Another Thought about Prices

Prices are invaluable signals to buyers and sellers. When government acts to abolish prices (in effect) by commanding them (as in the minimum wage and edicts against “price gouging”), or when it interferes with the signals through regulation (as in whether certain products and services may be imported), it robs buyers and sellers of options, and thus diminishes their well-being.

But prices aren’t everything. This is from “A Man for No Seasons“:

[T]oo many economists justify free markets on utilitarian grounds, that is, because free markets produce more (i.e., are more efficient) than regulated markets. This happens to be true, but free markets can and should be justified mainly because they are free, that is, because they allow individuals to pursue otherwise lawful aims through voluntary, mutually beneficial exchanges of products and services. Liberty is a principle, a deep value; economic efficiency is merely a byproduct of adherence to that value.

In fact, prices only reflect marginal valuations of things. Both Joe and I might be willing to part with $2 for a gallon of gasoline, but that coincidence says nothing about the utility that Joe and I gain (separately) from the use of the gasoline. In sum, prices aren’t a guide to the well-being of an individual person, let alone millions of disparate persons whose values are incommensurable. (This is one reason why GDP doesn’t mean much.)

Here’s a good case in point. In an area that’s growing rapidly, real-estate prices tend to rise rapidly. That’s a boon to home owners, right? Not necessarily. It’s not a boon to homeowners who strongly prefer to stay where they are. It usually means that the cost of staying where they are rises: higher property taxes, more noise and traffic, more crime, etc. Even taking into account the higher prices that they (or their heirs) will one day realize when their homes are sold, many (perhaps most) of them will feel worse off — and will be worse off, materially.

No one promised them a rose garden, did they? Of course not. And I would be the last person to suggest that they be “made whole,” which would require burdening other persons with higher taxes.

My point is that prices are an uncertain and often misleading guide to the well-being of persons who aren’t involved in the transactions that are represented by prices. And prices provide only a glimpse of the fleeting and idiosyncratic valuations placed on those transactions by those who engage in them.