By Geoffrey Lawrence and Ron Knecht
Assistant State Controller and State Controller
We like prices. We know that sounds strange. Most people like only certain kinds of prices: low prices if they are buying and high prices if they are selling. As economists, however, we like them all.
Why? Because there is perhaps no more powerful organizing force in society than prices set by the free interactions of buyers and sellers.
Prices instantly communicate information about society’s collective needs and the availability of goods and services, labor, materials and other resources to fill those needs. Simultaneously, they provide the necessary impetus for action that promotes human wellbeing.
When people see that an unexpected shortage of refrigeration following a natural disaster causes a spike in the price of ice in the affected area, many folks from elsewhere immediately fill their coolers with ice bags and drive sometimes hundreds of miles to sell them in the disaster area. In this context, prices actually save human lives by coordinating massive relief efforts beyond what charity or government could do.
Diabetics, for example, can keep their insulin on ice when it is available to purchase, where they might not be so fortunate if they had to wait for the slow response of government or relief agencies. Prices ensure that the right resources go to where they are needed most.
This is an extreme example, but one with which Lawrence, who grew up in hurricane alley, has first-hand experience. We could also cite many other examples. Every day, we are surrounded by the benefits of a functioning market-price system.
When we go to a grocery store, there are fresh fruits from other continents for us to purchase. When we go to Best Buy, there are inexpensive complex computer gadgets manufactured with parts, materials, and expertise from around the globe brought together at just the right prices to balance supply and demand.
Imagine government bureaucracies trying to coordinate such efforts: They would be so massive that the cost would be ridiculous, and the system surely would not work well at all. Market competition, fueled by price setting, drives downward the real prices of goods and services over the long run, sometimes to a breath-taking extent. Government administration – think Obamacare – drives them up.
These examples may sound mundane, but consider the gargantuan complexity of mining raw materials, processing them, selling them to components manufacturers, who sell to assembly factories, who sell to wholesalers and retailers, with materials sometimes crossing the world many times over. These processes are even more remarkable than selling ice out of a pickup truck. People organize entire industries and acquire specialized training in areas of need all based on the information embedded in a freely established price.
So, we find it strange that some political movements are obsessed with price controls. In the 1970s, price controls on gasoline didn’t make it more accessible to the average family. Rent control never increased the availability of affordable housing in New York City.
Price controls made it more difficult to acquire these things at all because the cost to supply them exceeded the prices that consumers were allowed to pay. So people stopped supplying them.
Some politicians have even gone so far as to impose price controls on things like ice and electrical generators in the wake of natural disasters, putting the brakes on the relief efforts that prices coordinate via voluntary action. The tragic result in such cases can be the loss of human life.
The prices paid for labor are another favorite target for some politicians. They claim that raising the minimum legal wage will provide greater opportunities for low-wage workers. But, just as with gasoline in the 1970s, price controls for labor benefit only the lucky few with a job while reducing the number of such jobs available.
Decades of data show that the minimum wage increases unemployment rates for the lowest-skilled workers and disproportionately harms teenagers and minorities who fall more frequently in this category. It’s difficult to move up and build a career for a teenager who can’t get her foot in the door for a first job because of price controls.
Prices are what allow us to prosper. Let’s set them ever freer to do so, not further constrain them.