Tuesday, November 12, 2013

Prices are Better than Words

Bart Wilson (no relation) at Econlog writes admirably on a subject that is at once important, obvious, and frequently ignored by political elites: prices are information. It's a subject we take seriously here at EE, enough so to merit its own tag. 

Wilson uses the example of labor. He contends that the final wage strike price aggregates and distills widely dispersed information, including (especially!) all the subjective relative preferences that lurk tucked away in people's minds. And he does not explicitly deny that one or more of those relative preferences could include a taste for arbitrary discrimination or the occasional bit of exploitation. Indeed, it would be silly to deny that. But because prices are quiet sentinels of Truth in a stochastic world, unmasking unwarranted avarice is seldom as simple as observing ex post transactions and evaluating them using ex ante behavioral assumptions.

Muddying the problem is that prices can be wrong quite naturally. Bubbles spontaneously form in the lab, de novo products can take time to settle on a stable retail price, exogenous shocks throw relative prices into disarray. Pushing the metaphor, for prices to be the most useful, the sentences they constitute should be clear and mature. Note however that being wrong is different than being false. Wrongness implies innocent error.
JR: Oh, did you try to sell me an off-brand CD player from 1986 for $600? You must be mistaken, Sam, for I am no rube, no dolt for you to rip off.
Me: Oops, sorry Jeff. I forgot to write the decimal point. That's six bucks.
JR: Ah, okay. I was worried there for a second I'd have to feed you a gluten-free knuckle sandwich.
Me: What?
JR: See you later, man. And look for my Thanksgiving post which should be up soon.
Falsehood implies intentional deception.
JR: What's this? $600 for an off-brand CD player from 1986?
Me: I got it in a storage locker auction.
JR: That makes it worth 600 bucks?
Me: It was part of a drug bust seizure.
JR: So?
Me: Look man, I'm not saying that the original owner hid diamonds inside the case, but when I shake it, I can definitely hear something rattling around in there.
JR: Really?
Me: I know that $600 is a steal for a piece of home electronics stuffed to the brim with diamonds, but I, uh, I need the money for cat food. What do you say?
JR: Well, I guess that's a win-win-win.
Me (looking around with shifty eyes): Yeah.
Price controls are the fiction that wrongness can be overcome with falsehood. (Possibly) well-intentioned political agents identify what they believe to be a sour note in the orchestra and haul the offending cellist out by the ear to swap in their own, complete with sheet music scribbled by committee. Egregious examples of this ooze out of Venezuela like pus from a ruptured sebaceous cyst. Lesser examples well up from time to time in the states, particularly following natural disasters and for some reason I don't quite fathom, in a self-inflicted orgy of consumerism the day after Thanksgiving.

Prices are like words? Prices are better than words. Prices don't lie. Unless someone forces them to. Let's let the world be more euvoluntary. The truth shall set you free.

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Do you have suggestions on where we could find more examples of this phenomenon?