Hence we should agree that the price system has significant advantages in its ability to incorporate information and to adjust to changes, without being at all clear whether prices, at any particular moment, can be said to be "right."
it is easy to think of cases in which products benefit from some kind of fad or fashion, ensuring wildly inflated prices by any objective measure.-Cass R. Sunstein, Infotopia: How Many Minds Produce Knowledge.
I intend to review Infotopia, but I wanted to address the above quote separately. Sunstein for the most part seems to be a grudging, or at least, a cautious supporter of free market economics. None the less, the above quote is among the moments in which he reveals the common misunderstanding about how the price system works, or even what a price is.
Sunstein is a smart man, and demonstrates his knowledge of a diversity of fields throughout the book. Yet when he speaks of a price that is "right" or wrong by "any objective measure", it is hard to believe that he read the same Hayek essay that I did, which he cites.
Speaking of the theoretical "man on the spot," Hayek states:
It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to obtain. All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses. It is always a question of the relative importance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment.More than once, Sunstein uses short-term fads as an example of situations that create "errors" in the price system. That would make sense, if you believed that a price was supposed to describe some sort of essential worth of a thing. Oddly enough, Sunstein does not purport to believe this--yet what else are we to conclude from his talk of "wildly inflated prices by any objective measure"?
When something is suddenly popular, the increase in price is not "wildly inflated"--it is signalling that it has become more difficult to obtain the item in question, and so the only people that will be able to get one will be those able to cover the increased costs of getting them. In other words, this is not market inefficiency at all; in the scenario that Sunstein seems to believe is the obvious case where the price system is flawed, the price system is in fact doing exactly what it is supposed to do.
The unfortunate thing is that Sunstein could have drawn on many topics in order to describe the challenges of the free market. External costs, natural monopolies, and price elasticity are just a few examples. That he would draw on the age-old "right price" fallacy is just disappointing.
When an argument invokes the support of "any objective measure", but fails to supply any examples of such "objective measures", I tend to think that I have been presented with an unsubstantiated assumption.
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4 comments:
At least he's not floating the "right price" balloon as a prelude to calling for government price-fixing.
Or is he?
Nah, he was mostly consistent in his argument that the free market was the most effective system in existence. This was just evidence that his acceptance of basic economics was, in all likelihood, a grudging one.
I certainly agree with the general principal that an "objective" standard for the right price is a meaningless idea. But a higher price for a more popular item doesn't neccesarily that the item is "more difficult to obtain". It could simply be that people have a higher willingness-to-pay and that a smart seller therefore prices higher.
"higher willingness-to-pay" translates into "more difficult to obtain" directly. As the quantity of an item that is demanded at a certain price increases, then sellers will have to either raise the price or face chronic shortages. Conversely, if they attempted to simply buy larger quantities of it to sell at the existing price, more resources would have to be devoted towards the production of the item, meaning higher net costs for the manufacturers. In order to cover those net costs, they would have to charge the seller a higher price or else take a loss and risk going out of business.
If the seller sticks with the existing price, then, their profit margin will shrink and again possibly go into the red. So the choice to increase prices is not one made by the "smart seller" attempting to ride the trend for cash, but rather one of survival--if the newly popular item's price is not increased, it may well become a liability no matter how well it sells.
So an increase in popularity will cause temporary shortages before adjustment occurs--an instance of how the commodity would be harder to find. Then, as more resources must be poured into the production of the item, the cost of obtaining it for a seller must increase in order to pay for the increased spending on the part of the manufacturer. Thus, it becomes more difficult for the seller to afford.
All in all, "higher willingness-to-pay" merely means that more of the resources put into making a thing have been consumed, creating a greater scarcity of those resources on the market.
Hence, "more difficult to obtain."
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