What Do Prices “Know” That You Don’t?

According to Prof. Michael Munger, prices (as in, the price of a carton of milk, or a new car) are akin to magic. Prices “magically” convert countless pieces of dispersed, complex information into a single signal that conveys to sellers what they should do to best benefit society. By ignoring the price system, you’re really ignoring the needs of those whom you want to serve.

Prof. Munger illustrates this through an example of two farmers trying to decide whether to plant corn or soybeans. One farmer is purely altruistic; he refuses to acknowledge the role of prices and instead sets about to determine which crop would help society most. He pores over data but finds himself overwhelmed with his impossible task. He makes a guess and plants corn. Unfortunately, there is already too much corn on the market. Not only is society not much better off, but his business fails.

The other farmer cares only about profits. A variety of world events have driven up the need for soy, so the price is higher. He sees the increased price and produces soybeans in order to maximize his profits. He doesn’t care why the price is high, and he doesn’t need to know. All that matters is that he was motivated to produce exactly what humanity wanted. This is the “magic” of the price system – it merges the needs of society with each seller’s desire for profit.

 

7 Comments

  1. Damian Robinson

    This was a revelation. 

    I never thought that a economic lesson could help me in other areas of my life but I’m definitely going to use this inflation as such.
    I’m going to watch this a couple of more times.
  2. Erin Shumaker

    I love his illustrative and narrative approach! This concept almost would seem like a "duh!" but I guess others just don’t have the same trust in the market. It makes logical sense that if there’s a shortage of one item, it would be more profitable to produce that item – the demand would be the same, but the supply would be low, driving up the equilibrium price. Of course, part of the long-term equation is flexibility to produce as much or as little as the market estimates at the equilibrium price, or be flexible enough to change item production altogether (which I know is entirely impractical for many industries, but the effect could have potential).

  3. Hunter Markson

    If one contacted a UNC professor instead of a Duke professor, they could know which crop was better to plant without looking up the price system.  Jk Dr. Munger 

Add Comment Register



Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

    LearnLiberty_Banner (1)