In anticipation of the 2020 elections, candidates have made campaign promises to make our country better. The high costs of a college education, medical treatment, improving our environment, housing, etc. are just some of our current problems. President Trump puts a heavy emphasis on the marketplace to provide needed products and services. By contrast, Senators Elizabeth Warren and Bernie Sanders embrace more government intervention.
In a market-driven economy prices are the straw that stirs the drink. Frequently, we make the mistake of confusing prices with costs. Just because you bring down an item’s price, that does not mean you have reduced its cost. Ultimately, art, education, health, and thousands of other things have costs that require time, effort and raw materials.
Let me raise the alternative argument posed by environmentalists. Prices do not reflect the full social cost of production. Climate change represents the perfect storm of the increasing social cost of private consumption of materials like plastic and driving gas-guzzlers.
I am heavily influenced by the ideas of Thomas Sowell. His book, “Basic Economics, A Common Guide to the Economy,” sums up his understanding of prices. “Prices primary role is to provide financial incentives to affect behavior in the use of resources and their resulting products.”
Economics provides a guide on the impact to society of allocating scarce resources. Let me emphasize, economic prescriptions are devoid of moral content. Prices play a central role. The marketplace solves demand and supply challenges. Stated differently, in our modern society, the task of supplying millions of products at affordable prices with sufficient quantities bewilders top-down decision-makers. Moreover, in allocating scarce resources to solve one problem, decision-makers can cause shortages in other areas.
Historically, different kinds of economies chose different methods to generate needed products and services. In a feudal economy, the lord of the manor told the serfs what to produce. In the Soviet Union, central planners planned every facet of the economy. They made key decisions on supplying needed resources to manufacturers, the quantity and type of output, and their prices.
By contrast, in a market economy, prices guide activity. There is nobody at the top to issue orders to control or coordinate activities throughout the economy.
According to Sowell, the last president of the Soviet Union, Mikhail Gorbachev, asked British Prime Minister Margaret Thatcher: “How do you see to it that people get food?” The answer was that she did not. Prices did that. Moreover, prices did a much better job of feeding the British public than the Soviet Union’s central planners. As a student in 1969 visiting the Soviet Union, I was shocked to see long lines of people waiting to purchase apples and potatoes.
The market place, not a production czar, determines how resources should be allocated to produce millions of products. Each buyer consummates transactions on mutually beneficial terms. Walmart proves every week to 10 percent of the American public that they can provide their needed products at “an everyday low price.”
In our capitalistic society, entrepreneurs seek equilibrium (supply equals demand) where they can sell their output profitably. If businesses produce a surplus, they will need to discount their product lines.
A free market economic system is a profit-and-loss system, not just a price system. Losses force producers to stop producing what consumers do not want.
We need to remember that economics requires us to recognize that we have limited resources. Just because we put a man on the moon does not mean we have sufficient resources to solve all of the nation’s ills. The only place that had unlimited resources was the Garden of Eden. We should therefore avoid snakes and politicians who promise us the moon!
Originally published in the Sarasota Herald-Tribune
