Prices as the Result of Human Action but Not of Human Design

by Don Boudreaux on September 29, 2005

in Prices

Russ Roberts gave a splendid lunch-time talk earlier this week at Liberty Circle, an event co-sponsored by the Institute for Humane Studies and the Mercatus Center at George Mason University.

My favorite part of his talk was his beautiful illustration of the differences between three types of phenomena:

1. Phenomena that are the result both of human action and of human design: Suppose that in a fit of anger I punch you in the face; you lose teeth and bleed. You’re angry at me. Your suffering is the result both of human action (my punch) and of human design (my intention was to harm you by punching you in the face). You’d act perfectly sensibly if you get angry with me and retaliate by punching me back.

2. Phenomena that are the result neither of human action nor of human design: Suppose that you’ve planned a picnic with your new girlfriend on Saturday; when you awaken you find that rain is pouring from the sky, which is dark in all directions. You’re angry; that’s quite understandable. But you don’t shake your fist at the heavens and blame someone; you don’t demand that the rain stop; you understand that things, such as rain storms, happen that are the result neither of human action nor of human design.

3. Phenomena that are the result of human action but not of human design: Suppose today you ask a college student to look up a term – say, "Hayekian." He or she will likely do so by "googling it." "Google" has become a verb. You might like this fact; you might despise this fact; but a fact it is. It is obviously the result of human action, but it is not the result of human design. No one decided, or planned, that "google" would be a verb.

Few people have difficulty identifying phenomena that are properly classified in either of the first two categories. But the third category is different. People don’t get it easily. Too bad, for it’s a vitally important category.

Senator Byron Dorgan is one person who doesn’t get it. Listen to this clip from National Public Radio’s All Things Considered program of today. You’ll hear the Democrat from North Dakota intone, self-righteously and angrily, of course, that

There’s no free market; that’s all nonsense. What there is is a market that takes an enormous amount of money out of the pockets of American consumers and sticks it in the treasuries of the major oil companies.

But oil prices are no more controlled by oil companies than housing prices are controlled by homeowners. It’s true that as the owner of the house at 123 Elm St., Ms. Jones can sell her house for any price she can fetch for it, and she can refuse to sell it at any price that is offered to her.

So when she learns from her real-estate agent that the going price of similar houses in her neighborhood is around $400,000, and she then lists her house for sale at, say, $405,000, she literally is the person who sets the price at which her house is listed for sale. But does she determine the price of her house?

No.

No one is forced to buy her house; moreover, all potential buyers of her house have other options of houses to buy or to rent. It is no more accurate to say that Jones determines the price of her house than it is to say that the buyer who agrees to pay $405,000 for Jones’s house "determines" the price of the house.

The price is the result of a wide, deep interaction of many buyers and many sellers, each bargaining in light of their own unique knowledge of time, place, and circumstance. (My apologies to Hayek’s ghost for stealing his phrase.) The same is true of oil prices and gasoline prices.

The fact that a professional pontificator whose chief skill is getting elected to government office for the purpose of spending other people’s money says otherwise is paltry evidence against the proposition.

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