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Pricing 101
Pay up or it dries up.


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Thomas Sowell

With all the advances in sophisticated analysis by professional economists, very little of even the basic principles of economics has gotten down to the average citizen and voter.

Many, if not most, of the economic policies advocated by politicians today would never pass muster if the average voter understood as much economics as an economist like Alfred Marshall understood 100 years ago or David Ricardo 200 years ago.

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Nothing is more basic in economics than prices — and yet the role of prices is repeatedly ignored or even misrepresented by politicians and the media.

What do prices do?

Prices impose the most effective kind of rationing — self-rationing. Why is rationing necessary? Because what everybody wants always adds up to more than there is.

It doesn’t matter whether you are talking about a capitalist economy, a socialist economy, a feudal economy, or whatever. Resources are limited but desires are not. That is the basic and defining problem of economics.

Prices force you to limit your claims on what other people have produced to the value of what you have produced for other people. Prices force you to limit how much of product A you buy because you need to keep some money to buy product B.

While prices convey these limitations, they do not cause them. No economy — capitalist, socialist, feudal or whatever — can keep consuming more than it produces. Producing more of product A means using up resources needed to produce product B.

Simple and obvious as all this may seem, politicians blithely ignore it when they promise to make the prices of housing or health care or other things “reasonable” or “affordable.”

Nothing is easier for any government than to impose price controls. Governments have been doing that for thousands of years. What governments cannot control are the underlying realities expressed through prices.

What does the history of thousands of years of price controls tell us?

The first thing undermined or destroyed is self-rationing. When you pay the full price of going to a doctor, you go there when you have a broken leg but not when you have the sniffles or a minor skin rash. When the government makes health care “affordable,” you go there for sniffles and a minor skin rash.

The underlying reality has not changed, however. The doctor’s time is still limited, and the time that you take up with your sniffles or skin rash is time that somebody else with a broken leg — or perhaps cancer — has to wait to get an appointment.

Government-run health-care systems in countries around the world have longer waits — sometimes months — to get medical attention. In other words, the rationing goes on, but more haphazardly, because prices do not force people to ration themselves according to the seriousness of their problem.

It is the same story when housing prices are controlled by government. Rent control has allowed some people to take up more housing space than they would if they had to pay the full price that reflects other people’s demand for housing.

The net result, whether in New York or San Francisco or elsewhere, is a lot of apartments with just one person living in each, and lots of families who cannot find a vacant place to move into. Housing shortages have resulted from rent control in cities around the world.

Housing shortages mean that some people are forced to live far from their jobs and commute, and some become homeless on the street. Homelessness tends to be greater in cities with rent control — New York and San Francisco again being classic examples.

Economists have long been saying that there is no free lunch but politicians get elected by promising free lunches. Controlling prices creates the illusion of free lunches.

Prices not only ration existing supplies, they also determine how many new supplies will be forthcoming. When a new pharmaceutical drug costs an average of $800 million to develop, there is no point talking about “affordable” medications.

Either the $800 million is going to be paid or the supply of new drugs will dry up. Controlling prices does not change that.

COPYRIGHT 2007 CREATORS SYNDICATE, INC.



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