Value & Capital, Note to Chapter IX -- THE FORMATION OF PRICES

In this section, the first of two sections comprising the end note for Chapter IX, the author examines Alfred Marshall's argument that (in Hicks's words), "the process of fixing prices by trial and error, necessary when market conditions are changing, need not have any appreciable effect upon the prices ultimately fixed."  The essential step in the argument is the assertion that "a change in price in the midst of trading has the same sort of effect as a redistribution of wealth."  Such a change is illustrated with an example in which an initial "false" price (Hicks's term of convenience for a price other than the equilibrium) is agreed upon for a given commodity:  the false price is chosen to be 10 dollars per pound, whereas the equilibrium price is 6 dollars per pound.  Suppose a person buys 3 pounds at the false price, but the market price soon drops to equilibrium.  This buyer's position is exactly the same as if the price had been 6 dollars per pound all along, but the buyer had been forced to cough up an extra 12 dollars to the seller.  The buyer's demand and seller's supply will be exactly the same in the two scenarios.   The effects of this sort of transfer are income effects, and as noted here, Hicks has repeatedly shown that "income effects can be very frequently neglected."  In Marshall's example the amount spent by the buyer on the commodity in question is assumed to be a small fraction of his resources; thus a price change will not have a large effect on the total value of these resources.  Hicks quotes Marshall as saying that this assumption "is justifiable with respect to most of the market dealings with which we are practically concerned.  When a person buys anything for his own consumption he generally spends on it a small part only of his total resources."  The buyer could be made better or worse off by the initial trading at the false price -- but only slightly in the big scheme of things -- so there will not be a significant effect on his demand for the commodity.  As a result, "the market must finish up very close to the equilibrium price."