Brian, thanks for a good article. May i make a couple of points?
For me the information value is much higher when you get into the meat of the subject with excellent examples to illustrate. The earlier explanatory section would benefit from some editing, but this depends on your readership.
There is a gap however: where is the section on government subsidies to influence price signals which you mention at the end? Did i miss something? This makes the essay seem to me unbalanced and could be seen as a blind spot.
Hope this assists your work which i appreciate greatly. Lawrence from London
I appreciated your examples, particularly with housing. My husband and I have a small rental portfolio and have through this become a lot more aware of housing from multiple angles. I’m continuously frustrated by this persistent misconception that housing is somehow immune from supply and demand pressures. People always think new housing units will *increase* rent, when the reverse is true.
But! My main work is in food systems, and I was thinking a lot throughout reading this on how government commodities subsidies so fundamentally affect our food markets—mostly, imo, in harmful ways. I’m a farmer, not an economist, but it seems that subsidies have maintained this deep over production of commodity crops, much to the detriment of land, ecology, and human health. It’s costing us all! I’ve often talked with other food systems folk about how if commodity crop subsidies went away, we might stand a chance at being competitive and our farms might be economically viable in a way that’s nearly impossible now.
Your article helped clarify some of that in my mind, and I thank you for it!
Thank you for this excellent article. I have never read prices explained in such a simple way while studying economics. Economists and politicians try to act as if gaining control over prices would solve all economic problems. Important reminder on the value of prices.
Considering the magnitude of the problem, and the magnitude of the sup-optimal policy interventions it's pretty amazing that taxation of net CO2 emissions merits no more than
"Rather than leveraging carbon prices to incentivize lower emissions while allowing markets to find efficient solutions ..."
Also the relative importance of rent controls compared to bad land use regulations and building codes seemed out of proportion.
The effects of the “bureaucratization of economic life” are dramatically related in The Turning Point, a scathing attack on the realities of socialist economic planning by two Soviet economists, Nikolai Smelev and Vladimir Popov, that gives examples of the planning process in actual operation. In 1982, to stimulate the production of gloves from moleskins, the Soviet government raised the price it was willing to pay for moleskins from twenty to fifty kopecks per pelt. Smelev and Popov noted:
State purchases increased, and now all the distribution centers are filled with these pelts. Industry is unable to use them all, and they often rot in warehouses before they can be processed. The Ministry of Light Industry has already requested Goskomtsen [the State Committee on Prices] twice to lower prices, but “the question has not been decided” yet. This is not surprising. Its members are too busy to decide. They have no time: besides setting prices on these pelts, they have to keep track of another 24 million prices. And how can they possibly know how much to lower the price today, so they won’t have to raise it tomorrow?
Prices are signals, but they're also noisy. If someone with $5 to their name spends $5 on a hamburger, and someone with $100,000 spends $10 on that same hamburger, does that signal the hamburger is more important to the richer person? Of course not, and it's exactly this issue that limits the functional use of prices as signals.
Each transaction between two economic actors, with their own motivations and contexts, leads to a purchase price. This purchase price is an efficient lossy compression algorithm. You would have better context if you could talk to the actors and understand their reasoning, their desires, their capabilities, etc, but that's infeasible, instead we use the purchase price to summarize the entire transaction. Actor A wants good X for at most $Y, and actor B wants to sell it for at least $Y. We've lost a lot of information about their context, but we've condensed it into a simple format we can use to aggregate many transactions into a condensed unit (the price).
The problem is that for each transaction, we condense the contexts of the two agents, of the entire economic system. Usually this is fine, we get the most important from the price, but sometimes we miss important information, or we aggregate between transactions we shouldn't and lose important context.
Suppose housing prices go high, is that because there's not enough houses for every individual, or is there one billionaire buying all the lots? Can you tell by just the price? No. This is the fundamental failure of using prices as signals, and why we either need to radically change the rest of our economic system so that prices can better reflect these contexts, rely on government intervention to artificially reset prices, or move onto a more radical system for allocation of resources.
Great article!! The examples paint such a good picture. I am reading / listening to to Basic economics by Thomas Sowell and he also talks about prices and how they make the market more efficient.
I got one for you. Why did the price of dryers increase when tariffs got slapped on washing machines? Shouldn’t it have been the other way around? Price of one good rises due to tariffs. Demand for complement good decreases. Price of that complement should go down, not up.
Brian, thanks for a good article. May i make a couple of points?
For me the information value is much higher when you get into the meat of the subject with excellent examples to illustrate. The earlier explanatory section would benefit from some editing, but this depends on your readership.
There is a gap however: where is the section on government subsidies to influence price signals which you mention at the end? Did i miss something? This makes the essay seem to me unbalanced and could be seen as a blind spot.
Hope this assists your work which i appreciate greatly. Lawrence from London
Thanks. I wasn’t sure what example to lead with earlier. On the subsidies part, I agree. I actually cut that section for length
I appreciated your examples, particularly with housing. My husband and I have a small rental portfolio and have through this become a lot more aware of housing from multiple angles. I’m continuously frustrated by this persistent misconception that housing is somehow immune from supply and demand pressures. People always think new housing units will *increase* rent, when the reverse is true.
But! My main work is in food systems, and I was thinking a lot throughout reading this on how government commodities subsidies so fundamentally affect our food markets—mostly, imo, in harmful ways. I’m a farmer, not an economist, but it seems that subsidies have maintained this deep over production of commodity crops, much to the detriment of land, ecology, and human health. It’s costing us all! I’ve often talked with other food systems folk about how if commodity crop subsidies went away, we might stand a chance at being competitive and our farms might be economically viable in a way that’s nearly impossible now.
Your article helped clarify some of that in my mind, and I thank you for it!
Thank you for this excellent article. I have never read prices explained in such a simple way while studying economics. Economists and politicians try to act as if gaining control over prices would solve all economic problems. Important reminder on the value of prices.
Glad you enjoyed :)
Great read! The bit on housing reminded me when rent controls were recently removed in Buenos Aires: supply skyrocketed and prices plummeted...
Absolutely. There are a lot of examples to go through. But I felt I was hitting my limit for a newsletter :)
Considering the magnitude of the problem, and the magnitude of the sup-optimal policy interventions it's pretty amazing that taxation of net CO2 emissions merits no more than
"Rather than leveraging carbon prices to incentivize lower emissions while allowing markets to find efficient solutions ..."
Also the relative importance of rent controls compared to bad land use regulations and building codes seemed out of proportion.
An excellent article. Prices are truly a gift to mankind - so much information to use and benefit from.
From “Socialism” by Robert Heilbroner
The effects of the “bureaucratization of economic life” are dramatically related in The Turning Point, a scathing attack on the realities of socialist economic planning by two Soviet economists, Nikolai Smelev and Vladimir Popov, that gives examples of the planning process in actual operation. In 1982, to stimulate the production of gloves from moleskins, the Soviet government raised the price it was willing to pay for moleskins from twenty to fifty kopecks per pelt. Smelev and Popov noted:
State purchases increased, and now all the distribution centers are filled with these pelts. Industry is unable to use them all, and they often rot in warehouses before they can be processed. The Ministry of Light Industry has already requested Goskomtsen [the State Committee on Prices] twice to lower prices, but “the question has not been decided” yet. This is not surprising. Its members are too busy to decide. They have no time: besides setting prices on these pelts, they have to keep track of another 24 million prices. And how can they possibly know how much to lower the price today, so they won’t have to raise it tomorrow?
https://www.econlib.org/library/Enc1/Socialism.html
Prices are signals, but they're also noisy. If someone with $5 to their name spends $5 on a hamburger, and someone with $100,000 spends $10 on that same hamburger, does that signal the hamburger is more important to the richer person? Of course not, and it's exactly this issue that limits the functional use of prices as signals.
Each transaction between two economic actors, with their own motivations and contexts, leads to a purchase price. This purchase price is an efficient lossy compression algorithm. You would have better context if you could talk to the actors and understand their reasoning, their desires, their capabilities, etc, but that's infeasible, instead we use the purchase price to summarize the entire transaction. Actor A wants good X for at most $Y, and actor B wants to sell it for at least $Y. We've lost a lot of information about their context, but we've condensed it into a simple format we can use to aggregate many transactions into a condensed unit (the price).
The problem is that for each transaction, we condense the contexts of the two agents, of the entire economic system. Usually this is fine, we get the most important from the price, but sometimes we miss important information, or we aggregate between transactions we shouldn't and lose important context.
Suppose housing prices go high, is that because there's not enough houses for every individual, or is there one billionaire buying all the lots? Can you tell by just the price? No. This is the fundamental failure of using prices as signals, and why we either need to radically change the rest of our economic system so that prices can better reflect these contexts, rely on government intervention to artificially reset prices, or move onto a more radical system for allocation of resources.
I think there is a case to argue that anticompetitive behaviour by industry can interfere with the price signal. On eggs consider this post which argues that industry has responded very differently to previous outbreaks of avian flu https://open.substack.com/pub/mattstoller/p/hatching-a-conspiracy-a-big-investigation?utm_source=share&utm_medium=android&r=16dij
Great article!! The examples paint such a good picture. I am reading / listening to to Basic economics by Thomas Sowell and he also talks about prices and how they make the market more efficient.
Excellent article. It's not just politicians distorting prices--algorithms are, as well.
https://bewaterltd.com/p/silicon-sorcery-codes-captive-markets
I got one for you. Why did the price of dryers increase when tariffs got slapped on washing machines? Shouldn’t it have been the other way around? Price of one good rises due to tariffs. Demand for complement good decreases. Price of that complement should go down, not up.
terrific discussion of the wonders of the price system; now if only you can get those in the political class to read this
Brilliant post! I love reading your posts because your writing is so clear and understandable.
Thank you.
"Politicians get elected by promising to “do something” about high prices."
That's why it's important for aggregate demand and inflation to be managed. In general I reckon the public is a little too negative about inflation.
I'm negative about (regulatory) management, particularly of "demand." Call me dogmatic.
Inflation is CAUSED by management. Hence, it should not be "managed."