Quotation of the Day…

by Don Boudreaux on April 7, 2015

in Prices, Reality Is Not Optional, Work

… is from page 113 of the 11th (2006) edition of one of greatest economics textbooks of all time: Paul Heyne’s, Peter Boettke’s, and David Prychitko’s The Economic Way of Thinking:

No one blames the thermometer for low temperatures or seriously proposes to warm up the house on a cold day by holding a candle under the furnace thermostat.  That’s because they have a more-or-less correct understanding of how those things work.  People do, however, often blame high prices for the scarcity of certain goods and act as if scarcity can be eliminated by enforcing price controls.

Market-determined prices – those that are neither set nor constrained by government diktat – reflect underlying economic realities.  Prices are the results of those realities.  Prices – even those that are set or constrained by government diktat – also have consequences; prices affect and direct economic decision-making.  So while prices that are set or constrained by government diktat affect and direct economic decision-making no less than do market-determined prices, only the latter does so in ways that are consistent with underlying economic realities.  The reason is that only market-determined prices tell the truth about underlying economic realities; minimum-wage rates and other prices that are set or constrained by government diktat lie about underlying market realities.  Such government-determined prices thus cause people to act on misinformation – on economic lies.  And people who are misinformed and misled will not make decisions that improve underlying economic realities; quite the opposite.

….

Whenever I encounter anyone who supports, or even expresses some sympathy for, minimum wages and other government-dictated price controls, that person immediately strikes me as being someone who can be persuaded that holding a candle flame beneath a thermostat will warm the house because such a ham-fisted action does indeed cause the thermostat to register a higher temperature reading.  Or a different analogy: such a person is the sort who supposes that killing the messenger wipes from reality the bad news that the messenger communicates.  At the very least, such a person – regardless of whether or not he or she is formally credentialed as an economist – does not adequately understand what prices are, how they are set, and what roles they play.

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