To economists, prices serve as crucial signals to producers and consumers. In a regulated market, the state sets prices high enough for private companies to cover their costs and earn a guaranteed profit for their investors. But in a deregulated market, prices should vary with demand and supply.
'Reinventing the Bazaar,' by John McMillan, is a great and fun introduction to the wild variety and importance of markets throughout history and around the world. I finally understood how a Middle Eastern souk actually works economically and how to compare that to modern-day telecom-spectrum auctions. I love that book.
During my Ph.D. program, I became interested in the informational structure of markets that turned into the work on signaling, which was the part of my early work that was recognized for the Nobel Prize, but it was not really a subject at the time.
Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated.
In well-functioning markets, price equals opportunity cost. Meaning that the proper way to price out and charge us for things is to charge us what those resources could otherwise have produced. This is a lesson the Soviet Union never learned at all, and the rest is history.
Customers often value a good more when its price goes up. One reason may be its signaling value. An expensive handcrafted mechanical watch may tell time no more accurately than a cheap quartz model; but, because few people can afford one, buying it signals that the owner is rich.
In the market economy the price that is offered is counted upon to produce the result that is sought.
Despite massive evidence to the contrary, libertarians hold tight to their romantic concept of capitalism, which, freed from government interference, serves the consumer with the best products at the lowest prices.
What is so terrible about transaction costs? On what basis are they considered the ultimate evil, so that their minimization must override all other considerations of choice, freedom, and justice?
The beauty of the free market is that everyone gets what they want. With governmentally imposed systems, it is always one size fits all.
Money, first and foremost, is a medium of communication, conveying the information we call 'price'. Government control of the money supply is censorship, a violation of the First Amendment. Inflation is a lie.
