Posted on 04/06/2014 7:10:29 AM PDT by SeekAndFind
Prices are storehouses of knowledge.
One person whose grammar is impeccable except on the rare occasions when it isn’t is Kevin Williamson. He had a great piece the other day on the mystery of prices. I loved his opening sentence: “Prices are a mystery, and why that is is a mystery.”
This reminded me of a great line from this wonderful video essay on Hayek’s “On the Use of Knowledge in Society” over at the Marginal Revolution University. It’s arguably Hayek’s most important contribution — which is saying a lot. It’s like saying Michael Jordan’s best slam dunk or Bill Cosby’s funniest joke or “Obama’s lamest joke.” Unfortunately Hayek’s native tongue is German, which means he’s not always pithy. (“Whenever the literary German dives into a sentence,” Mark Twain observed, “that is the last you are going to see of him till he emerges on the other side of his Atlantic with his verb in his mouth.”)
So here’s Hayek:
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
And here’s the useful summary of the idea from the folks at MRU: “A price is a signal wrapped in an incentive.”
Hail, Ants
Let’s say that Argentine ants in Brazil have had enough with their human overlords and go on the attack causing aluminum mines (I know, I know, bauxite mines) to shut down. The increased scarcity causes the price of aluminum to go up. But the new price also includes the expected costs to South American miners as they launch an all-out war against the satanic pests. But wait, the new price also includes the increased shipping costs from Australia, given the unseasonably windy summer down under, the expected outcomes of union negotiations in Canada, the price of various substitutes of aluminum (your next Macbook might be made with Naugahyde if the U.N. ever lifts the worldwide ban on Nauga-slaughter) and all of the taxes and tariffs that apply to them, the energy costs anywhere aluminum is manufactured, and the desire of a certain aluminum tycoon in Shanghai to exploit the shortage by raising prices to make enough money to finally finish his lifelong project of building the world’s largest recreation of the Boxer Rebellion with life-size Pez dispensers. And that’s just off the top of my head. And that’s just on the supply side. (On the demand side, there are another billion variables having to do with everything from the weather to the troubling evolution of a new breed of vampires that are allergic to aluminum instead of silver.) And that’s just for this minute; the variables change constantly, and so does the price.
In short, nobody can ever, ever, ever, ever, ever-to-the-32nd-power ever know all of the factors that go into the price of anything. And yet, we get a price. And the price is a vast storehouse of knowledge no one person could ever possess (re-read the Hayek quote above). This is why Hayek thought economic planning was so incandescently stoooooopid. The idea that one shmuck in his office in Washington or Moscow could set prices for, variously, wheat, iron, pork, cars, steel, movie tickets, fertilizer, Nauga meat, and a thousand other things, better than the market, not just for a moment, but for years in advance, is so amazingly hubristic and ridiculous it makes you want to go find Henry Wallace and slap him about the head and neck with a pork belly.
Contra Kevin
So in a sense, Kevin is wrong. Why prices are a mystery isn’t a mystery. The why of prices — or at least all the whys of prices — are simply unknowable. Sure, you might be able to know why person X wants $28.99 for his vintage Batman talking alarm clock while another person wants $80.99 for the same masterpiece, but you can’t know all the reasons why it originally sold for $9.99. Once you make your peace with that fact, the mystery ceases being mysterious.
What I think is fascinating — and something I’ve been noodling for a book idea that’s been bouncing around my head like something that bounces inside something else that is conducive to lots of bouncing — is that prices aren’t unique. We think they are a category unto themselves. A price isn’t like anything else, right? Well, wrong — maybe. If prices are simply the agglomeration of disparate and complex information boiled down to a number, can’t other things be agglomerations of disparate and complex information boiled down to something else? Lord knows I’ve written a lot about embedded knowledge and intangible capital in this space (I’m referring to Jimmy Lord, a really attentive G-File reader, by the way. He remembers everything I write). The whole point of “I, Pencil” (Now a major Internet movie!) is that the pencil itself is a huge storehouse of knowledge and information not possessed by any single person. That the price of the pencil puts a monetary value on all that doesn’t for a moment detract from the wonder of the pencil itself.
But here’s the thing: concepts, traditions, customs, and habits are also huge storehouses of knowledge. For instance, we don’t know all the reasons we do all of the things that fall under the rubric of “good manners.” We just do them because we should. Handshakes probably originated in the need to demonstrate that you weren’t holding a weapon. That rationale has vanished, but the handshake still has great value — but it has no price. There have certainly been times in my life when failure to shake someone’s hand could have cost me dearly in financial terms (remember the Seinfeld where Elaine’s boss refuses to shake hands with the Japanese investors because he sneezed in his hand, thus losing Pendant Publishing? Well, YouTube doesn’t. Though this is actually an ancient plot device).
Remember the scene in Good Will Hunting where Minnie Driver asks Matt Damon out for coffee? Well YouTube doesn’t remember that either. (But it does have this poorly acted re-enactment of it for some reason). Damon says something like “Sure, or we could just go somewhere and eat a bunch of caramels” because “when you think about it, it’s just as arbitrary as drinking coffee.” It’s fitting that this scene comes on the heels of Damon singing the praises of Howard Zinn. The two statements are from the same cloth of smug poseur left-wing D-baggery. The brief against Howard Zinn is old and obvious. But the caramel line is one of those things that sounds smart but is in fact a perfect example of the arrogance of the Now, that characterizes so much left-wing thinking. Just because Will Hunting Math Genius can’t glean the reasons why the global and ancient custom of coffee-drinking is less arbitrary than the non-existent custom of caramel-eating doesn’t mean there are none. (“You’re not going to talk about Chesterton’s fence again, are you?” — The Couch).
Anyway, the point I’m getting at is that there’s nothing — nothing — that we say, do, own, make, or believe that isn’t brimming with all of the sorts of information that go into a price. The fact that we can’t put a price on some of them, doesn’t mean that they have less information in them. In fact, it probably means that they have more information in them. And that makes not just prices mysterious, but life itself. And that should fill us with awe and humility.
Just like a really amazing slice of cantaloupe.
Prices are a mystery, and why that is is a mystery. People often talk about prices as though they were set by conspiracy in some corporate boardroom, or as though the real-world marketplace worked like a cost-plus government contract, with firms totaling up the expense of all their inputs and then adding some percentage to it. Prices are in an important sense arbitrary, which is why, paradoxical though it may sound, they are meaningful.
Take the case of a round-trip flight between New York City’s horrible LaGuardia Airport and Miami’s horrible Miami airport. From the airline’s point of view, the cost of providing round-trip service from New York to Miami — fuel, flight hours, crew wages, etc. — is precisely the same as the cost of providing round-trip service from Miami to New York. In fact, each leg of the flight will in all likelihood contain both MIA–LGA and LGA–MIA passengers, some on their outbound journeys and some on their return flights.
But, if it happens to be February, it will generally be the case that the LGA–MIA round-trip flight is significantly more expensive than the MIA–LGA round-trip flight, because New York City is a cold, miserable, wet, depressing place, where your stay will be nasty and brutish even if short, whereas Miami will be only wet, assuming you don’t go too far the wrong way on North River Drive. There is more demand for LGA–MIA than MIA–LGA, thus the higher prices. Nothing at work but supply and demand mediated by prices. Everybody seems to get that, until it comes to a commodity that they have a stake in.
The United States passed its first sugar tariff in 1789, before Rhode Island got around to ratifying the Constitution. We’ve had some major public-policy changes over the years — abolishing slavery, women’s suffrage, direct election of senators, gay marriage here and there — but the sugar tariff stays and stays, the economic version of drug-resistant syphilis. It is a matter of pure political power: The sugar producers believe that the price that Americans are willing to pay for sugar is not the right price — which is to say, it’s a lower price than the one they would prefer — and so we pay more thanks to the cowardice of Congress and the predictable victory of the producers’ concentrated benefits over the consumers’ dispersed costs. As Willi Schlamm said, the problem with capitalism is capitalists, a motto that should be engraved in marble above the entrance to the U.S. Department of Agriculture.
Similarly, the United States passed its first minimum-wage law in 1933. It was thrown out as unconstitutional, and then reestablished in 1938, at which point it became constitutional via the magic of the infinitely flexible Commerce Clause. (There’s a reason Supreme Court justices and fairy-tale wizards wear the same outfits, with the nine-member national super-legislature missing only those awesome conical hats, which we, a freedom-loving people, should insist they adopt immediately.) Why? Because, as with the case of the sugar producers, somebody with sufficient political power decided that the price wasn’t right — and a wage is nothing but a price, the price of labor. The same people who understand why LGA–MIA costs more in the winter than MIA–LGA cannot understand — or refuse to accept — that wages work in precisely the same way. I hear fairly regularly from public-school teachers who insist that they should be paid more because they have a master’s degree, from MFA holders who insist that they should be paid more than Starbucks is paying them, and from people who insist that people working in fast-food jobs should be paid $10.10 an hour, or whatever it is that the Democrats are proposing this week. But there is no should when it comes to prices. Nobody cares what it costs Delta to get them to Miami in February; they care that it’s warm there and that other airlines might be offering a better deal. They could, in theory, even fly U.S. Airways if they were cheap enough and sufficiently masochistic, and flexible about arriving eight hours after they’re supposed to.
Economics is hard, and it gets harder the deeper you go into it. But there are some economic truths that are both pretty easy to understand and necessary to understand. Supply and demand don’t always move in smooth, predictable curves, but the relationship between them is not optional, because consumers and producers are real people, not imaginary constructs in somebody’s policy model. Interfere with the supply of sugar and prices will go up. Raise the price of labor and demand for it will go down. That is reality, and reality is not optional.
The minimum wage is almost always presented by the Left as a moral question rather than an economic one, mainly because the economics are pretty plainly against the Left on the question, while it’s always easy to cook up a plausible moral rationale for whatever economic interference seems good at the moment, which is why our economic policy is such a swamp of contradictions and special-interest rent-seeking. (“Morass” is not a contraction of the phrase “moralizing asses,” but it should be.) I’m sure that those sugar barons and ethanol parasites could come up with a compelling moral case for the government’s shunting great roaring streams of money into their bank accounts.
Which is not to say that there are no moral questions attached to, e.g., the status of the working poor, or the non-working poor, for that matter. But the moral questions are separate from the economic questions. If you want to make the lives of the poor better in material terms, there are many ways to do that: You can write them monthly checks, give them lump-sum payments, institute a negative income tax (my own preference) in order to encourage and reward work and move them closer to self-sufficiency. Or you can try to use policy to distort markets to produce the results that you like, which is what we most often do. The problem with that is that there are always tradeoffs in economic matters, and those tradeoffs do not always work in predictable ways.
On the minimum-wage question, we get some truly dumb analysis — e.g., the claims by Shut the Chamber, an organization that seeks to forcibly disband the U.S. Chamber of Commerce (Nice Bill of Rights you’ve got there!) and maintains that if we doubled McDonald’s workers’ wages, the price of a Big Mac would go up only 68 cents. This is pure illiteracy. McDonald’s would have many ways to respond to higher minimum wages, but simply raising prices is not one of them — because McDonald’s does not set prices. Consumers set prices. If McDonald’s could simply raise Big Mac prices by 68 cents with no consequence, they’d already have done it. McDonald’s has basically no power over consumers, but it does have some power over its suppliers, to whom it would no doubt seek to pass on additional expenses, and over its own organizational model, which it would no doubt be tempted to make less labor-intensive if wages were artificially inflated.
Organizations such as Shut the Chamber and the Democratic caucus in Congress believe that they can make low-income workers better off by making their employers worse off, and they lack the wit to understand that producers and consumers both engage in cost-shifting. They are bright enough to understand that if Starbucks were to suddenly develop a deep new appreciation for the ineffable value of the mighty MFA and raise its prices drastically, then consumers could go to Dunkin’ Donuts instead — or make their own coffee at home, or get their morning caffeine jolt from two cans of Diet Coke like a civilized person does — but they are not smart enough to realize that companies price-shop, too, as if the guys who run money at Fortune 500 companies were not as economically sophisticated as latte-loving high-school students. That is how policies putatively designed to help the poor end up making them worse off. A $10.10 minimum wage does not do you any good if you are unemployed. It just makes the labor-intensive services you yourself consume more expensive.
Complaining about market prices is like complaining about the weather. The sun shines in Florida, and it’s going to keep shining even if Charles Schumer thinks that’s unfair.
— Kevin D. Williamson is roving correspondent for National Review.
Actually, economics is easy but it gets harder the deeper you go into it.
Therefore keep it simple and it stays easy. Clutter it up with concepts that sound intelligent and it becomes unintelligible.
Furthermore, the costs of a product are irrelevant to the buyer. All that matters to the buyer is what he is willing to pay. And that is the price or value or worth of a product.
“A $10.10 minimum wage does not do you any good if you are unemployed. It just makes the labor-intensive services you yourself consume more expensive.”
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All very true but what I want to know is what kook came up with $10.10 rather than just $10.00 or $10.50 or $11.00. Something about that lonely dime hanging on the end irritates me to no end. As a young person I found it irritaing to see gasoline prices such as $.23 9/10. Nine tenths of one cent on the end of a price always seemed ridiculous to me and now that a typical price in my area is something like $3.38 9/10 it seems vastly more ridiculous. When are we going to drop this insanity? If inflation continues, which is like saying if the Sun continues to light the day, at some point we will see prices like $110.36 9/10. How absurd can things get?
You can apply this sort of approach to almost any facet of life.
I had this discussion many times with the students in my economics classes. Price is what the market is willing and able to pay for a good or service. Consider you find a da Vinci painting in your attic. You could set the price anywhere you wanted because of its rarity, but if you were to attempt to sell it at a price of say $100 billion not even the very richest collector would be able to afford it. However, at auction you would likely be able to sell it for millions of dollars as buyers who both wanted the painting and were able to pay such prices would bid for it. Note that at auction there is a final price beyond which no one is willing to pay.
What store would willingly charge more for its products than it reasonably expected to get? Just because YOU think that it is too expensive, doesn't mean the rest of the market does. When you try to sell your house, you try to get the most amount of money possible for it. Why would you not expect a store to do the same thing?
Bookmark
A theoretician had to go to the bathroom really bad.
First he went half the distance. Then he went half the remaining distance. Then he went half the remaining distance again, over and over. Then he died.
Right.
Lets assume that a Liberal has bought a new house, and is preparing to move in. He can choose between different movers to move his stuff for him. He narrows his options down to two different moving companies, and for the sake of discussion, lets say both will do identical work in the way of quality, but one is priced significantly lower due to less overhead/more efficient business model. Will he hire the more expensive company for the same quality work, doing the “morally right” thing(according to his supposed values) by paying more than he has to, or will he pay the least amount he can for the same amount/quality work?
We can be sure he’ll pay the least amount he can to get the job done like anyone would, but lets say he indeed chooses to unnecessarily pay more. If such decisions were made by everyone throughout the economy, it would discourage efficiency and innovation; while incentivizing laziness which all inevitably lead to economic ‘Moral Hazard’. Liberals only practice the concept of ‘economic morality’ with prices and wages when it’s other people’s money that’s being spent.
You wrote: “A theoretician had to go to the bathroom really bad. First he went half the distance. Then he went half the remaining distance. Then he went half the remaining distance again, over and over. Then he died.”
Then he must have been following a very crooked route using the most accurate measurement of distance available. :)
“The smaller the increment of measurement, the longer the measured length becomes. If one were to measure a crooked stretch with a yardstick, one would get a shorter result than if the same stretch were measured with a one-foot (30cm) ruler. The measured length increases without limit as the measurement scale decreases towards zero” => http://tinyurl.com/o6j3vfq
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