I had a conversation with an individual the other day regarding the price mechanism. His argument, essentially, was that since he was unhappy with the price for the good/service he was attempting to purchase, there must be some kind of market failure and therefore the government needed to step in and impose a price ceiling. With respect to this individual, nothing could be farther from the truth.
Prices are signals. They are no different from a traffic light or Yield sign. If a traffic light turns red as you are hurrying toward some destination, would you claim there was some sort of traffic light malfunction? Of course not.
It is important to remember all resources are scarce, no matter how vital they are to life: food, water, medical care, electricity, labor, plastics, oil, trees, and even time itself, are all limited in number. Prices adjust to reflect this: when the price of a certain good/service is relatively low, it means there is a relative abundance of the good/service. When prices are high, there is a relative shortage.
When prices rise, the consumers of that good/service aren’t happy. Assuming all else equal, they can now afford less of the good/service. But that doesn’t mean the prices are wrong or there is something wrong with the system. It simply means the good/service is now more scarce than before. If governments impose price controls, it can encourage over-consumption of the good/service, making the shortage even worse.
Prices are signals: ignore or manipulate them at your own peril.
A Force for Good 
Jon, hopefully you’re not discouraged by the dearth of comments. I think many people, myself included, don’t comment on things with which they totally agree. That doesn’t mean your comments aren’t being read.
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Not at all. I can actually see how many unique visitors I get, what posts are read, what links are clicked, etc.
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You have a future at the NSA.
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Nah. I have a friend who works there and he says it’s quite boring. All they do is listen to whiny housewives bitch to their whiny housewife friends 😛
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Are resources scarce? Or, are they scarce in the sense of readily available for consumption for purposes intended by the consumer? I am assuming that resources have not finite in the sense that once used, they are no gone, forever. Having read Don Boudreaux introducing Julian Simon’s theory that innovation and recycling by economizing, I assume that there is a infinite amount of resources to consume. Am I incorrect. Resources are scarce in the sense of supplying enough for everyone at one given time. Remember, I am not trained in economics as you are. Go easy, chief.
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I would say your second question is correct. They are scarce in the sense of readily available for consumption. Of course, if I consume a gallon of gasoline, that particular gallon is lost forever. There isn’t literally an unlimited amount of oil/coal/natural gas available within the Earth itself. However (and you are correct to invoke Julian Simon), there is a RELATIVE unlimited supply of hydrocarbons when you take into account the price mechanism and supply responses. Extremely high nominal prices for gas 5 years ago was a price signal that production of the amounts of gasoline that yielded low nominal prices was no longer feasible under current market conditions (scarcity). A supply response was the discovery of shale oil and gas which brought down nominal prices. At least, I think that’s the case.
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Dan, The word, “scarce,” is nebulous. In general, natural resources are not “scarce” in the sense that there is very little of a particular resource left to be had. [It can happen, right after the meteor hit, dinosaur hambones became scarcer and scarcer until there were none.] As you, Julian Simon and many others point out [I particularly like room half filled with shelled peanut analogy – which I believe is Russ Robert’s], that sense of “scarcity” is rarely in play in economic matters.
From an economics perspective, something is scarce if there is not enough of it freely available to everyone who wants it, e.g., air. If a thing is not freely available because it costs something to make the thing available, people will have to use some of their wealth to obtain it. If people have less money than is necessary to purchase everything they want, then everything they want to buy is “scarce” for economic purposes.
To illustrate the difference, assume there is enough oil in the ground to supply human needs for 1000 years (i.e., not physically scarce), but the cost of producing the oil is $1000 per barrel. From an economic standpoint, oil would be considered to be exceedingly scarce. If, however, that same oil (after refinement) could be bought at the gas station for $0.50 per gallon, oil would, from an economic perspective, not considered to be very scarce at all.
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One of the most important prices in the economy is the price of credit, the interest rate. Sadly, many who consider themselves to be market-oriented or free-market economists believe that this price should be manipulated by a central banking authority. Sad stuff.
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Agreed. I’d rather see a free-floating interest rate system
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Where does that get you if the government controls the money supply? Or do they not?
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In theory, the government could manipulate the interest rate though money supply operations (given the IS-LM curve), but such a move would be extremely expensive in terms of inflation. Ideally, I’d like government out of money (although I will say I have no problem with a central bank acting as a “lender of last resort”)
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“Where does that get you if the government controls the money supply? Or do they not?”
they won’t for much longer.
governments have been truly lousy stewards of fiat currencies. the dollar has lost, what, 95% of it’s value since 1970?
real alternatives are beginning to emerge and they are far better deigned than existing currency. the blockchain will become an integral part of coding languages and crypto currency will be a full fungible, predictable, private, and better featured medium of exchange.
it will also be safer.
the mechanisms it took 200 years to emerge in government backed currency will evolve in 15.
i know this sounds really far fetched, but as someone who is watching the tech develop from a front row seat and has a lot of experience with this sort of thing, this looks awfully real to me.
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Jon, I wasn’t aware of this blog until CafeHayek.org mentioned it today. Congrats on doing this. I hope i goes well.
The idea of this post is a good one. A better metaphor might be asking for legislation to change the temperature if one is not happy with the temperature at any particular time. Stop lights (which are centrally planned and controlled) are unlike prices which are a reflection of actual, natural phenomena.
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Even more than traffic signals, prices are like thermometer readings.
Say a child registers 103°. That’s a signal for antipyretics or even an ice bath.
Price controls and “anti-gouging” acts are like renumbering the thermometer to 98.6°, And just as damaging.
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Good post though I don’t like the traffic signal analogy. It’s not an “emerging order” type signal which is what we’re looking for here. Though as I think about it I suppose it could be if it has traffic sensors and therefore responds to the demands of traffic vs. being arbitrarily programmed by people or allowing direct intervention by a “traffic controller”.
So it’s a good analogy but needs to have that qualifier or else it opens it up to those who point out that it allows for a central planner to “fix” things when they go “awry”.
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