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The Invisible Hand Relies Upon Visible Prices

In my latest column for AIER I celebrate the remarkable and indispensable – literally indispensable – role that visible prices play in enabling the successful operation of the invisible hand of the market. A slice:

Just as the market order is essential to our survival, prices expressed in money are essential to the market order. Prices are among the visible results of the invisible hand’s successful operation, as well as the single most important source of this success.

Each price objectively summarizes an inconceivably large number of details that must be taken account of if the economy is to perform even moderately well.

Consider the price of a loaf of a particular kind and brand of bread. This price reflects, in part, the willingness of legions of consumers to spend their incomes on that sort of bread, as opposed to other goods or services. It also reflects details of the weather and of different governments’ trade and regulatory policies, each of which is among the many factors that affect supplies of wheat. And the price of bread reflects also supplies of yeast, of ovens, of electricity, of bakery workers, of delivery vehicles, of diesel fuel, of packaging materials, and of insurance. In turn, supplies of each of these inputs to the baking and distribution of bread are affected by the demands for these inputs for use in producing and distributing muffins, pasta, popcorn, particle board, bus tires, and jumbo jets – in short, everything else.

The price at the supermarket of a loaf of bread, a straightforward $4.99, is the distillation of the economic results of the interaction of an unfathomably large number of details from around the globe about opportunities, trade-offs, and preferences. The invisible hand of the market causes these details to be visibly summarized not only in the price of bread, but in the prices of all other consumer goods and services, as well as in the prices of each of the inputs used in production. These market prices, each easily visible in terms of a single ‘objective’ measuring unit of value (for example, the U.S. dollar), gives consumers guidance on how to get the most out of their incomes. These market prices also give investors and entrepreneurs guidance on how to deploy scarce resources in ways that produce that particular mix of goods and services that will today be of greatest benefit for consumers.

That this guidance is imperfect according to a standard that would be set by a supernatural intelligence is undeniable. Yet equally undeniable is the fact that this guidance is far better than any that we humans could achieve without market prices.

The market’s invisible hand, in short, alone makes possible – yet equally depends upon – visible market prices.

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