Posts by Perry Munger

@dogma

Heh. Economics, for those of you late to the subject, is as much a study of psychology as anything else. Sure, there are numbers and maths and hard things like models and graphs, but it all boils down to preference.

Economists call it the 'utility function', which is what the free man uses to evaluate the things he wants. In other words, if he wants a Prius, he will pay for one, bidding it up and allowing Toyota to sell more or increase the price (do we all remember the demand curve, class?). The utility function is a computation of all the priorities in a rational entity that results in the allocation of resources to achieve the entity's ends.

So, when you say that price is not the sole component of a rational decision, you have seriously missed the point. Price is more a result of the decision process. Price is what you have after you have computed a given thing's worth in comparison to all the other things you could have bought. In other words, when you're looking at soda, you may decide to buy the generic brand so you can get chips too, which signals as a result that the quality of the soda isn't as important as the getting of chips. Alternatively, you may forego the chips because you feel you need the better quality soda, which validates the higher price.

Yes, price is a component of the consumer's decision and cost (the prices a producer pays) is a component of the producer's decision, but the thrust of price theory is that where the two prices (consumer and producer) meet is a result of all kinds of calculations, or, in the case of most people and soda, a whim.

What I'm trying to say is that the statement that the market will signal price as an indication of overall systemic interest in a thing is not a dogma at all; it is a rational observation as valid as that things fall and we call this gravity. Price theory is pretty darn easy to defend as theories go. It is those that wish to regulate prices that must resort to normative tactics, as they say they know better than the accumulated wishes of the unwashed what those wishes ought to be and thus are entitled to mess around with price.

Well, welcome to another interesting fact that price theory predicts: force the price down and there will be not enough of the thing to go around, causing lines, frustrated consumers and things like blackouts. This is because producers can't afford to grow production and don't see an adequate profit margin so slow production until they do. Force the price up artificially and people quit buying it so much, which can lead to a reduction in profits as the cost increases due to reduced scale coupled with a reduction in innovation in the sector because profits are locked in.

Pretty much any time price gets decoupled from the market, distortions follow, which the utopists argue can be mended with more/more effective governance, but, in reality, it is merely people trying to eke out happiness however they can, which may mean circumventing government controls no matter how necessary or well-intentioned. This is what man does, has been observed to do since the dawn of time, and will continue to do no matter how much he's told not to. That is why the price theory remains positive rather than normative: it is an observation of what man does, rather than an attempt to change what man does to fit some neat pet theory.