A Survey on the Importance of Prices

[Xerographica]

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.

[Solitary]

I don't think anyone knows how economics works. I still remember my economics teacher telling us to remember one thing in his class if we forget everything else. The government controls the economy, not prices, not wages, and not unions. If John Fordes Nash lost money with stocks then anyone else is just lucky or doing inside trading. At my work when the big crash came I was the only one that came out ahead with my stocks when I refused to listen to the experts and sell when they said we should. My older son was mad as hell at me for telling him not to sell and lost over a million---he's very glad he listen to me now.  :)  Solitary

[Colanth]

Capitalism isn't about efficient allocation of resources.  If you want efficient allocation of resources you need a dictatorship.  It's not about economics, it's about the fact that the majority of the people in a capitalist nation don't care about efficient allocation of resources, they care about allocation of resources to THEM, and they'll work against any plan that isn't aimed toward that end.

Economics doesn't work in a vacuum, but you keep treating it as if it did.

[billhilly]

Where is this utopian dictatorship with an efficient allocation of resources?

[Fidel_Castronaut]

[billhilly]

[ Image ]

If you want efficient allocation of resources you need a dictatorship.

Was that for me?

[SGOS]

Capitalism isn't about efficient allocation of resources.  If you want efficient allocation of resources you need a dictatorship.  It's not about economics, it's about the fact that the majority of the people in a capitalist nation don't care about efficient allocation of resources.

While working my way through college, I worked a couple of years at what was once the largest pine lumber mill in the world.  I pulled veneer off the green chain in the plywood division.  During those years, they continually ran the chain faster and faster, and as a point of pride, most all of the workers worked harder and harder to get all the stuff off the chain and sorted into the proper piles.  

But the faster it went, the more waste there was.  More and more useable veneer would end up going over the end and into the "hog" as it was called, where everything became wood chips burned as waste in things called teepee burners.

That was my first insight into part of what people call "economics" in corporate America (corporate anyplace, probably).  As you point out, efficiency is not the major objective.  It's about maximizing profit.  The faster the chain went, the more inefficient the process was, but at the same time, there was increased output, and hence, more profit for the owners.

This was 50 years ago, when the Western United States was a cornucopia of timber, most of which was on public lands.  The US government was selling the timber at a contrived price far below cost.  In effect, the lumber industry was buying raw materials at a price lower than the cost of producing it, with the government subsidizing the production of raw material through tax dollars.

The bottom line is that the timber industry had little incentive to be efficient, not until the end when the resource and the subsidies began to dry up, and our mill, along with most of the newer more efficient mills simply folded up and left the communities high and dry wallowing in seas of clear cuts and unemployment.  But the mill owners simply moved on with millions of dollars in their pockets looking for other investments.  The joke was rumored that they are now buying diamond mines in Africa.

The government controlled that economy, in this case, a glorious boom turned bust in resource extraction.  They do the same thing in the mining industry.  It's much the same with the recent boom/bust in housing.  These are examples of what you have described as a government controlled economy.

[Fidel_Castronaut]

[ Image ]

If you want efficient allocation of resources you need a dictatorship.

Was that for me?

My image? No it was to the OP...I always read your stuff billhilly ;)

[billhilly]

Well then, that was a total and complete misunderstanding on my part.  I mistook your 'didn't read' as something else entirely.  Makes much more sense now that I get it.  Imagine that ;)

[Colanth]

Where is this utopian dictatorship with an efficient allocation of resources?

In the minds of people who have a problem understanding reality.

[Bibliofagus]

Efficient allocation:  Each resource has a nearly infinite amount of uses.  Each use provides a different amount of value.  

What's this 'value' you speak of?

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.

Indeed. In poorly administered countries the option to ram your cheap car into an expensive one, and rob the hapless victim afterwards, is the best option in terms of ROI for the perpetrator.

Most people, thank [s:1x5ga153]goodness[/s:1x5ga153] law and order, derive more value from the first use.

Fify. Do you really believe people act out of 'goodness'? Do you ever watch the fucking news?

Resources are efficiently allocated when they are put to their most valuable uses.

Value for whom? Let's say I could take all your money in 10 seconds, without consequenses. That would be great value for me right? And it may well be that I will be spending it in a way that benefits the economy more that it would if you would be spending it.

I'm also curious about your views on clientilism. Greek style.

[billhilly]

Capitalism isn't about efficient allocation of resources.  If you want efficient allocation of resources you need a dictatorship.

Where is this utopian dictatorship with an efficient allocation of resources?

In the minds of people who have a problem understanding reality.

I'm happy to see you acknowledge that.

[Xerographica]

What's this 'value' you speak of?

You spend x amount of time on this forum.  The more time you spend on this forum, the less time you'll be able to spend on other things.  You don't randomly allocate your time.  You allocate your time according to the amount of benefit/enjoyment/utility/value you derive from each particular use of your time.  

Therefore, you maximize the amount of value you derive from your limited resources simply because you have the freedom to put your limited resources, in this case time, to their most valuable uses.  It's the same thing with money.  

Indeed. In poorly administered countries the option to ram your cheap car into an expensive one, and rob the hapless victim afterwards, is the best option in terms of ROI for the perpetrator.

Destroying value destroys options.  

Fify. Do you really believe people act out of 'goodness'? Do you ever watch the fucking news?

Right, because the news really highlights how much goodness there is in the world.  

Value for whom? Let's say I could take all your money in 10 seconds, without consequenses. That would be great value for me right? And it may well be that I will be spending it in a way that benefits the economy more that it would if you would be spending it.

It would be great immediate value.  Same thing if China was able to successfully invade the US and take all our resources.  Same thing if aliens attacked our planet and took all our resources.

But having resources isn't the source of prosperity and progress.  It's how they are used.  And coming up with different uses of society's limited resources is a function of different perspectives.  If you and I had the same exact perspective, then we wouldn't be able to see any different uses of society's limited resources.  But because we have different perspectives, we're going to be able to see different uses of society's limited resources.  

So progress/prosperity depends on trading rather than taking.  Unfortunately, we, as a society, haven't figured this out yet.  Because if we did grasp this concept, then we'd allow taxpayers to choose where their taxes go.  We'd allow them to decide for themselves which public uses of their tax dollars they value most.  And our prosperity/progress would greatly increase.

[Colanth]

What's this 'value' you speak of?

You spend x amount of time on this forum.  The more time you spend on this forum, the less time you'll be able to spend on other things.  You don't randomly allocate your time.  You allocate your time according to the amount of benefit/enjoyment/utility/value you derive from each particular use of your time.

So you can't have a general allocation of resources, since resources have different values for different people.  Each person allocates the resources as he values them.

Of course this means that there's no allocation of any resource to "the people", so anything that requires the government to allocate resources doesn't happen.

That means no roads, so nothing can get done.  (Try eating when there's no way to get food to the store you want to buy it from.)

It also means no military, so unless you force the entire world to play along, a little country with a few hundred soldiers could overrun the US.

But it would satisfy someone's infantile idea of an "efficient economy".

[Xerographica]

Of course this means that there's no allocation of any resource to "the people", so anything that requires the government to allocate resources doesn't happen.

If every organization was a non-profit...we could still have a congress and we could still have the IRS.  Congress would determine what percentage of your income you had to spend on collective goods...defense, roads, education, healthcare...and the IRS would be responsible for ensuring compliance.  

So if you were worried about the free-rider problem...then you'd be more than welcome to donate some of your money to congress and the IRS.  The amount of money they received would reflect the collective concern for chip clips.  

As I tried to explain to you before...the free-rider problem is the definitive, theoretical, justification for the public sector.  I don't think it's an unreasonable justification.  What I do think is unreasonable is the idea that government planners can somehow "divine" the preferences of millions of unique individuals.  But none of this is really controversial...

Nevertheless, the classic solution to the problem of underprovision of public goods has been government funding - through compulsory taxation - and government production of the good or service in question.  Although this may substantially alleviate the problem of numerous free-riders that refuse to pay for the benefits they receive, it should be noted that the policy process does not provide any very plausible method for determining what the optimal or best level of provision of a public good actually is.  When it is impossible to observe what individuals are willing to give up in order to get the public good, how can policymakers access how urgently they really want more or less of it, given the other possible uses of their money?  There is a whole economic literature dealing with the willingness-to-pay methods and contingent valuation techniques to try and divine such preference in the absence of a market price doing so, but even the most optimistic proponents of such devices tend to concede that public goods will still most likely be underprovided or overprovided under government stewardship.   - Patricia Kennett, Governance, globalization and public policy

The free-rider problem is a reasonable justification for forcing people to chip in to pay for collective goods.  Sure.  No problem.  But as this passage points out...if taxpayers can't shop for themselves...if they can't decide whether they value x or y more...then it's likely that the government will undersupply or oversupply public goods.  

Therefore, the solution is simply to allow taxpayers to choose where their taxes go.  This will reveal their true priorities.  Because voting really does not...

When you vote, the chance that you tip the outcome is near 0%, so you might as well just scream about your identity.  When you move, in contrast, the chance that you tip the outcome is near 100%, so you'd better consider cost and convenience. - Bryan Caplan, Expressive Voting, Emigration, and Alsace-Lorraine