The Meaning of Price II
By M. Northrup Buechner
An entry in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.
My last blog ended with the point that if you consider a price of $4.00 for a slice of pizza, the concept $4.00 has a definite meaning in your mind. In fact, any sum of money, whether or not it is a price, has a definite meaning to people who live with that money. What is that meaning? Every price is a measure of something. What does it measure? In this case, the answer depends on the relation of $4.00 to all the other prices in the economy.
The idea that names that relation is the doctrine of relative prices. This idea says that the meaning of any individual price depends on its relation to other prices. All prices are relative prices. No price stands alone. This doctrine is true. Let us see what it means.
The significance of the doctrine of relative prices is best conveyed by an historical example. During the 1970s in the United States, there were price controls on the energy industries, and most importantly on oil and gas. At the same time, there were periodic shortages of gasoline. In 1974 and again in 1979, long lines of cars waited at gas stations until the stations’ supplies of gas ran out. There were also many other inconveniences and irrationalities which together became known as the “energy crisis.”
Advocates of the free market said that these troubles could be eliminated by repealing the price controls. If there were no controls, they said, the price of gasoline would rise until the quantity people wanted to buy equaled the quantity supplied by the oil companies, thus ending the shortages.
The politicians, intellectuals, and bureaucrats who favored controls emphatically denied this. They pointed out that under the controls, gasoline prices had been rising at a rate of over four percent a year (from 1975 to 1979) while the quantity sold had been rising at the same time. “Gasoline is a necessity,” they said. “ People must have it for essential purposes, like shopping and driving to work. Increases in price do not reduce the quantity of gasoline people must have. Removing the controls would allow the oil companies to reap huge profits while doing nothing to remedy the gasoline shortages.”
This argument in favor of controls was wrong on every count, not the least of which was the underlying moral premise. Next time I will name that moral premise as well as the economic errors. In the meantime, I leave it to the reader to see how many errors he can find. Hint: the primary economic error depends on the doctrine of relative prices.