What is adjusted is what is adjustable. A priori, it cannot be said which elements of the system are adjustable; this depends greatly on the nature of the social organization and on the social climate surrounding a particular sector of society. Both Walrasian and Marshallian forces may easily be at work.
A large harvest will create tensions in the wheat market, where the easiest thing to adjust is its price, since organized markets, after all, specialize in adjusting prices. A decline in the demand for steel and, consequently, a surplus in steel inventories may not result in a fall in prices at all. The easiest things for steel companies to adjust are their employment and their output, both of which will decline under these circumstances.
The grants system is clearly part of this process. Sometimes the grants structure is the adjustable part of society, and this is what changes in response to pressures. For example, rising or high unemployment may create overwhelming demand for increased welfare payments, unemployment insurance, defense contracts and so on. Agricultural poverty creates demand for state subsidies, just as any declining industry does.
The poverty of poor countries results in demand not so much for changing their occupations, as in the traditional response to an unsatisfactory terms-of-trade relationship, but for subsidies and concessions from rich countries, as in UNCTAD. Unfortunately, in this case, the supply does not appear to be very elastic.
Sometimes adjustment takes place through violence, as in guerrilla warfare, civil unrest, demonstrations and international war. Therefore, the processes of the exchange economy, as described in conventional exchange theory, must be seen as a very special case of a general adjustment process in which adjustments may occur not only in quantities produced and prices, but also in grants, violence, strikes, boycotts and other mechanisms.
The adjustments that take place do not necessarily reduce the tensions that produce them. If they do not, the system moves toward increasing tension and possibly collapse. There are strong selective forces at work that lead to the elimination of systems whose adjustments increase tension. Once this is perceived, both the exchange economy and the grants economy can be considered special cases of a much broader social phenomenon.
A very interesting question, deserving further research, is whether the grants economy, and public grants in particular, can be used effectively to solve the problem of inflation and underemployment. Before we can give a definitive answer to this question, we need to know more about the actual social dynamics of price formation and about the kinds of pressures that lead to decisions resulting in increases in money prices and wages.
Nevertheless, the idea is worth pursuing. Gardiner Means, for example, developed almost the only theory on this subject to appear in thirty years, in his book on the steel industry. He suggested that differential taxation, in the form of a surtax on those increases in income derived from increases in money prices and wages, would have a coercive effect on such increases and would not be administratively impossible, although it would introduce additional accounting and calculation costs.
This in itself would be a differential application of the grants economy, through the tax system, to penalize the kinds of behavior that produce inflation. I am not prepared to say at this point whether it is practicable or not, or even equitable. The general idea, however, deserves extensive investigation, if only because of the seriousness of the problem and the lack of satisfactory proposals for its solution, apart from detailed price and wage controls, which are administratively an extremely difficult problem and politically acceptable only under conditions of considerable tension.
For example, Means’s suggestion could be taken further by considering subsidies for depressed prices and wages in those cases where empirical study shows that there is a “demonstration effect”; that is, when an increase in the prices or wages of one sector sets the pattern for others.
Suppose, for the sake of argument, that any increase in money wages shown to be inflationary had to be financed by a tax on the final product. All these policies would have redistributive effects on income that may be considered undesirable. Nevertheless, it is worth thinking about the problem of how to organize income redistribution in such a way that it has a restraining effect on inflation.
So far, the absence of a formal theory of the grants economy has practically prevented this problem from even being posed. Once posed, however, the chances of solving it will certainly increase.
Thus, while it is true that we cannot offer a theory of the grants economy as a panacea for the defects of an exchange economy, it at least contributes to deepening the latter, which is necessary if we are to solve the problems of the real world, in which exchange is only one part of the broader picture.
