Quotation of the Day…

by Don Boudreaux on April 6, 2018

in Economics, Prices, Reality Is Not Optional, Seen and Unseen

… is from page 403 of the late Paul Heyne‘s 1982 speech “What Is the Responsibility of Business Under Democratic Capitalism?” as this speech is reprinted in the 2008 collection of Heyne’s writings, “Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion (Geoffrey Brennan and A.M.C. Waterman, eds.):

The freedom that capitalism provides is created by the ability of individuals to manage and dispose of particular resources on the basis of their personal knowledge and interests.  That is impossible without clearly defined and stable rights over particular resources.  When such a system of rights exists, then social interaction – what the economist calls supply and demand – will establish scarcity-reflecting prices, and the vast, dispersed knowledge that the members of society possess will be effectively coordinated.

DBx: In prices set on markets the economist sees, among other features, what might be called ‘mediators’: devices that bring buyers and sellers into agreement with each other – mutual agreement, implying that each buyer and each seller who is party to any of the many trades that take place in markets is made better off.  At least, this is part of what is seen by the competent economist.  (Not all people sporting PhDs in economics are competent economists.)

Many (most?) non-economists see in prices set on markets something entirely different.  They see arbitrary terms dictated by one or the other party to each trade to his or her counterparty.  These non-economists, who implicitly assume that whatever trades that are observed to occur are somehow destined to occur independently of the prices and other terms of the trades, see prices merely as distributional tools.  The higher the price, the better-off is the seller and the worse-off is the buyer; the lower the price, the worse-off is the seller and the better-off is the buyer.

According to this non-economic (mis)understanding of prices set on markets, each such price reflects only the relative bargaining power of each party to each trade.  Prices set on markets, in this (mis)understanding, are neither system-wide conveyors of information nor incentives that direct the choices and actions of existing and potential buyers and sellers.  Instead, in this (mis)understanding of prices set on markets – including, of course, wages set on markets – are merely arbitrary impositions subject to be changed by government in ways that improve the well-being of the group favored by government at the expense of the disfavored group.

Third-party observers – say, those in academic classrooms or in government buildings – who determine (by what process, it is never made clear) that this price is too high or that wage is too low, feel free to demand that government force this price down or that wage up.  These third-party observers – some, but not all, of whom might be described as being well-intentioned – never look beyond the superficial ‘achievement’ of the government-imposed price controls that they champion.  It’s as if these third-party observers, looking out of their bedroom windows in the morning and seeing weather that is unpleasantly dark and stormy, paint on their windows sunny vistas.  When their paintings are competed, they stand back from their painted windows, observe the beautiful vistas that they then behold, and conclude that, through their painting, they’ve driven away the clouds and rain and brought in the sun and song birds.

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