Ownership As Identification

The Institution of Rightful Ownership Identifies an Economic Value With Its Creator

Stuart K. Hayashi

Though it is not often phrased in this manner, there is an implication buried in economists’ conventional explanations for the origin of the concept of private property rights. The implication is that the main purpose of private property rights is to resolve disputes over competing claims over who should be able to control and consume which resources. This has much to do with the conventional proclamation by economists that the basis of economics in general and private property rights in particular is “scarcity.”



Private Property Rights Are Merely About Settling Disputes Over Control of Scarce Tangible Resources?
“Scarcity,” in this context, refers to the fact that, at any given moment, there is a specific total quantity of units of a good on the market. That there is this specific total quantity means that if, at this very moment, I gain and consume 50 units of this good, those are 50 fewer units available for anyone else at any given moment. My accessing and consuming more units at this moment means fewer units available for everyone else at this moment.

That principle applies even under all of the following three conditions.

1. More units of this good can easily be produced in the near future.
2. There is no danger of any long-term shortage of units of the good emerging.
3. My ravenous consumption of units correctly signals to producers of the units to produce even greater numbers of units in the near future. 

The number of units of the good available are on the supply side. Economists then conventionally continue that human wants are unlimited, and these wants are on the demand side. They thus come to two conclusions.

• Without establishing who privately owns what, a society lacking in recognition of property rights of any sort would devolve into chaos where everyone fights everyone else for “scarce” units of what they need. Insofar as people accept the institution of private ownership, that helps reduce the squabbling.
• The proper value and free-market price of a good are at the intersection of demand and supply, where vendor and buyer agree on how much of the buyer’s own wealth the buyer will give up in exchange for the good.

Both conclusions are mostly correct, but they are far from sufficient. Insofar as this dispute resolution was the major impetus for the origin of the concept of private property, that still leaves an important question unanswered. This “scarcity” might explain why life for everyone in general is more harmonious if different parties control different resources and units of goods. But this “scarcity” is not adequate to explain why it is that a specific party should control a particular resource or unit. In effect, most libertarians and economists conclude that your homestead should be privately owned by somebody, but few libertarians and economists care to elaborate on why it is you in particular who should own the very homestead that you settled.

Conventional economists are largely silent on this issue. Even economists who have reputations for defending laissez-faire enterprise have been lackluster on this. That is ironic. The issue of why a particular person is right to own and control a particular resource was touched upon by two founding fathers of the discipline, John Locke and Adam Smith, though they didn’t write essays that explored this idea to the point where they would take it to its logical conclusion. This essay you are reading is part of my attempt to expand upon the logic of their argument.




Private Property Rights Emerging to Protect a New Economic Value That Someone Has Created
Imagine you’re a homesteader. You go onto wilderness land that was not claimed by anyone. If you were a hunter-gatherer, you might be satisfied with this land in its default condition. But that hunter-gatherers mostly gained their food from foraging and hunting and otherwise did not change the land as much was a big reason why the infant mortality rate among them was 25 percent. As you want the chances for mortality to be much lower for yourself and the children you intend to bring into the world, you know that this wilderness is not satisfactory for your habitation.  For the land to be truly hospitable, you need to change it.

You choose which crops to plant. You irrigate the land so that the crops receive water with greater regularity. Although Karl Marx mischaracterizes this process as if it were manual labor and nothing else, the process actually involves the exercise of a body part other than the arms and shoulders: the brain. You improve the land and make it livable mostly through the plans you devise for it. And, as John Locke points out, the new livability of the land is economic value that was not inherent to the land.

 No, the net increase in the land’s economic value was something that your creative choices had put into it. It is for this reason, note John Locke and Adam Smith, that the homestead has rightfully become yours. As Locke and Smith laid the foundation for this interpretation, I call it the Locke-Smith (“Locksmith”) Theory. When other people come and homestead their own plots, it is proper that they respect that your own plot is rightfully yours to control exclusively.




The Interpretation That Private Property Rights Are Just About Ending Intra-Community Disputes;
or: “I Don’t Care Who Started It!”
Throughout history, many societies have considered any conflict between neighbors to be inherently bad. These societies are unable to cope with intra-neighborhood conflict. Their intolerance of intra-community conflict goes to the point that they would rather there be an unjust resolution to the conflict than for the squabble to go on longer. That applies even if the intra-community conflict extending for a much longer period of time would increase the likelihood of a just resolution. That is, a speedy end to conflict has priority over the attainment of justice.

Here is an example you might have witnessed. Two children begin fighting. An adult authority figure steps between them and breaks it up. One child points to the other and yells, “He started it!” Then the adult authority figure immediately snaps, “I don’t care who started it!” Speaking personally, this attitude seems common among my fellow persons of Japanese descent who reside in Hawaii. Ever since childhood, when I have stood up for myself verbally, some elderly person would say, “Quiet! Nobody cares if you were right or not earlier. We’d rather you just shut up and spare us all this noise!”

Yet when justice is prioritized above conflict resolution, it necessarily matters who started it. If you immediately come upon a woman stabbing a man with a knife, the context that led to this outcome certainly matters. It may be the case that the man started it — he was trying to rape this woman, and she stabbed him in self-defense. On the other hand, it may be the case that this man did nothing to her other than write her into his will. Maybe she had planned to stab him, dispose of the body in secret, and have him declared legally dead after a period of his having been reported missing. It would be for the purpose of inheriting his fortune. In that case, she would be the one who “started” it. In criminal justice, who “started it” is the difference between assault and self-defense.

If a woman stabs a male assailant in self-defense, I don’t think there would be much controversy over who is morally in the right. We do find that there is a lot of controversy over who is right in disputes over private property.

Let us return to the scenario where you have improved a plot of land and therefore gained legal ownership over it. I have contributed nothing to your improvement over the land. But once I see the improvements you have made on it, I decide that that is where I need to stay. I try to squat on your land. You accuse me of trespassing and call the police on me. I then proclaim that you are a greedy overlord trying to deprive me of the amenities I need and therefore deserve. You and I go to court to settle this.

Throughout most Western and even central Asian history, most courts would side with you. But it would not necessarily be because these courts concede that moral right and righteousness are on your side. As I have written before, throughout most of history it was that most societies regarded your private control over your land as nothing better than as a stewardship tentatively assigned to you by society-as-a-whole or by the gods and wilderness spirits.

Pertinent to this discussion, it was not until the arrival of Enlightenment philosophers such as Locke that intellectuals began to recognize that the economic value of your land did not come primarily from the land’s default state or from the gods. It was not until Enlightenment philosophers such as Locke that intellectuals began to consider that the economic value of your land comes from your choices in what to do with the land. It was when people began to entertain the realization that economic value and wealth are created by such intellectual and entrepreneurial effort.

But, generally, the courts would side with you for a different reason: they see the precedent of previously-established private ownership as the easiest, quickest, and most convenient method for settling the dispute. The courts ruling in favor of the private property holder is indeed the morally just ruling. But very few people, even judges who rule on the side of the property holder, understand that. In the scenario where the courts must settle the dispute between you, the homesteader, and me, the trespassing squatter, the courts come down on the side of right largely by accident. In many instances where people side with the property holder, they do so grudgingly.

To the degree that most people are more sympathetic to the property holder than the trespasser, it has less to do with the fact that the property holder earned her property, and more to do with the property holder being seen as more predictable and reliable — and therefore less dangerous to the community. Conversely, the trespasser is regarded as inherently more disruptive and therefore likelier to instigate future intra-neighborhood conflict. Again, the very emergence of strife is considered worse than any injustice that might be inflicted within the squabble or in attempt to end it.

For instance, the same Garrett Hardin who coined the tragedy of the commons writes in the journal Science that the most effective route for settling disputes over who gets what resources is “the institution of private property coupled with legal inheritance.” Immediately upon saying that, Hardin qualifies that, like many other people, he believes that the court coming down on the side of you, the property holder, is the lesser evil, the greater evil being any continuation of our squabble. Hardin goes on,

We must admit that our legal system of private property plus inheritance is unjust — but we put up with it because we are not convinced, at the moment, that anyone has invented a better system. The alternative...is too horrifying to contemplate. Injustice is preferable to total ruin.

That is the attitude of most people in the West, including alleged defenders of laissez-faire capitalism such as Thomas Sowell. The notion is that for a society to put up with the institution of capitalist private property is rather crass and cynical, but humans are too grubby and “fallen” to be able to manage something of higher aims, such as socialism. That is why Sowell says,

If everyone were sweetness and light, socialism would be the way to go. . . . Maybe some day we will discover creatures in some other galaxy who can operate a whole society that way. But the history of human beings shows that a nation with millions of people cannot operate like one big family. . . . 

While my desires for a better life for ordinary people have not changed from the days of my youthful Marxism, experience has taught the bitter lesson that the way to get there is the opposite of what I once thought.

This notion that the institution of private property is nothing better than a begrudging recourse for resolving disputes over the distribution of resources is also found in the arguments of many libertarians.

 That is visible when libertarians argue that all resources that can be privately owned, such as forests and even rivers, should be.  Their main rationale for this privatization that the differing incentives between private profiteers versus tax-funded government employees often result in the privately owned resources being better-conserved and better-managed. Libertarians who advance that argument are not wrong on that point. Still, when that is presented as the main argument for private property, it overlooks the implicit role played by private property that is of far greater psychological significance.

Libertarian attorney Timothy Sandefur exemplifies that approach. Consistent with that approach, he writes that legitimate private property, in contrast to the concept of intellectual property that he tries to discredit, “is naturally exclusive, meaning that if I have it, you simply *cannot*; if I take it, you no longer have it — you have been ‘disseised.’”

Sandefur presents private property as, more than anything, that form of dispute resolution, and simultaneously fails to address who exactly should be recognized by the law as the default owner of a newly created economic value.




Rightful Ownership As Identification
Ayn Rand said, “Existence is Identity, Consciousness is Identification.” That has a two-part meaning. First is that every entity that exists has its own identity, its own specific nature. That means that insofar as an entity can be distinguished as such, it possesses traits that make it stand out from other entities. “Consciousness is Identification” refers to how it is by use of your reasoning mind that you discern the attributes distinguish one entity from others. To translate, an entity has its own identity and it is through your rational faculty that you gain knowledge of its identity. To gain knowledge of something’s identity is to identify it. That is the identification. And an important application of this faculty for identification of anything is the identification of a piece of property with its owner.

Here we find that the notions about private property that I have described above — property as a tentative method for dispute resolution — is, at best, woefully incomplete. To identify a property with its owner is about so much more than identifying who currently has the legal authority to control which resources. We return to the previously imagined scenario of a dispute concerning you, the homesteader, versus me, the trespassing squatter.

Here, to identify the property owner is about so much more than identifying which of the disputing parties is the safer, more reliable party who is less prone to initiate social discord. Nay. To a large extent, to identify a form of wealth with its rightful owner is to identify that wealth with the party that created it. That is a fundamental distinction.

Many judges would say that they rule in your favor because that is just the law. For them, that is the end of it. At least, for them that is the most direct and substantial reason why it is you who should have ownership control over your homestead. It is on account of official legal documents saying so. Judges who are more philosophically inclined, but who tend to be molded by the conventional philosophic consensus, may cite, as their reason for siding with the property holder, that it is the tradition that accords with the big priority that is ending conflicts per se.

In court, we establish that I am the one who trespassed on the plot that you improved. You point out that you were rightfully minding your own business, whereas I took the initiative to intrude upon your life. We get into a fight. Here, “I don’t care who started it!” is the perfect retort from a judge who believes that private property rights are merely about settling disputes over scarce tangible resources. Such a person sure doesn’t care that the economic value over which we are fighting is a value that was started by you and your choices.

The most direct and substantial reason why you are the one who should have ownership control over the economic value of your homestead is that you are the one who created that economic value. The law’s formal observance of you as the homestead’s owner is no more than secondary to that fact. And the law’s formal recognition of you as the owner is merely the law acknowledging, always implicitly though seldom explicitly, that the party that should have default claim of ownership control over an economic value is the one that made it.

Ownership is the means of identifying an economic value with its creator. This identification is what helps the law ensure that, in controlling and enjoying the economic value she took the initiative in producing, a person experiences the logical consequences of her peaceful chosen actions. That identification helps prevent thieves from wrestling away control of the effect (the economic value) from its cause (the value’s creator). This especially applies to intellectual property rights.



If an Economic Value Belongs to Its Creator, How Can I Rightfully Own Units Made By Someone Else?
This principle is not mitigated by the fact that a particular unit’s rightful owner is seldom the same party that produced the unit directly. In most instances where someone resolutely trades away the units she produced directly, she maintains the economic value she had created in the direct production of the units. The economic value she previously had in those units is what she now has stored in whatever good or service she obtained in exchange for the units. Indeed, insofar as this party first produced those units with the intention of trading them away later, she did so for the purpose of maintaining the units’ economic value in the form of good or service she gained in exchange for the units.

When you improve your land, the improvements are what you have produced directly. But when you sell the land for $500,000, you retain the economic value of the improvements. The economic value you produced is now stored in the $500,000. When you exchange the $500,000 for Y, the Y itself was assembled directly by other parties, but the economic value you produced is now in the Y.

Due to natural circumstances, that economic value might depreciate on its own. Machinery can wear down. Food items will rot. The depreciation can also be imposed from government forces, such as in the national government’s treasury and the central bank devaluing the monetary units you saved up. But if the material units you produced directly were traded away for Y, whatever economic value remains with Y is the same economic value created from your production of the original material units.

There is a corollary to this. Note that an extension of the right of the homesteader to the land he improved is his right to sell that land. Thus, the homesteader’s right to the land he improved is applied in the homesteader’s ability to transfer ownership of it to someone else. That does not change the fact that, by default, the first rightful claim of ownership over improved land goes to the homesteader whose planning choices improved it.

That principle applies to manual labor. An extension of the Locke-Smith Principle is the laborer’s right to transfer ownership of his labor. For that reason, it is consistent with the worker’s rights that the worker may forge an agreement with an employer. The worker implicitly agrees that, in exchange for the employer’s remuneration, the employer gains ownership over the product of the worker’s physical labor as that labor is being performed. That does not change the principle that, by default, the first rightful claim of ownership over one’s efforts goes to the person who is performing that effort.



The Right to Ownership Over the Economic Value One Has Created Includes the Right to Bestow It to Heirs of One’s Choosing
Many readers balk at this idea, saying that most of the wealth a person has was not created by she herself, but was what she inherited from elder relatives. They say that especially applies in instances of the heiresses of multi-million-dollar fortunes. The consideration that a lot of people start with inheritances, reply my detractors, demonstrates that most of the economic value a person possesses is not what she created herself.

 More specifically, the proclamation goes that the $300 million that Paris Hilton inherited cannot be the result of her own creative choices. No, goes the proclamation, she is known for being a flaky socialite who made no wise investment other than having been born to the most convenient set of parents. As Garrett Hardin says it,

An idiot can inherit millions, and a trust fund can keep his estate intact. We must admit that our legal system of private property plus inheritance is unjust — but we put up with it because we are not convinced, at the moment, that anyone has invented a better system.

I have refuted that argument in this other post.

I cannot deny that most of us alive today, rich and poor alike, work with economic value that was already created by our forebears. But, as I have written in months past, that reality does not nullify the principle. The fact is that insofar as you are free, the economic value you own and control is still the result of your own productive choices. And that fact does not hinge upon your fortune having been built up from nothing, ex nihilo.

As I have noted in this other blog post, to say that Paris Hilton inheriting $300 million is a reward to her for doing nothing, or for merely having been born, is to overlook something crucial. The member of the Hilton family most germane to this discussion is Paris’s great grandfather, Conrad Hilton, founder of Hilton Hotels. The hundreds of millions of dollars he accumulated were the sum total of what his hotel guests willingly paid him in exchange for his lodging services. And these guests chosen to pay him these prices because they valued the lodging services more than the monetary sums they gave up.

 One of the great motivators of earning lots of money is spending it on oneself in one’s own lifetime, but another is being able to bequeath it to descendants. Paris Hilton’s inheritance is not an instance of some malevolent deity, named Capitalist Inequality, rewarding her for having been born to convenient parents. Nay, her inheritance is the reward to Conrad Hilton from his guests for the services he provided them.

Many people reply indignantly that even if they can sympathize with Conrad Hilton wanting to ensure a comfortable life for his great-grandchildren, it still offends them that flaky heirs and heiresses can frolic in an affluence that the heirs and heiresses themselves take for granted. The reality is that insofar as there is economic freedom, heirs and heiresses hold onto their wealth to the extent that they still exercise responsibility and even productiveness in managing their heritage. Through unwise choices, an heir or heiress truly unworthy of such a fortune will happen to lose it.

At age five, Woolworth department store heiress Barbara Hutton inherited $70 million — $1.372 billion in 2018 U.S. dollars. Not only did she not appreciate her fortune; she did not even appreciate fortune-makers, writing hate poems about how capitalism is venal and corrupting. She did not manage her fortune with much self-care. When she died, she had no more than $3,500 left. Her story is unusual only in its severity — accounts of shrinkage of the fortunes of multimillionaire heirs are less extreme but nonetheless common. When “Commodore” Cornelius Vanderbilt died in 1877, he left behind an estate of $100 million. When his descendants held an official reunion at Vanderbilt University in 1973, not one of them possessed a net worth even as high as $1 million.

Paris Hilton inheriting $300 million does not negate my point that, insofar as people deal peacefully with one another, in the long run a person’s wealth is the stored version of the economic value which that person created. Paris inheriting $300 million is, in principle, about Conrad Hilton having created the 300-million-dollar value and rightfully deciding what to do with it. How much of that wealth Paris will continue to retain in her old age will depend upon her own wisdom in managing and re-investment of this economic value.

Thus, indeed, insofar as anyone acquired it through choices made in freedom and peace, the amount of wealth that someone owns, inherited or otherwise, is the quantity of economic value that he or she created through her choices. And these choices are an important portion of one’s identity. Concordantly, identifying someone’s ownership over wealth that is the result of such choices is a method of identifying important aspects of the owner herself.





Conclusion: Your Economically Productive Choices As Part of Your Identity, As All Your Choices Are
Yes, your private ownership over the economic value you created identifies you with the creative actions you chose to bring that economic value into existence. As I have written earlier, I find so much of “Identity Politics” to be tragic. I feel sorry for political activists talking about one’s race, sex, gender, sexual orientation, or another trait with which someone was born beyond her control, as if those unchosen traits are the main ones that provide someone with an identity. Someone’s identity is most specifically at the individual level. Identity is most specifically that which distinguishes a single person from everyone else, including from many other people that have superficially similar qualities.

My ethnic origin hardly identifies me in separation from the 1.4 million other Americans of Japanese ancestry. It definitely does not identify me among the 130 million other people of Japanese descent. Were it that my identity could be no more specific than my ethnicity, that would hardly narrow it down. And that is just fine for many political activists who try to exalt the social collective over the individual. In the end, what actually identifies me from everyone else is what renders me unique. What makes me unique is the sum total of choices I have made throughout my life.

Point to any one innocuous, whimsical decision I made in my life — such as eating a hamburger at McDonald’s today — and that same choice was probably made by millions or even billions of other people. However, the choices add up over a lifetime. Looking at the entire series of choices a single person has made over his or her lifetime, it is not exactly like anyone else’s series of lifetime choices. To reclaim a noble term that internet trolls have tried to make into a slur, the identity that comes from the sum of your lifetime choices is of a uniqueness comparable to a snowflake.

Many of the more general, more superficial — literally surface-level — aspects of someone’s identity are outside of his or her control, such as the aforementioned ethnic origin or sex-related traits. But the most substantial and specific attributes that distinguish someone are the choices in his or her control. Hence, those choices are the most substantial source of one’s identity, and, well into adulthood, your identity ultimately consists of the results of the choices pertaining to what you have made of it. As noted by Amazon founder Jeff Bezos, “We are our choices.”

And among the choices that make up our identity are those pertaining to finance and economics. I hold no doubt that many people recoil at such a thought. It is a common refrain, “I hate people being materialistic and trying to wrap up their identity in what they own. If the bank forecloses me and I lose my stuff, it doesn’t erase my personality; I don’t stop being who I was before the foreclosure.”

 I readily acknowledge that you are not the belongings that are external to you. You have an identity separate from such objects. Were you to lose a significant portion of your fortune from some unforeseen traumatic event, that loss of money, by itself, would not stop you from being you. Still, the steps you chose to take to acquire anything with which you were not already born do display facets of your personality and are thus part of your identity.

As an institution that is supposed to be helpful in safeguarding you against theft, a document of rightful ownership is a document of identification. It is an identification in several important respects. The deed to your homestead, for instance, is such a document for identification. Consistent with what I have been saying, the deed identifies you with the property you control because it identifies the economic value with its creator.

This is something that cannot be stressed enough. Your identity consists of your creative choices. Your creative choices produce economic value. When the economic value you produce is respected as your private property, that ownership identifies the economic value with its creator. That is, respectively, to identify the effect with its cause. Rightful ownership is thus a form of identification. For someone to steal the economic value you produced is for that person to steal the logical effects of your choices, choices that are part of your identity. On a broad level, all theft is a sort of identity theft.

Are There Forms of Economic Value That Exist As a Default in the Pristine Wilderness, Before Human Entrepreneurship Was Applied to It?

And Might Human Entrepreneurship Ruin This Economic Value Found in the Wild?


Stuart K. Hayashi





I have argued that, since the times of the hunter-gatherer, poverty has been the default for human beings. Most economic value existing today was created by human initiative, where entrepreneurial innovators have devised new methods of producing greater quantities of economic value from ever-fewer and ever-smaller inputs of natural resources.

But I think some people might reply that there are forms of economic value that existed prior to any human initiative, and that entrepreneurial value-creation might have been of detriment to these natural and preexisting forms of wealth. As an example, hunter-gatherers had fresh, breathable air. Throughout the 1800s, industrialization produced many forms of wealth that hunter-gatherers did not possess, but this industrialization infested the atmosphere with toxic smoke. Does a point such as that negate my argument overall?

I concede there are some instances of some natural resources already possessing economic value as a default. Breathable air is taken for granted until particular industrial activities cause pollution that render safely breathable air a scarcity. Although environmental regulations that governments imposed, from the top-down, are inaccurately credited as the main reason for improvements in air quality since the 1970s, much of the improvement is due to market-based factor.

One is the recognition that the breathable air in one’s vicinity is one’s private property, and therefore people whose air is polluted can rightfully sue neighboring air-polluting firms. These air-polluting firms were trying to cut their own costs by declining to make proper and safe disposal of the waste byproducts that went up their smokestacks. This hurt the air-polluting firms’ neighbors. In their civil suits, the neighbors transfer those costs back to the firms.

Hence, air pollution is not the result of laissez faire as much as it is an attempt by firms to socialize and collectivize their own costs. Those costs being transferred back to these firms, by means of the air being recognized as others’ private property that should not be damaged, is the solution. And it is a specifically capitalist solution. Insofar as people are free and peaceful, an entrepreneur cannot forcibly impose her own costs onto other people as an air-polluting firm would.

Every input of natural resources and human labor imposes a cost on the entrepreneur. The entrepreneur therefore downsizes her costs and upsizes her profits insofar as she can devise methods of producing greater economic value from ever-smaller and ever-fewer inputs of natural resources and human labor. Air pollution comes from the waste byproducts of this process. To cut down on this waste is to cut costs. Hence, entrepreneurs who did the most to reduce waste in the inputs of natural resources were, per unit produced, also the ones who cut costs by the widest margins.

Breathable air that can be damaged by some forms of industrialization may be an example of an economic value that already existed in the wilderness as a default. For the most part, though, most economic value comes from market participants applying scientific knowledge to convert objects from the wilderness into an environment more suited to human habitation. Overall, my point still stands. For hunter-gatherers, the infant mortality rate is 25 percent. In the West, it was political-economic liberalization and industrialization that got that figure below 1 percent.

On a net balance, most wealth comes from entrepreneurial development of technology, not from hunter-gatherers simply accommodating themselves to the wilderness in its default condition.

Ludwig von Mises’s Explanation on How Price Changes Contain Information Signaling Shifts in Supply and Demand

Stuart K. Hayashi

Ludwig von Mises; image from
Wikimedia
Commons, which came
from the Ludwig von
Mises
Institute; licensing
permissions informa-
tion here

Many libertarian anarchists, such as those of the Ludwig von Mises Institute, denigrate the institutions of intellectual property (IP) and intellectual property rights (IPRs). This is ironic, as IPRs are important for sending information throughout the economy to the market’s participants. This is similar, in principle, to an idea put forth by that anarchist institute’s own namesake, the economist and non-anarchist Ludwig von Mises.

Mises provided a helpful explanation for how observed changes in commodities’ prices were forms of information that sent signals to would-be vendors on which commodities would need more or less supplying to consumers. Mises also explained how efforts by governments, from the top down, to mandate maximums or minimums on prices would ultimately provide misleading and inaccurate information to the would-be vendors.  The misleading signals sent by governmental price controls thus imposed shortages in some parts of the economy and wastefulness toward resources in others parts. Those shortages and waste would have been more easily avoided if not for the government’s attempt to control prices. The explanation is something as follows.

If the average price of a unit of a good — say, a widget — increases, that indicates, to those watching the market, at least one of two possibilities. The first is that there has been an increase in marketplace demand for the widget. That would mean that people are more willing or more able to trade greater amounts of their wealth for the good than they were before. The second possibility is that there was a reduction in the supply of widgets. That would mean that fewer units of the good are being placed on the market. That could be because there has been a reduction in vendors of this product. It may also be because some increasing cost in the process of placing widgets on the market has made fewer widgets available.

In any case, the price increase transmits to would-be vendors the signal that there is a greater profitability in the supplying of widgets to the market than there was before. This motivates more would-be widget vendors to place additional widgets on the market. That brings the price back down.

Conversely, if there is a reduction in the average price for units of widgets, it suggests the opposite possibilities. It could be that there is a reduction in marketplace demand for widgets. That would mean fewer people are that willing or able to give up portions of their wealth in exchange for widgets. It could also be that there has been an increase in the supply of units of widgets. That would result in would-be widget customers having to compete less fiercely with one another to get every last widget they want. They are no longer bidding the price as high as they were previously. In any case, the decrease in the likelihood of making a big profit from supplying widgets is what signals to would-be widget vendors that this market is saturated. It suggests to them that bigger profits are to be made in supplying units of some other good that is scarcer.

That is why Mises concludes that price changes are important signals transmitted throughout the market to guide participants, informing them of when marketplace demand has increased or when a much-desired good is becoming scarcer and needs to be replenished in stock. And he adds that the freer the market is — meaning the more peacefully that participants interact with one another — the more reliable is the information encased in the price changes. Mises explains that controls in price that governments impose from the top down have the effect of sending misleading information to market participants. Market participants being misled in this manner impedes upon their ability to make well-informed decisions they otherwise would execute.

Suppose you have a store that sells widgets. Due to a shortage of supplies in the natural resources that go into producing widgets, you have had to increase the price of units from $10 to $70 per unit. In an unfettered market this would signal to widget manufacturers that to win back customers, they might need to find some new and cheaper type of resource to produce widgets. But with the new scarcity in widgets, customers know they have to conserve. They must be sparing in their purchases of widgets and sparing in their usage of these units. Now every Sunday, a new shipment comes in of seven widgets, which you charge at $70 apiece. Also every Sunday, I come in and purchase one unit for $70. Previously I would have purchased more than one unit. In fact, every day of the week, a specific customer — corresponding to that day of the week — comes in and purchases one unit for $70.

But suppose the government decrees that the price increase is unfair. The government says that because customers were accustomed to the old price, there should be statutes officiating that the price cannot exceed that. When I enter your store on Sunday, and see the price is back down to $10, the signal that I was to be sparing and conservative has disappeared. I purchase all seven units for the week. Then each day from Monday to Saturday, a customer comes in and finds there is nothing for him or her.

The government-mandated price controls feed misleading information to market participants, upon which they act. That is why, when governments set a maximum price for a product that is far lower than the free-market price, that results in shortages. It is also why, when governments set a minimum price for a product that greatly exceeds its free-market price, the consequence is a surplus of units that would-be vendors cannot unload.

Yes, price changes transmit necessary information to market participants. That is why it is fitting that the ancient messenger god Hermes/Mercury is also associated with commerce. Acts of commerce not only rely on information but transmit it.

What I have written above about price changes is very basic economics-related knowledge to the libertarian anarchists and libertarian economists who seek to downplay the need for IP protection. But these alleged free-marketers have been overlooking an even more basic type of information in the market.  More than that, the far-more-basic information these alleged free-marketers overlook is information that serves as the foundation enabling customers to find vendors and negotiate free-market prices in the first place.  That is a matter I try to explain over here.