The Political Philosophy of Pricing

Let’s get into a little bit of political philosophy. Here’s my logic flow that sets the context for this discussion. This is my first crack at laying this out, so I hope it is easy to follow:

  1. An efficient economy is desirable because it raises the general standard of living, which can help more people escape from the limiting effects of poverty.
  2. An efficient economy is one that enables resources to be put to the best use.
  3. Prices are central to helping resources be put to their best use. Only market-generated prices can accurately convey the true and current value of something, as explained by all the following points.
  4. The market-generated price of something is determined by (1) the cost of all the inputs and (2) people’s willingness to pay.
    1. The cost of all the inputs is determined by the price at which those inputs are being sold by suppliers. And those suppliers are setting their prices according to the same two factors (the cost of their inputs and people’s willingness to pay).
    2. People’s willingness to pay is an aggregation of the different potential buyers how much that input is worth to each of them, which depends on if there are substitutes and, if so, the relative price and quality of those substitutes for their specific use case.
  5. The numerous supplier-buyer diads, taken together, form a supply chain, and at each link in the chain there are prices being set in accordance with those same two factors.
  6. New uses for resources are constantly being developed, and the availability and procurement cost of resources are also constantly changing, all of which have ripple effects on the prices of all other resources in the economy as mediated by changes in those two factors that determine market-generated prices.

I’m sure that logic flow will need to be clarified and changed, but it is a start at least. And the conclusion of it, at least as it relates to administrative pricing, is that there is no way a group of experts could ever acquire enough information to accurately determine the proper efficient-economy price for a single product at any point in time, let alone constantly adjust that price over time to take into account the ever-changing factors in every locality.

The way Friedrich Hayek said it in his seminal paper, The Use of Knowledge in Society, is that “the knowledge of the circumstance of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” And, therefore, “Prices can act to coordinate the separate actions of different people.”

He gives an example of this using the tin market, showing what would happen when suddenly there arises a new use for tin:

“All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.”

I do not think people argue that administrative pricing is as efficient as relying on market-generated prices. But from this it should be clear that those two prices are going to end up being wildly different from each other most of the time, and the challenge is to quantify the efficiency cost to the economy of that and then to weigh it against the estimated benefits of using administrative pricing.

Or, in cases where administrative pricing is being proposed in an attempt to curb our capitalistic society’s wealth inequalities, why not just use other methods to redistribute wealth and avoid administrative pricing’s efficiency costs on our economy altogether? This is what I’ve described in my examples of an optimal single-payer healthcare system and an optimal government-run healthcare system.

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