The Theory of Money and Credit - Ludwig von Mises [57]
In this sense, reference to an inertia of prices is unobjectionable, although the errors of earlier economists should warn us of the real danger that the use of terms borrowed from mechanics may lead to a "mechanical" system, that is, to one that abstracts erroneously from the subjective valuations of individuals. But any suggestion of a causal relationship between past and present prices must be decisively rejected.
It is not disputed that there are institutional forces in operation which oppose changes in prices that would be necessitated by changes in valuations, and which are responsible when changes in prices that would have been caused by changes in supply and demand are postponed and when small or transitory changes in the relations between supply and demand lead to no corresponding change in prices at all. It is quite permissible to speak of an inertia of prices in this sense. Even the statement that the closing price forms the starting point for the transactions of the next market[7] may be accepted if it is understood in the sense suggested above. If the general conditions that determined yesterday's price have altered but little during the night, today's price should be but little different from that of yesterday, and in practice it does not seem incorrect to make yesterday's the starting point. Nevertheless, there is no causal connection between past and present prices as far as the relative exchange ratios of economic goods (not including money) are concerned. The fact that the price of beer was high yesterday cannot be of the smallest significance as far as today's price is concerned—we need only think of the effect upon the prices of alcoholic drinks that would follow a general triumph of the Prohibition movement. Anybody who devotes attention to market activities is daily aware of alterations in the exchange ratios of goods, and it is quite impossible for anybody who is well acquainted with economic phenomena to accept a theory which seeks to explain price changes by a supposed constancy of prices.
It may incidentally be remarked that to trace the determination of prices back to their supposed inertia, as even Zwiedineck in his pleadings for this assumption is obliged to admit, is to resign at the outset any hope of explaining the ultimate causes of prices and to be content with explanations from secondary causes. [8] It must unreservedly be admitted that an explanation of the earliest forms of exchange transaction that can be shown to have existed—a task to the solution of which the economic historian has so far contributed but little would show that the forces that counteract sudden changes in prices were once stronger than they are now. But it must positively be denied that there is any sort of connection between those early prices and those of the present day; that is, if there really is anybody who believes it possible to maintain the assertion that the exchange ratios of economic goods (not the money prices) that prevail today on the German stock exchanges are in any sort of causal connection with those that were valid in the days of Hermann or Barbarossa. If all the exchange ratios of the past were erased from human memory, the process of market-price determination might certainly become more difficult, because everybody would have to construct a new scale of valuations for himself; but it would not become impossible. In fact, people the whole world over are engaged daily and hourly in the operation from which all prices result: the decision as to the relative significance enjoyed by specific quantities of goods as conditions for the satisfaction of wants.
It is so far as the money prices of goods are determined by monetary factors, that a historically continuous component is included in them, without