Fundamental Economic Concepts (Part 8 of 12) – Prices

The price on the market for any particular resource emerges as producers and consumers compete for the resource's alternative uses – i.e. what has to be given up in order to obtain a scarce good for its highest subjectively valued use. It is important to remember the market is a complex series of events caused by the purposeful action of individual humans. It is not correct to say the market “sets” a price for goods. The very essence of every human action is change. As individuals act, their subsequent actions (including their valuations) change. For this reason prices refer to the price of a specific resource at that specific time based on the subjective valuations of the buyer and the seller.

Because individuals in the market are competing for scarce resources with alternative uses, prices emerging on the market provide vital information about the relative scarcity, surplus, and consumer demand for resources. It is only through the voluntary interactions of individuals participating in the market process that the relative importance for resources is determined and allocated based on the subjective preferences of consumers and producers.

• “...every time some small adjustment in the allocation of resources had to be made—go explicitly through all the relations between ends and means which might possibly be affected...In any small change he will have to consider only these quantitative indices (or "values") in which all the relevant information is concentrated; and, by adjusting the quantities one by one, he can appropriately rearrange his dispositions without having to solve the whole puzzle...this problem can be solved, and in fact is being solved, by the price system....Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” - F.A. Hayek - "The Use of Knowledge in Society"
  

Prices can be artificially set and enforced by coercive central planning / regulatory agencies. Regardless of the well meaning intentions of central planners, artificial price controls deviating from the market price (such as minimum wage laws and rent controls) always moves away from the subjective preference of consumers in the market. Resources are diverted away from their highest and best use and the result is always a net loss to an economy. One group may benefit from the government-granted special privilege, but only at the expense of the group that did not receive such privilege.

Artificial price control necessarily interferes with the essential role of prices in an economy (providing information regarding the relative subjective preferences of buyers and sellers in the market). The concepts of price and private property are inextricably linked. As Lew Rockwell notes, “...prices simply cannot do their work apart from private property and concomitant freedom to contract.”

Private property is a prerequisite for market prices. Market prices are the way buyers and sellers communicate knowledge and information regarding the preferred uses of scarce resources. Not only is coercive price control a violation of property rights, but as explained in the recent post about property, economic calculation is not possible without private property and prices.

• “[Prices] are the exchange ratios of various goods, which result from the voluntary interactions of distinct individuals based on the institution of private property. Without the institution of private property, the information conveyed by prices simply does not exist. Private property is the necessary condition—die Bedingung der Möglichkeit—of the knowledge communicated through prices.” - Hans-Hermann Hoppe

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