A Survey on the Importance of Prices

Xerographica · Aug 18, 2013

Just how important are prices anyways?

A few definitions/descriptions...

Efficient allocation: Each resource has a nearly infinite amount of uses. Each use provides a different amount of value. For example, you can use your car to safely go from point A to point B...or can use your car to ram other cars. Most people, thank goodness, derive more value from the first use. Resources are efficiently allocated when they are put to their most valuable uses.

Market economy (no prices): Every organization would be a non-profit, but you could choose which non-profits you give your money to.

Consumer sovereignty: Individuals decide for themselves which uses of their limited resources they value most. Consumers are sovereign in market economies but not in planned economies.

Opportunity cost: One use of a limited resource requires the sacrifice of alternative uses. For example, you could give a dollar to a homeless shelter or to an animal shelter. You are neither homeless...nor an animal...therefore you're not going to be served by either organization. You do, however, value both of their services. But because you can't spend the same dollar twice, you'll have to sacrifice one of the organizations. Therefore, whichever organization you give your dollar to will reveal which use of your dollar you value most...at that specific point in time.

My answer to the survey...A-0, B-7.5, C-8. From my perspective, there's a huge disparity in the allocative efficiency between planned economies and market economies...and little, if any, of that has to do with prices. It simply has to do with the fact that in a planned economy people's preferences are either assumed, or disregarded. As a result, how society's limited resources are used (the supply) does not reflect the actual demand for goods/services. When individuals do not have the freedom to decide which uses of their limited resources they value most...it's a given that resources will not be put to their most valuable uses.

However, I believe that most/all free-market economists give more weight to the importance of prices than I do. So in theory, the greater the distance between B and C on the allocative efficiency scale, the more weight a person gives to the importance of prices. So their answer might look something like this...A-0, B-3, C-8.

For example, let's consider some passages from the free-market economist Ludwig von Mises...

The entrepreneur in a capitalist society depends upon the market and upon the consumers. He has to obey the orders which the consumers transmit to him by their buying or failure to buy, and the mandate with which they have charged him can be revoked at any hour. Every entrepreneur and every owner of means of production must daily justify his social function through subservience to the wants of the consumers.

Within the market society each serves all his fellow citizens and each is served by them. It is a system of mutual exchange of services and commodities, a mutual giving and receiving. In that endless rotating mechanism the entrepreneurs and capitalists are the servants of the consumers. The consumers are the masters, to whose whims the entrepreneurs and the capitalists must adjust their investments and methods of production. The market chooses the entrepreneurs and the capitalists, and removes them as soon as they prove failures. The market is a democracy in which every penny gives a right to vote and where voting is repeated every day.

To be in business, to depend directly on the approval or disapproval of one’s actions by the consumers, to woo the patronage of the buyers, and to earn profit if one succeeds in satisfying them better than one’s competitors do is, from the point of view of officialdom’s ideology, selfish and shameful. Only those on the government’s payroll are rated as unselfish and noble.

What vitiates entirely the socialists economic critique of capitalism is their failure to grasp the sovereignty of the consumers in the market economy.

Clearly Mises believed that consumer sovereignty is essential. But did he believe that it was more important than prices?

Each individual, in buying or not buying and in selling or not selling, contributes his share to the formation of the market prices. But the larger the market is, the smaller is the weight of each individuals contribution. Thus the structure of market prices appears to the individual as a datum to which he must adjust his own conduct.

Economic calculation can only take place by means of money prices established in the market for production goods in a society resting on private property in the means of production.

Where there is no market, there is no price system, and where there is no price system there can be no economic calculation.

Economic calculation makes it possible for business to adjust production to the demands of the consumers.

For Mises, economic calculation depends on prices...so without prices...it would be impossible for organizations to effectively meet the demands of consumers. So it doesn't seem unreasonable to argue that from Mises' perspective, consumer sovereignty would be of little use in a system without prices. However, as far as I know, he never specifically discussed a market system without prices.

From my perspective, if individuals are free to choose the most valuable uses of their limited resources...then I don't quite grasp how it would be possible for resources to be inefficiently allocated.

Clearly it matches my preferences for there to be more discussion on the topic! I look forward to seeing your survey answers. Please note that filling out the survey won't cost you a dime...but there will be an opportunity cost. The question is whether filling out the survey will provide you with more value than the alternative uses of your limited time. Only you know the answer to this question...which is why market economies create value while planned economies destroy value.

Fisher · Aug 18, 2013

From my perspective, if individuals are free to choose the most valuable uses of their limited resources...then I don't quite grasp how it would be possible for resources to be inefficiently allocated.

https://www.google.com/search?q=hoa...I8epyAGv1oEw&ved=0CAkQ_AUoAQ&biw=1366&bih=662

Xerographica · Aug 27, 2013

Fisher said:
https://www.google.com/search?q=hoa...I8epyAGv1oEw&ved=0CAkQ_AUoAQ&biw=1366&bih=662

Hoarders? If you don't like what a hoarder is doing with their resources...then guess what? You won't give her your own resources. This fail safe device is why markets are infinitely better than planned economies at limiting the amount of resources that a person can waste/destroy.

So likewise of the public consumption; consumption for the mere purpose of consumption, systematic profusion, the creation of an office, for the sole purpose of giving a salary, the destruction of an article, for the mere pleasure of paying for it, are acts of extravagance either in a government or an individual, in a small state or a large one, a republic or a monarchy. Nay, there is more criminality in public, than in private extravagance and profusion; inasmuch as the individual squanders only what belongs to him; but the government has nothing of its own to squander, being, in fact, a mere trustee of the public treasure. - J.B. Say, A Treatise on Political Economy

Unlike the government, a private individual can only squander what belongs to him. For example, the only way that I can squander your money is if you give it to me. If you don't give me your money then I can't squander it. If you give me your money and I squander it then you can simply take your money elsewhere.

JP Hochbaum · Aug 27, 2013

Prices do give us some information. On the most basic level it helps to determine basic supply and demand. But in real life it isn't as easy as that. There is speculation that drives prices up or down based on future trading expectations (sometimes those expectations are realized).

There is also novelty and emotional attachments (ie collectibles) that go into prices. There are fads and there are also scares. There are also monopolistic effects on prices when a certain entity controls most of a product they can set the price assuming there is demand for it.

Fisher · Aug 27, 2013

JP Hochbaum said:
Prices do give us some information. On the most basic level it helps to determine basic supply and demand. But in real life it isn't as easy as that. There is speculation that drives prices up or down based on future trading expectations (sometimes those expectations are realized).

There is also novelty and emotional attachments (ie collectibles) that go into prices. There are fads and there are also scares. There are also monopolistic effects on prices when a certain entity controls most of a product they can set the price assuming there is demand for it.

That is the whole purpose of the shopping cards that give you discounts--it gives the retailers a vast amount of information of purchasing habits, both individually and the aggregate, so that they can better triangulate on the most profitable schemes.

Xerographica · Aug 27, 2013

JP Hochbaum said:
Prices do give us some information. On the most basic level it helps to determine basic supply and demand. But in real life it isn't as easy as that. There is speculation that drives prices up or down based on future trading expectations (sometimes those expectations are realized).

There is also novelty and emotional attachments (ie collectibles) that go into prices. There are fads and there are also scares. There are also monopolistic effects on prices when a certain entity controls most of a product they can set the price assuming there is demand for it.

If you truly understand the importance/significance of prices then why not share your answer to the survey?

JP Hochbaum · Aug 27, 2013

Xerographica said:
If you truly understand the importance/significance of prices then why not share your answer to the survey?

5, 5, 5.

If the market was as good as you claim then the Austrians would have no need for a business cycle theory that corrects itself for trillions of misallocated transactions.

JP Hochbaum · Aug 28, 2013

There is a reason why the "free market" is rather cold and inaccurate. Let's take for example the price of motherhood. As things stand now, the most important job in the world, motherhood, raising children, and the numerous skills and job types it entails, is completely unpaid in any monetary way, and is in fact monetarily punished. For if a woman decides to have children and stay at home, they not only lose potential income (close to a million for an average lifetime), but they are considered to be treated like rusty machines if they reenter the workforce.

Xerographica · Aug 28, 2013

JP Hochbaum said:
5, 5, 5.

So planned/command economies can allocate resources as efficiently as markets can?

JP Hochbaum said:
If the market was as good as you claim then the Austrians would have no need for a business cycle theory that corrects itself for trillions of misallocated transactions.

The government gives money away...businesses spread themselves too thin...with inevitable and negative consequences. It makes me sad that you think that this problem is caused by markets.

JP Hochbaum · Aug 28, 2013

Xerographica said:
So planned/command economies can allocate resources as efficiently as markets can?

The government gives money away...businesses spread themselves too thin...with inevitable and negative consequences. It makes me sad that you think that this problem is caused by markets.

Yes it certainly is caused by markets. Look at the late 19th century, no central bank (national banking system and fractional reserve lending) and a government deficit that was around 2-3% of GDP. At the closest every we have been to an Austrian utopia that era had wild swings directly because of market conditions.

The Depression of 1893 | Economic History Services

Xerographica · Sep 11, 2013

JP Hochbaum said:
Yes it certainly is caused by markets. Look at the late 19th century, no central bank (national banking system and fractional reserve lending) and a government deficit that was around 2-3% of GDP. At the closest every we have been to an Austrian utopia that era had wild swings directly because of market conditions.

The Depression of 1893 | Economic History Services

Our current system is based on the assumption that congresspeople are omniscient. (True/False)

JP Hochbaum · Sep 11, 2013

Xerographica said:
Our current system is based on the assumption that congresspeople are omniscient. (True/False)

False

Xerographica · Sep 11, 2013

JP Hochbaum said:
False

Therefore, congresspeople don't know how much you value public education. (True/False)

JP Hochbaum · Sep 11, 2013

Xerographica said:
Therefore, congresspeople don't know how much you value public education. (True/False)

True.

FederalRepublic · Sep 12, 2013

Xerographica said:
Just how important are prices anyways?

A few definitions/descriptions...

Efficient allocation: Each resource has a nearly infinite amount of uses. Each use provides a different amount of value. For example, you can use your car to safely go from point A to point B...or can use your car to ram other cars. Most people, thank goodness, derive more value from the first use. Resources are efficiently allocated when they are put to their most valuable uses.

Market economy (no prices): Every organization would be a non-profit, but you could choose which non-profits you give your money to.

Consumer sovereignty: Individuals decide for themselves which uses of their limited resources they value most. Consumers are sovereign in market economies but not in planned economies.

Opportunity cost: One use of a limited resource requires the sacrifice of alternative uses. For example, you could give a dollar to a homeless shelter or to an animal shelter. You are neither homeless...nor an animal...therefore you're not going to be served by either organization. You do, however, value both of their services. But because you can't spend the same dollar twice, you'll have to sacrifice one of the organizations. Therefore, whichever organization you give your dollar to will reveal which use of your dollar you value most...at that specific point in time.

My answer to the survey...A-0, B-7.5, C-8. From my perspective, there's a huge disparity in the allocative efficiency between planned economies and market economies...and little, if any, of that has to do with prices. It simply has to do with the fact that in a planned economy people's preferences are either assumed, or disregarded. As a result, how society's limited resources are used (the supply) does not reflect the actual demand for goods/services. When individuals do not have the freedom to decide which uses of their limited resources they value most...it's a given that resources will not be put to their most valuable uses.

However, I believe that most/all free-market economists give more weight to the importance of prices than I do. So in theory, the greater the distance between B and C on the allocative efficiency scale, the more weight a person gives to the importance of prices. So their answer might look something like this...A-0, B-3, C-8.

For example, let's consider some passages from the free-market economist Ludwig von Mises...

Clearly Mises believed that consumer sovereignty is essential. But did he believe that it was more important than prices?

For Mises, economic calculation depends on prices...so without prices...it would be impossible for organizations to effectively meet the demands of consumers. So it doesn't seem unreasonable to argue that from Mises' perspective, consumer sovereignty would be of little use in a system without prices. However, as far as I know, he never specifically discussed a market system without prices.

From my perspective, if individuals are free to choose the most valuable uses of their limited resources...then I don't quite grasp how it would be possible for resources to be inefficiently allocated.

Clearly it matches my preferences for there to be more discussion on the topic! I look forward to seeing your survey answers. Please note that filling out the survey won't cost you a dime...but there will be an opportunity cost. The question is whether filling out the survey will provide you with more value than the alternative uses of your limited time. Only you know the answer to this question...which is why market economies create value while planned economies destroy value.

People don't always pay attention to prices, and in some cases, the price is so far removed from the receipt of good/services, people don't really have much idea how much it costs them. Both situations lead to a vast amount of waste and fraud, but there's only one that we can realistically do anything about.

A Survey on the Importance of Prices

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