The following appeared on Professor Don Boudreaux’s blog Cafe Hayek on January 24th, 2016. The following is an excerpt. Be sure to head over to his blog to check out the whole piece packed full of economic wisdom.
In The Road to Serfdom,* F.A. Hayek makes an elaborate and important point that is summarized nicely, I think, by this key observation by David Friedman(recently mentioned in a comment on this post by Walter Clark):
Economists are often accused of believing that everything – health, happiness, life itself – can be measured in money. What we actually believe is even odder. We believe that everything can be measured in anything.”]
Among the many benefits of the price system unfettered by government-imposed price controls is that market-set prices allow each buyer to pay for the things he buys with the particular goods or services that he values the least, while simultaneously allowing each seller of those things to be paid, in exchange for those things, in the particular goods and services that she values the most. Monetary exchange at market-determined prices, in effect, eliminates all need for barter.
An example: monetary exchange at market prices permits Joe to pay for his lunch with (say) a ticket to the movies while Jane, the seller of that lunch, is paid for it with (say) a glass of lovely dry riesling to be enjoyed tomorrow evening. What Joe pays for his lunch is not only that which Joe minds least giving up (among the multitude of goods and services that he can spend his money on), it is also not the same as that which Jane receives. Jane in this example receives from Joe not a ticket to the movies but, instead, a glass of dry riesling. This fact is so because the market-determined price of the lunch (say, $12) is the same as the price of that glass of lovely dry riesling. Monetary exchange at market prices enables happy outcomes such as this one.