Why Do Prices Lie?

Column for week of December 8, 2014

     We have considered ways to achieve satisfaction.  We
saw how free people trading with each other endlessly seek to
better serve others to get more satisfaction from those others. 
Last time we considered the importance of rules to human
interaction.  Today we will consider more about how free
people coordinate their actions for mutual benefit.

     To achieve prosperity we must specialize and trade with
each other.  The productivity of self sufficient individuals is so
low that they are inevitably poor.  How can billions of people
coordinate their production and consumption so as to provide
everyone with an abundance of what they want?

     No one person comes close to knowing what everyone
wants.  Likewise, no one knows how to produce all of those
things, or how much to produce.  Thus, putting a great
commander in charge of production can't possibly yield good
results.  We will end up with inefficient, wasteful production of
much of the wrong stuff.  Remember the Soviet Union?

     How can people in China know how to best serve
people in the USA?  We have already seen that people in
China will want to better serve people in the USA to motivate
people in the USA to better serve people in China.

     When we think of prices, How many people think
beyond what something will cost, or how much they can sell it
for?  Prices are far more important than that.  Prices are
communications.

     The price we offer for something tells the world how
much we want that thing.  The prices we ask for something tell
the world how willing we are to supply the thing.  When we
offer higher prices we are saying "Produce more."   Lower
offers say "Produce less."

     When we offer more for flowers and less for nails, we
say "Produce more flowers and fewer nails."  To get the best
price for their efforts producers must shift from nails to
flowers.

     Free market prices tell everyone what to do to maximize
the price he will receive for his efforts.  Prices guide producers,
from workers to land owners, to use their resources to produce
the things others value the most.

     Prices guide workers to better use the skills they have
and to develop new skills.  Also, prices direct owners to devote
natural resources to their most valuable uses.

     Anything that interferes with free market pricing
disrupts production by sending false signals about supply,
demand and best uses.  Prices other than free market prices lie. 
Lying prices deceive producers into producing the wrong
things.  Shortages and surpluses result.

     One of the most destructive price lies of our time was
natural gas prices from the 1950s into the 1970s.  Government
capped natural gas prices at a very low level.  The message
sent was "Don't produce more natural gas."  The result was the
natural gas shortages of the 1960s and 1970s.  Only after the
end of price controls and lying prices did free market producers
provide an abundant supply of natural gas.  They found ways
to do this even though many "experts" said it was impossible.

     Government creates subsidy payments, special tax
breaks, quotas, minimum wage laws, and a morass of other
laws and regulations.  By doing this government has turned
most prices into liars.  These lying prices have deceived
businesses and consumers into making disastrous choices.

     Lying prices were the force that inflated the housing
bubble.  Lying interest rates set by the Federal Reserve
deceived almost everyone about the supply of wealth leading to
many ill-advised investments, including investment in housing. 
The crash of the bad investments gave us the recession.

     The human race figured out ages ago that lying is
destructive and dangerous.  How long will it take to figure out
that prices are the most destructive of liars?

     Prices are not willing liars.  They lie because
government tortures them.  We will never have real economic
recovery until government allows prices to freely speak the
truth.

     Next time: The destructiveness of parasites.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum