each operating division an estimate based upon as objective a set of
criteria as could be devised, free from the inherent optimism of the sales staff.
The managerial evolution of which price administration was a part involved the substi-
tution of trained managers of capital for capitalists and the institutional innovation of
decentralised, multidivisional organisational structures. As a system of financial controls,
price administration enabled the general corporate office to take on the objective charac-
teristics of capital as pure self-expanding value because it relieved top management of
day-to-day operating responsibilities. Price administration enabled the effective exercise
of authority over production, and enabled organised contact with market conditions at
the same time.
From a classical perspective, the economic power represented by GM's method of
price analysis and financial control may be seen as a purer form of Marx's 'capital-
labour* relation than existed in the eighteenth or nineteenth centuries.' By enabling the
general corporate office to be solely concerned with the interests of capital, Brown's
method of price analysis focusing on the economic return attainable, enabled the laws
of motion of capital to operate on a more objective basis. With price administration
capital had finally freed itself from the capitalist. Price administration allowed a purer
institutional form of capital than the capitalist to emerge, in the form of the general
corporate office.
These were not in the least revolutionary developments, though they may have
appeared so at the time. As the firm began to take on the character of pure finance,
so too prices began to take on the character of prices of production with price
administration.

CONCLUSION
In the context of neoclassical theory, the administered price debate never came to a
satisfactory conclusion. The liberals' explanation mis-specified the locus of economic
•A recognition of this does not include any value judgement on my pan as to whether such authority over
production is 'good' or 'bad'. The statement should not be construed as supporting a Marxist ideology.
36 J. A. CLIFTON

power associated with the development of financial controls and price administration.
They viewed it as a modern form of market power rather than the increasing control
of finance over production within the firm. This led them to compound their error. To
assert a monopoly power explanation of administered prices required a denial that
administered prices existed generally in circumstances of competition. The conserva-
tives were able to attack this denial of market reality, if not easily or quickly at least
definitively in the 1970s. The liberal dilemma was the first anomaly for neoclassical
theory in the debate. Price administration did enhance the economic power of the firm,
but the nature of that power could not be discerned within the structure of neoclassical
theory, which focuses exclusively on conditions of exchange.
The second anomaly was that the Chicago School never grasped the important role
of regulation (tatonnement) that the new institution of administered prices did come to
play in the market, despite the central importance of tatonnement in the neoclassical
framework. For Chicago the economy was viewed as competitive, but it was not viewed
correctly as being tnore competitive with the advent of administered prices. The Chicago
framework lacked the concept of a developing mode of production and its significance
for examining new institutional developments.
The third anomaly for the neoclassical framework in the administered price debate
was that Means recognised that the economic power implicit in price administration was
not monopoly power. But he was never able to go beyond that step within the confines
of that theory. As a result he wandered as a lost explorer between the poles of perfect
competition and pure monopoly without ever explaining one of the most important
institutional innovations in the history of capitalist development.
The innovation of price administration spread rapidly among major corporations fol-
lowing its origin at General Motors. Today, systems of financial control evolved from
Donaldson Brown's method of price analysis are used by moderate size firms as well.
The use of administered price systems to control large organisations is well documented
in the management science literature, for example, in Gordon (1964). That the primary
function of price administration is internal control of the firm, not the exercise of
monopoly power in the market, is a theme accountants have correctly emphasised, if
not economists.
Another use of accounting data is for control over business processes and activities. The standard
cost system is one method by which such control is effected. Standards of performance, such as
the number of labor hours and quantities of material that should be used on a job, are specified.
The differences between the recorded usage and the standard quantities or rates are reported
as variances. Managers, who are familiar with the process, the standards, and the conditions that
occurred at the time the job was done, then must analyze the variances to determine whether
the process is out of control (Benston, 1982, p. 213).

The primary advances in price administration since the early 1920s are threefold: (1)
replacement cost accounting which is based on an inflation forecast; (2) use of generally
accepted accounting principles; (3) the advent of computer technology in financial
control and regulation of the market.
The application of computer technology, in particular to price administration, appears
to have enabled corporations to use price more often as a strategic variable in compe-
 ADMINISTERED PRICES 37

tition than was practically possible in early administered price systems. As Business Week
magazine pointed out:
While a huge deflation took place in agricultural, raw material, and service prices (in the 1930s),
industrial prices were characterized by a rigidity that was often noted and that was described in
the voluminous report of the Temporary National Economic Committee.
But something new has been added to the pricing scene — if not to antitrust attitudes—since
the 1930s. The growing sophistication of computer technology has provided the means for flexible
pricing. Using computers, companies are now able to continuously monitor costs of inputs such
as labor, raw materials, and energy across a wide range of product lines. In fact, computerized
cost review has spread so fast that virtually all moderate-size companies use some kind of data-
processing system for this purpose. (1977, p. 88).
The empirical evidence on price rigidity gathered and presented by so many authors
over the years appears highly contradictory. The most charitable deduction that can be
drawn is that plenty of evidence exists on both sides of the issues. I believe this
interpretation of the evidence is more satisfactory and objective than one focusing on
a priori motives biasing research or differing political ideologies. It is my own opinion
that the sophisticated nature of price administration today allows greater flexibility of
market prices and greater frequency of change as part of overall competitive strategy
than was technically possible in the 1920s and 1930s.
But the point made here is that prices of production in their institutional form of
base price estimates are simply a centre of gravity which express the systematic and
intensive forces of competition at work in the corporate economy, and around which
market conditions, whether prices or quantities, are always in flux. Whether corpor-
ations maintain market prices at their normal (equilibrium) level over time or enable
prices to fluctuate around their normal level at frequent intervals is really a very
secondary question to which no general answer is possible over the long run. It is a
shame economists have spent so much time on it and so little effort trying to understand
what administered prices were all about in the first place.

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