Skepticism about prices

by Russ Roberts on July 21, 2008

in Prices

Arnold writes:

Russ Roberts’ not-yet-released novel The Price of Everything
starts out by making the economic case for the snow shovel pricing
mechanism. My wife read and enjoyed the novel (which is more than can
be said for any of my own books, so I think Russ should be optimistic
about his book’s prospects). But afterwards, she was still skeptical,
wondering if Russ and I are right, why don’t more people think the way
we do?

That is, if prices are so great at rationing scarcity, why don’t people feel better about them?

It’s a good question. A couple of possible answers.

1. We’re (economists) wrong. High prices in a crisis are awful. We should rely on the benevolence of strangers rather than their self-interest.

2. People don’t understand economics and the full effects of prices. They only see the transfer from buyer to seller and wish it were otherwise–that is, they wish they could have the good and pay the everyday, non-crisis price. They also tend to ignore the long-term incentive effects.

3. People understand economics, but are hardwired or culturally affected to be skeptical of transfers during a crisis.

I’m partial to number two. But three could be part of it, too. There are certainly many settings where we are averse to rationing via price–the family for example. We may carry those feelings into other situations as Hayek suggested.


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