Price Communication, the Organization of Production, and Freedom

Human beings are reliant on daily interpersonal communication. In order to buy the things we want, express our feelings and thoughts to others, or simply to let someone know we are trying to get around them we use some form of communication. Among the most obvious and common are speech and writing, there are also more subtle ways to get info across such as non-verbal communication like body language (Non-verbal communication). Regardless of the method, without communicating society would shut down. On a grand scale you could picture a breakdown in diplomacy between two bitter nations, or on a smaller scale you could imagine trying to buy something from a vendor without pointing, using words, or writing something for him to read. Everything would grind to a halt. So if communication is what we do to get across ideas, motives, thought etc, would not prices fall into this category?

But What is a Price Anyway?

Before I get into by thesis, I quickly want to go over what a price is or what it represents. To quote Wikipedia:

In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.

A price represents how much someone is willing to give up to receive something else. If you were to buy a suit from a tailor for $100, this means that you value the suit more than you value $100. The tailor may charge you $200 for the suit and you refuse to buy it. This means you value $200 hundred dollars more than the suit. Perhaps you offer to pay him $50 for the suit and the tailor refuses sell. He values keeping the suit over having an additional $50. At some point you will both reach a number that both parties can agree on and an exchange will take place. So if you buy the suit for $100 dollars, that is the price of the suit in dollars. (We must observe that both parties believe they are going to be better off after the exchange because they both value what they are receiving more than what they are giving up. This shows us that although prices can be measured, the actual value that people apply to goods or services cannot be measured. If all goods had a measurable, real value no one would exchange anything. If 1 suit was always “worth” more than $100, no one in their right mind would sell a suit for $100. But since some people may value a suit more than $100, and some people may value a suit for less than $100 we must observe that all value is subjective. Value can only be given, not inherently possessed.)

Now since the market is full of many people with many different value scales (a rank of preference for having certain goods more than others), we will end up with many differences on what people think the price of something should be. Even goods that appear to be so similar can be valued completely differently. One person may value a pound of Swiss cheese over a pound of mozzarella. Producers wants very high prices so they can make a lot of money off what they are selling while consumers want low prices so they can buy more with the money they earn. At high prices producers will make more of their goods so they can make money off them and consumers will buy less goods because they cost so much. The opposite holds true, low prices make consumers buy more (i.e., “More bang for your buck”) and producers make less. Based off what producers of goods are willing to sell for, and what consumers of goods are willing to buy for, the market will adjust itself until one price rules over any given good. This is called the Market Equilibrium Price or the Market Clearing Price. It is the point where supply equals demand, a point where there should be no surpluses (Due to high prices) or shortages (Due to low prices). That is called the The Law of Supply and Demand, it is what sets prices.

Prices Organize Society’s Production

So as we can see, the price of a good determines how much of it will be produced and consumed. This applies for more than just one good. An entrepreneur can choose to enter into any business he wants. If you were an entrepreneur and wanted to earn a lot of money running a business, would you pick an industry to enter where the prices of the goods you produced were low? Earning you little return for your investment? Probably not. High prices tend attract new producers into the high price markets (Or will cause producers of other goods to switch to the production of the high priced good). This is turn will increase the amount of goods in that market causing the price to drop. Again, the opposite is true as well. Markets full of low priced goods may lose producers as they shift their production into more profitable sectors, thus decreasing supply and raising prices. And as the law of demand states, higher prices leads to less consumption, lower prices to higher consumption. This back-and-forth motion of prices leads to market stability and the market equilibrium price shows what society wants to produce and consume.

The market is incredibly complex. As shown above, shifts in prices can completely change how we function as a society. Let’s make a short example to illustrate how the shift in the price of one good can have very far reaching, and often un-seen consequences: Shawn’s Allegory of the Pencil.

My allegory goes like this: A grand deity came down from the skies and told all the people of the USA that #2 pencils are evil. Shocked by the existence of this deity and following his word, most people (save for a bunch of non-believers) stop buying pencils. This causes the price of pencils to plummet, and as we know, the #2 company and all other pencil producers are going to reduce their output of pencils or completely stop making them. That is obvious. The price of the pencil drops, so pencil makers stop making them. Yet, this fluctuation goes much deeper than just pencils. For the most part, your standard #2 pencil is made out of four things: Wood, Rubber, Aluminum, and Graphite. This drop in the supply of pencils also means that there is a drop in demand for all four of its components. If the drop is sufficient enough, or made up a large part of the wood, rubber, aluminum, or graphite company’s revenue, those industries would have to either decrease their production of those goods or shift into the production of other goods. The wood companies would cut less wood, plant fewer trees, buy less saws,etc. The graphite company will mine less, buy less drills and equipment. The same goes for the aluminum and rubber industries. All four may have to fire workers they no longer need, sell off unused equipment and buildings. Some capital, such as large industrial wood saws have no other purpose that cutting wood. So what would become of assets like that? Should they be ripped apart and scrapped for other uses? Or simply left there waiting for a rise in wood prices so they can be used again? What of the trucking companies that shipped all of these goods? Or the stores that sold pencils? Or the paint they use on pencils? Producers and consumers will organize the new lines of production based off prices. The market will be forced to adjust itself now that a change of prices has rippled through the economy. Is this bad? Maybe, maybe not. But change is ever present, no industries will last forever, there will always be a replacement for something that seems irreplaceable. New industries will arise, old industries may change.

Now although this probably wont happen to the good #2 pencil any time soon, it illustrates how all goods are somehow interconnected. Price fluctuation can effect entire countries.

So…How are Prices a Form of Communication?

As the first part of this article showed, prices are formed by our subjective valuations of goods. Prices embody our preferences, and although we may not literally “speak” though prices, their measurement is a reflection of our value and thus is a medium of information. My allegory showed us how prices can effect whole industries, this effect is that of mass public choice. We simply act on our values (buying certain goods over others), and prices reflect this. So if price’s reflection of our preferences and views organize society, and without this price mechanism how can society be organized? How do we know what should be produced, how much of it, over how much time, where it should be produced, in what method should it be produced, and when it should be produced? The answer is simple: we don’t. The only way society can function is through what I would call Mass Preferential Communication. The embodiment of human value and thought put into measurable numbers; numbers used to organize everything. 

I hope everything has made sense so far, because now I wish to show what can happen when prices, and by extension, communication are hampered by outside forces.

So as we can see, the price of a good determines how much of it will be produced and consumed. This applies for more than just one good. An entrepreneur can choose to enter into any business he wants. If you were an entrepreneur and wanted to earn a lot of money running a business, would you pick an industry to enter where the prices of the goods you produced were low? Earning you little return for your investment? Probably not. High prices tend attract new producers into the high price markets (Or will cause producers of other goods to switch to the production of the high priced good). This is turn will increase the amount of goods in that market causing the price to drop. Again, the opposite is true as well. Markets full of low priced goods may lose producers as they shift their production into more profitable sectors, thus decreasing supply and raising prices. And as the law of demand states, higher prices leads to less consumption, lower prices to higher consumption. This back-and-forth motion of prices leads to market stability and the market equilibrium price shows what society wants to produce and consume.

The Effects of Coercion on Free Formed Prices

We had, up to this point, assumed that all prices formulated were done so in a state of freedom. That is to say, there was no coercion or threat against us that may have changed what we sought to buy or produce. However, the world does not work that way; government is an ever present reality that constantly interferes with market activity. This interference has consequences for all of us. I can separate these into two forms: Socialism and Mixed Market Intervention.

Socialism

Socialism is a a society where the means of production are owned by the state (or in stateless socialism, by everyone). Socialism prohibits the formation of prices, because in socialism there cannot be any meaningful exchanges. Thought experiment: Your body is like socialism, one entity owns all of itself. So right now, if you were to sell yourself your shoe, how much would you charge yourself? $5? $100? $100,000,000?…It wouldn’t matter. The “price” wouldn’t reflect any sort of preference of goods, it would be just an internal transfer with an arbitrary number attached to it. You couldn’t value your own shoe more than your own $5 since you have both of them. No price could be formed, and without formation of prices, how do we know how much of something should be made? Without many people buying and selling property from each other, how can society organize production? In Socialism, production is based off what central planners think society needs, not what people want. So a socialist society would suffer from immense inefficiency. What economist Ludwig von Mises called the Economic Calculation Problem.

Mises states that Socialism is impossible. That it can never work. Yet, many people will argue that point saying, “Preposterous! Even if Socialism is less efficient than Capitalism, the USSR still lasted more than 70 years! How is that an impossibility?” This is easy to figure out, the USSR was not the only country on earth, and although it was “socialistic” it still existed in a world full of prices. It still traded with other nations. So although socialism stops the true formation of prices, the USSR could somewhat rationally allocate itself to a degree due to external prices affecting it. Much like how you would set the price of your own shoe based off what the normal price for that kind of shoe is somewhere else. Heck, Nikita Khrushchev himself once said that “Even if the whole world will become Socialist, Switzerland will have to remain Capitalistic to tell us the price of everything.” It is ironic that the most anti-capitalistic society imaginable cannot exist if not for capitalism and its prices.

Prices convey our values. They communicate our preferences. Without that communication how do we know what is to be produced? How can a mute person speak about his wishes? He can’t.

Mixed Market Intervention

As opposed to Socialism, which inhibits the formation of prices, Mixed Economies (Generally free markets with government intervention) have functioning price mechanisms. Most modern nations, including the US, are mixed economies. Unlike socialism which is easy to notice and define, a mixed economy can range from near socialistic to almost completely capitalistic (i.e., no government intervention at all). It all depends on the degree at which the government interferes with the market. Regulation, taxation, subsidies, bans, cheap credit, and altering the money supply are all ways in which prices can be distorted. I will quickly touch up on some of them and explain in slightly more detail the most important ones.

Regulation: Regulations vary immensely is size and complexity. In its most simple form, regulations are federal, state, or local rules by which they limit what businesses and people can or cannot do. You can divide regulations into two main categories (Categories I made up for simplicity’s sake): Negative and Positive Regulations. Negative regulations consists of rules that stop business from doing certain things. For instance, regulations that toilet and shower head producers must follow that only allow a certain amount of water flow per minute. Positive regulations are rules that force business to do things it otherwise wouldn’t do. For example forcing business to pay for workers healthcare or benefits. All of these have some sort of effect on prices. Negative regulations often lead to inefficient products (toilets that clog, etc.) and a waste of resources (Using more water to flush more often) while positive regulation adds undue costs to conduct business (paying for a workers health coverage) that wouldn’t have existed without the regulations. I’m not going to say whether they are good or bad (Not here anyway), I’m just observing the fact that they do have effects.

Taxation: Far more obvious than regulation, taxation is the direct transfer of money from private hands to government hands. Depending on what kinds of taxes are levied, certain good may increase in price, like from a tariff on foreign goods, or increase the cost of business so much that companies are forces to raise the price of their goods in order to make money (i.e., corporate taxes, etc.)

Bans: Bans are easy, they simply diminish the supply of goods. If these goods are still desired, people will find ways to produce them (Cocaine and other illicit drugs). The danger is that banned goods often, but not always, attract some shady people into their markets and suffer in quality due to lack of competition and arbitration. No one goes to the cops because the drug dealer sold you a bad batch of weed.

Cheap Credit/Alteration of the Money Supply: This is a major category of market intervention, and I touched up on the details of it in one of my previous articles but I will cover it really quickly due to it’s importance. Alterations in the supply of money are easy to discuss. As all things go, the laws of supply and demand are what sets prices. But when most, if not all, goods are measured in one other good (Money) the supply and demand for that universally accepted good are very important. If the supply of money increases, then generally speaking, the price of most goods will increase (because all goods are measured in dollars, the “dollar to other goods” ratio will rise, causing relative prices to rise), the inverse is true, a decrease in the amount of money will lead to a general fall in prices. This affect is obvious. Cheap credit, although a form of money creation, is slightly more difficult to figure out.

I’ll give a quick summary of the effects of cheap credit creation: The Federal Reserve decreases the Federal Funds rate (National Interest Rates) and/or prints new money and lends it to banks. This new low (and artificial) interest rate leads businesses to take out loans they otherwise would’t have taken and invest it in long term growth projects. So as all this money flows in certain sectors of the economy, asset prices in these sectors tends to grow and as we learned above, producers will shift their production into these sectors of the economy. This is how the bubble forms. As most long term investments typically involve the capital goods industries and real estate, bubbles are almost always formed in these sectors. Eventually, these producers realize that there is not enough resources, people, equipment, capital, and real savings to complete all the projects they started. So they need to stop what they are doing and tear down what they started, fire workers who should never have been hired, and stop using equipment that never should have been bought/used. This is where the bubble pops, i.e. the recession. This is Austrian Business Cycle Theory.

As we can see, mixed economies can and do intervene in free market affairs. This always leads to distortions in the economy and people’s suffering. Due to active markets in these countries, most people enjoy a relatively high standard of living, when we can communicate our preferences to each other we enjoy a functioning economic equilibrium. Whereas socialism is a mute man trying to speak his values, mixed economies are akin to having certain letters or words banned. Functionally muddling or bogging down our ability to communicate our preferences effectively.

Free Prices = Free Speech/Expression = Free Markets = Freedom

As I hope I have shown, prices, which are formed through us acting on our preferences, are a form of societal communication. If my idea holds true, then attacks on free formation of prices (and by extension the free market) are attacks on the freedom of speech and expression. Price fluctuations have real effects that can ruin relationships, businesses, and people’s lives. And although the meddling is sometimes hard to observe the effects are no less immoral. State coercion is an assault on the free choices of people, it redirects wealth and power into politically favored hands and serves to undermine individual liberty.

The first amendment to the Constitution in probably one of the most violently defended ones. Whereas stereotypical liberals couldn’t care about the second amendment and stereotypical conservatives don’t seem to care much for the fourth or fifth (at least for immigrants anyway), the first amendment is normally endorsed by all. The fervor with which we defend the 1st should extend into our defense of free markets. People so often look at government oppression as brown shirts, mustachioed dictators, and guns pointed at innocents that we forget that subtle attacks on our pricing system, the system of free choice and expression, erodes all we hold dear. It is in the market, in each other, that we improve our lot in life and exist in peace. The state is the opposite this, it relies on the use of force to achieve aims; it undermines our choices; it choose for us what we do or do not want. If one believes that the “People” are who should run society, that democratic institutions best serve the masses, and that working together betters everyone then the market is where you should throw your support.

Fight against intervention. Fight against the attack on our prices. Defend our freedom to express ourselves and speak our minds.

Defend the most fair, democratic, and ethical institution ever devised: The Market.

 

 

About Shawn Kelly

Shawn is a student and father who first took to the ideas of liberty during Ron Paul's first presidential campaign. He now is pursuing a career in economics, the understanding of which he believes is paramount for those who seek a free society.
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2 Responses to Price Communication, the Organization of Production, and Freedom

  1. Andrew Shemo says:

    very nice piece and informative!

    your reference to the pencil reminds me of the little essay the Austrian economics Leonard Read wrote called “I, pencil”. that can be downloaded for free here.

  2. Pingback: Your Questions About Reverse Mortgage Rates

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