prices

prices reflect the payments made by consumers for the goods and services that they buy. Prices relate not only to the goods bought in shops but also to factor inputs. Inputs prices reflect the payments required to attract factors of production into the market—i.e. wages, rent, interest, and profit for labour, land, capital, and entrepreneurship respectively. While monetary prices are the norm today, in earlier times prices were represented by the relative worth of goods used in trade. Indeed, there are still many goods and services which have no money prices attached to them because they are outside the market process.

Prices for individual commodities vary as market conditions of supply and demand fluctuate. If demand rises then, without a commensurate increase in supply, prices will also rise. Equally, a contraction in supply will, other things unchanged, result in higher prices. In the past, for instance, the price of foodstuffs fluctuated considerably according to the nature of the harvest—poor harvests in the 1840s, for example, pushing up the price of wheat and potatoes. Speculation about future market conditions can also result in price changes with anticipation of shortages pushing up prices. There may also be price rises if the currency is debased (e.g. the gold content of coins reduced) or confidence is lost in its acceptability.

A general rise in prices across all commodities is inflation and a fall in prices is deflation. The rate of inflation in Britain has fluctuated considerably although never to the same extent as experienced in countries such as Germany, which suffered hyperinflation in the late 1920s. Britain was affected by the severe inflation experienced across the Roman empire under Diocletian in the 3rd cent. but price data do not exist for England until the Middle Ages. The medieval period saw only modest overall general price rises although there were periods of rising prices—e.g. after the Black Death had swept Europe (1348/9)—interspersed with periods of falling prices. This trend continued through the next centuries but with bouts of rapid price rises. These periods of high inflation were often associated with wars and the pressures to finance them. Wars increase the demand for goods but reduce the available resources to produce them. Prices rose, for instance during the Revolutionary and Napoleonic wars (1793–1815). There have also been times, most notably in the Tudor period, when the currency has been debased, reducing its value and creating general price rises. Since the deflation of the Great Depression of the 1930s, however, Britain, in line with other industrial countries, has experienced consistently gradually rising prices. The price increases have generally been low, 2–4 per cent a year, but have included a period of quite rapid inflation—over 10 per cent p.a.—in the early 1980s.

The underlying causes of general price rises are disputed but, since high levels of inflation are seen as socially inequitable and can reduce confidence in a country's economy, understanding them is important for policy-making. Traditionally, classical economists supported the quantity theory of money as explaining price levels. The idea, in its simple form, was that any increase in money supply directly pushes up prices. To contain inflation, advocates of this school look to controlling the money supply. The more recent Keynesian theories focus on aggregate demand and market distortions—demand pull theories of inflation. They emphasize the role of price controls and the regulation of total expenditure.

The state has periodically attempted directly to regulate prices. There is a long history of price controls over monopoly suppliers. When markets are perfectly competitive, no individual actor has sufficient influence to affect prices—they are determined by Adam Smith's ‘invisible hand’. Where markets are imperfect, those with monopoly (or monopsony) power can withhold supply and increase prices beyond the competitive level. Action is then taken either to limit prices by reducing the monopoly power of the supplier or by acting directly on the prices permitted.

At various times in recent history there have also been efforts by government to control the general prices (e.g. price and incomes policies) especially during wartime and as a counter-inflation strategy. In some instances (e.g. for periods of rationing during the world wars) the price mechanism has been abandoned over parts of the economy. Macro-efforts at price control have, however, in general, proved to be singularly unsuccessful as long-term policies, producing political difficulties and tending to run against the natural tide of market forces.

Kenneth Button