… is from page 120 of the third edition (2015) of my colleagues Tyler Cowen’s and Alex Tabarrok’s microeconomics textbook, Modern Principles: Microeconomics:
How is order produced from freedom of choice? That is a scientific mystery, and prices are the biggest clue to the solution. Prices do much more than tell people how much they must shell out for a burger and fries. Prices are incentives, prices are signals, prices are predictions…. A price is a signal wrapped up in an incentive.
People who advocate government controls on prices (such as rent-control and minimum wages) – and controls on activities (such as speculation) that cause prices to more accurately reflect underlying economic realities – do not understand the reality that Tyler and Alex point out. Such advocates of price controls think that, because they do not like the information that prices convey, they can change the underlying economic reality by forcing prices to lie about that reality.
A well-meaning advocate of minimum-wage legislation, for example, understandably laments that some workers’ hourly wages are much lower than what that advocate would like those wages to be. But then this advocate (who, it pains me to say, is sometimes a credentialed economist) reveals his or her failure to truly grasp the role of prices by demanding that the price give a false report about the underlying reality. The minimum-wage advocate believes that changing what the wage reports about the underlying economic reality is sufficient to change the underlying reality in just the way that this advocate desires.
It’s as if a newspaper editor, distraught at a report written by reporter Smith of a gruesome murder, orders reporter Smith to change his report to read that the victims were only slapped around a bit rather than murdered. No one this side of sanity would suppose that changing the wording of the newspaper report would miraculously bring the murder victims back to life. Yet many people, otherwise sane, believe that a government policy of forcing wages and prices to report realities different from what those realities actually are miraculously changes reality for the better.
And note: the monopsony story that the more-sophisticated advocates of minimum wages strain to use to justify their policy of forcing wages to lie about reality does not escape the above criticism. If wages for many workers don’t currently reflect those workers’ marginal productivities, these currently too-low wages themselves are both market signals and incentives: they reveal profit opportunities that either existing or new employers can exploit, and will exploit absent government-erected barriers to doing so.
