Price Behaviour and Business Behaviour

The present essay is the second in a series of three papers which examine alternative approaches to inflation. Here we identify some of the principal criticisms expressed against neoclassical views on price behaviour and business behaviour. These challenges grew from the early discovery of ‘administered prices’ by Means and the subsequent findings by Hall and Hitch regarding ‘full cost’ pricing. The notions that industrial prices were relatively inflexible and that businessmen set those prices by imprecise rules of thumb stood in sharp contrast to the pristine simplicity of neoclassical models. Yet these attempts for greater realism seemed to undermine the prospects of constructing a coherent theory for prices.