Thursday, May 17, 2012

Expressive Prices

I'm writing tonight under the influence of an anonymous Pinot Grigio: we spent the early evening with Sarah at Guapo's.   The dinner and the company were exceptional.  You may rate the wine after the following comments, based on the content and eloquence it induces.

I want to continue yesterday's blog.  More exactly, I want to comment on the quote from Hayek and the vision of the whole price structure across all of space as a sparse communication network: in his example about tin, prices provide exactly the information  each economic atom needs to do exactly the right thing.  When some new desire in a far away country increased demand for tin, or some new calamity reduces its supply, businesses that use tin reduce production or find substitutes, which is exactly what they need to do to accommodate distant events they know nothing about.  When transportation costs rise, businesses substitute local inputs and consumers substitute local products---and not just local products, but products whose production uses local products.  The consumers involved, and the businesses involved, don't need to know what calamity occurred, or what desire erupted, in a distant country: they only need to know that the price they must pay for tin, or for transportation, has risen or has declined, and the price leads them in what Hayek says is the right direction.

The comment I want to make is that while it may be efficient to transmit only a limited amount of information, while prices may induce behavior that seems economically good, ignorance of causes is not always optimal, and distant unseen causes are not always accidents, and not always benign.

One example: prices are systematically manipulated by almost everyone.  Governments subsidize industries they want to nurture, and the industries and businesses involved in those industries manipulate prices to achieve a desired result.  I'm reminded of a story I heard Chilean economist Manfred Max-Neef tell in this video,   He talks about a breakfast he had at a local hotel,  he was living in the south of Chile, in an area known for the high quality and efficiency of its dairy industry.  In the restaurant there were little packets of butter, wrapped in foil.  The butter was from New Zealand.  New Zealand!  The butter had started as cream from cows halfway around the world from him, when there were dairy farms half a mile away producing butter just as good, and just as efficiently.  Why?  We could chase down the reason, but I haven't.  I have to guess.  There are a thousand possible reasons, from exchange rate peculiarities to transportation subsidies to specialized dairy industry supports in New Zealand that are not available in his locality in Chile.  But this particular oddity was not the result of a worldwide shortage of butter, or a local shortage of butter, or of hyper-efficient production of butter in New Zealand, or of sloppy production of butter in Chile.  It was something else: the price-driven communication system Hayek describes conveys bad information, and manipulated information, as quickly and as completely as it conveys good information.

And there are other things you may want to know about why prices are low or high.  Recently the state of Georgia enacted a severe immigration policy, Georgia House Bill 87.  This had an unintended side effect: Georgia blueberry farmers, among others, suddenly found that they couldn't find field laborers at a price they could afford to pay---or at least a price they wanted to pay---to pick their blueberries.  You can Google all of this, but here's a story about it.  But think about what this means: Georgia farmers were paying rock bottom wages to farm workers to pick blueberries, rock bottom because many of those workers were illegal and so had very limited power to contest those wages.  Farm labor rates in Georgia, it turns out, are the lowest in the country, and as a result the prices of blueberries have for a very long time been lower than they would have been if the farm workers were paid higher wages.   And with this sparse information, seeing only that the price was low, we all ate more blueberries than we would have if the laborers had been paid more.  Is that bad?  Well, not necessarily; increased demand for blueberries actually increases the market power of the farm laborers.  But it is an issue, isn't it?  Doesn't the fact that laborers are being underpaid because they are illegal and have no power to contest their wages have some relevance to us when we buy blueberries?  No matter which side of the immigration issue you are on, this matters.  But the price system tells us nothing whatever about it.

The price system tells us nothing whatever about production externalities: we may want to know that the oceans are dieing or that the planet is warming because of our consumption of things whose production cause environmental damage: even if the prices truly reflected the full costs of production, including the cost of repairing the environmental damage cause in the production process, the system still might not induce us to buy optimal amounts, because the environmental damage will impact future generations and we who are now living are often arrogant about our own importance.

The point is that the price system is a very efficient communication network, as Hayek described.   But it communicates the information it receives, whether that information is good or bad, manipulated or pure, complete or incomplete, true or false, short sighted or visionary.  Saying, as Hayek does, that "The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly" does not complete the discussion.  Why there is a scarcity, or why there is a plenitude, actually can matter, if not to an individual consumer or business, then to a country, or to a planet.

Before I sign off for the evening I want to be clear: I'm not slamming the free market system when I  say all of that.  My own belief is that the information dumped into our price-based market communication network is mostly, fuzzily, good, and mostly, fuzzily, true.  I think many on the left are frustrated by the mesmerized adulation of the free market by writers and politicians on the right, and in reaction want to point out all of its flaws.  I am drawn into that reaction too.  But as Dan's comments (in my last blog post) remind us, markets do a great deal of good, they are the world's primary engine of growth and change, and we should not forget that.

We also should not forget the market system's limitations.  They can bite us, and sometimes they do.

1 comment:

  1. I shoulda read this before I posted my most recent email to our economics and politics group discussion. Well said.