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