A second-year graduate student in economics (who wishes to remain anonymous) e-mailed me, after he read Pete Boettke’s and Rosolino Candela’s new paper (that I linked to yesterday), with a complaint. His complaint is worded awkwardly, so I summarize that complaint here in my own words. (I received this student’s approval for my rendition of his complaint.) Here’s the complaint:
Even with free entry into, and free exit out of, markets, market prices that are not perfectly competitive general-equilibrium prices reflect a great deal of inaccurate information about the existing state of reality. Your [Boudreaux’s] trust in real-world market prices, which are never perfectly competitive general-equilibrium ones, is excessive.
I’ve much to say in response (some of which I’ve said, in one form or another, in earlier posts). However, because I’m pressed for time now, I content myself to make just two points, each of which falls under the heading Everything Is Relative:
(1) Actual market prices relative to each other convey much useful information even if that information is incomplete and sometimes mixed with information that is misleading. When the price of apples rises it’s usually because the demand for apples rose or the supply of apples fell (or a combination of both). The resulting higher price of apples relative to that of pears directs some consumers to substitute pears for apples, and it directs some producers to devote more effort and resources to the production of apples. Such consumer and producer adjustments might not be correct, when judged from the vantage point of god (or from that of a presumptuous academic or government official), but unless we’re willing to believe that hikes in the price of apples relative to that of pears (and of other goods and services) are random – as likely as not to be the result of a rise in demand for, or a fall in the supply of, apples – then surely on the whole such price changes more often than not prompt economic actors to take the correct economic steps.
(2) What’s the practical alternative to real-world market prices? Does my anonymous correspondent know of a better way to transmit knowledge about underlying economic reality to billions of people around the globe? Pointing out the trivial fact that market prices are never “perfect” is child’s play. What is required of anyone wishing to cast doubt on the efficacy of private-property markets guided by real-world market prices is a believable explanation of how the economy might be operated better by an alternative system. However imperfect real-world market prices are, show me any real-world government-set price, or any real-world government-determined mechanism for allocating resources outside of the price system, and I’ll show you a price and a mechanism far more imperfect than real-world market prices.
….
This student’s e-mail to me is further evidence that young economists today are not being taught proper price theory – which is to say, young economists are not being taught economics.
