Everything Has Its Price (And That's a Good Thing)
Prices ensure your demands are supplied- even in times of scarcity. But who decides prices? Manufacturers and stores play a role, of course. As Professor Don Boudreaux explains, though, the biggest decider in determining prices is you, the consumer. Prices reflect the value consumers think the products are worth. Whether it’s the price of a bottle of ketchup or a Hermes Birkin purse, the price tag is the end result of a “global chain of cooperation.”
The economist Friedrich Hayek first discovered and articulated the importance of prices. You can learn more about him and his work at www.essentialhayek.org.
Taking Hayek Seriously (Blog): Resources about the life and works of Friedrich Hayek. http://hayekcenter.org/
The Fraser Institute (website): The Fraser Institute is an independent non-partisan research and educational organization based in Canada which supports a free and prosperous world through choice, markets and responsibility. http://www.fraserinstitute.org/
Prof. Boudreaux: Everyday as a consumer you interact with and perform minor miracles and yet you probably don’t recognize them as such. If you think about them at all, you might consider them as nuisances or as obstacles. But while they’re largely unappreciated, these small things actually make our modern lives possible.
What am I talking about? Prices. The prices we pay everyday for goods and services. You might think they’re just the unfortunate cost of getting something you want but they’re much more than that. When you learn about the vast amounts of information contained within every price, each one becomes a marvel, a wonder that helps coordinate the billions of choices of multitudes of people into a productive and dynamic economy. Let me explain. Think about, say ketchup, the primary ingredient in that delicious red sauce is of course tomatoes.
Now suppose that there’s a terrible drought in California, this year’s tomato harvest drops substantially. The demand is still there, people still want ketchup as much as they did before for their hamburgers and fries but the supply is shriveled so farmers start to charge higher prices for their tomatoes. That means ketchup makers have to pay more for tomatoes so they charge grocery stores more for their product, and so in turn, grocery stores charge higher prices for ketchup to consumers. The important point here is just how customers respond. A few of them won’t care much about the higher price and they’ll continue to buy as many bottles of ketchup as before but most consumers will care. They’ll switch to mayonnaise or to mustard or just go without condiments altogether. And that’s actually a good outcome given the drought.
There simply aren’t as many tomatoes to go around as before. People as a group need to eat fewer tomatoes. This uptake in the price of ketchup leads some people; those who care the least about the particular condiment, to use less of it and that means total consumption of tomatoes shrinks. From a bird’s eye view, it might look as though this chain of events is consciously coordinated at the farmer, manufacturer, grocery store, and customers are all working together according to some plan or to some directive to adjust to the fact that the drought destroyed a lot of tomatoes. But of course we know they aren’t. There’s no bureau of condiments ordering people to hold the ketchup. Information about the need to cut back on tomato consumption was communicated organically through prices. Or as the great economist Friedrich Hayek put it, the ketchup’s price is, “A kind of machinery for registering change.”
Now multiply this chain of events by trillions, that’s the world economy. There are billions of buyers and suppliers adjusting in real time, every hour of every day to shortages and surpluses and they’re elaborately coordinating their behavior with each other and adjusting to on the ground developments and they don’t even realize that they’re part of this great, global chain of cooperation. All of this coordination and adjustment is thanks to prices. All those different bits of information can be in that one little number. Think about that next time you go to the grocery store. We understand the power of prices thanks to economists like Friedrich Hayek.
To learn more about Hayek’s essential ideas and how they help explain our world, click here.