Timothy Sandefur, vice president of the Goldwater Institute, was kind enough to provide the five-tweet thread explaining Economics 101 to President Joe Biden on just how prices work:
I don’t know who (other than the freaking President of the United States) needs to hear this, but: prices are INFORMATION SIGNALS. They’re a way of tracing how resources are used, or could be used. They’re a way of calculating trade offs.
— Timothy Sandefur (@TimothySandefur) June 22, 2022
Hint, hint, Mr. President. This works for gas prices, too:
Exxon gets gas from ppl who charge them for it. If Exxon can’t pay off that cost, it can’t get the gas to give us. Exxon’s suppliers, in turn, have their own bills to pay. If Exxon doesn’t pay them, they have to pay those bills some other way—say, by fishing—& we don’t get gas.
— Timothy Sandefur (@TimothySandefur) June 22, 2022
This is news to the president, however:
Prices aren’t just randomly set by evil greedy corporations at will. They have to get back their costs and pay their bills. And that means they have to set em high enough to recoup their costs & low enough that ppl don’t shop elsewhere. They aren’t just MAKING PRICES UP.
— Timothy Sandefur (@TimothySandefur) June 22, 2022
Yet, this is exactly what the White House is saying oil companies can do:
That means they can’t just snap their fingers and make gas cheap. If they could do that, we’d all be living in Candyland utopia. Instead, THEY GOTS TO GET PAID. pic.twitter.com/UvPaHfvx0h
— Timothy Sandefur (@TimothySandefur) June 22, 2022
And then he hit the president, metaphorically, upside the head with this essay from Austrian School economist Ludwig von Mises on how all of this actually works:
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Gonna lay some Ludwig von Mises on you: pic.twitter.com/RAXFvlVjPZ
— Timothy Sandefur (@TimothySandefur) June 22, 2022
The above is an excerpt from MIses’ “The Source of Prices”, via the Mises Institute:
The characteristic feature of the market price is that it tends to equalize supply and demand. Any deviation of a market price from the height at which supply and demand are equal is — in the unhampered market — self-liquidating.
At times governments have resorted to maximum prices, at other times to minimum prices for various commodities. At times they have decreed maximum wage rates, at other times minimum wage rates. It is only with regard to interest that they have never had recourse to minimum rates; when they have interfered, they have always decreed maximum interest rates. They have always looked askance upon saving, investing, and moneylending.
But if the government fixes prices at a height different from what the market would have fixed if left alone, this equilibrium of demand and supply is disturbed. Then there are — with maximum prices — potential buyers who cannot buy although they are ready to pay the price fixed by the authority, or even a higher price. Then there are — with minimum prices — potential sellers who cannot sell although they are ready to sell at the price fixed by the authority, or even at a lower price. The price can no longer segregate those potential buyers and sellers who can buy and sell from those who cannot. If the authority does not want chance or violence to determine the allocation of the supply available, and conditions to become chaotic, it must itself regulate the amount which each individual is permitted to buy. It must resort to rationing.
Before the government interfered, the goods concerned were, in the eyes of the government, too dear. As a result of the maximum price their supply dwindles or disappears altogether. The government interfered because it considered these commodities especially vital, necessary, indispensable. But its action curtailed the supply available. It is therefore, from the point of view of the government, absurd and nonsensical. A government can no more determine prices than a goose can lay hen’s eggs.
If the government is unwilling to acquiesce in this undesired and undesirable outcome and goes further and further, if it fixes the prices of all goods and services and obliges all people to continue producing and working at these prices and wage rates, it eliminates the market altogether. Then the planned economy, socialism of the German Zwangswirtschaft pattern, is substituted for the market economy.
Prices are by definition determined by peoples’ buying and selling or abstention from buying and selling. They must not be confused with fiats issued by governments or other agencies enforcing their orders by an apparatus of coercion and compulsion.
Prices are a market phenomenon. They are generated by the market process and are the pith of the market economy. There is no such thing as prices outside the market. Prices cannot be constructed synthetically, as it were.
The very idea of cost prices is unrealizable. The reason why the price of Burgundy is higher than that of Chianti is not the higher price of the vineyards of Burgundy as against those of Tuscany. The causation is the other way around. Because people are ready to pay higher prices for Burgundy than for Chianti, winegrowers are ready to pay higher prices for the vineyards of Burgundy than for those of Tuscany.
Prices of the market are the ultimate fact for economic calculation. Attempts to eliminate monetary terms from economic calculation are delusive. No method of economic calculation is possible other than one based on money prices as determined by the market.
The pricing process is a social process. It is consummated by an interaction of all members of the society. All collaborate and cooperate, each in the particular role he has chosen for himself in the framework of the division of labor. Competing in cooperation and cooperating in competition all people are instrumental in bringing about the result, viz., the price structure of the market, the allocation of the factors of production to the various lines of want-satisfaction, and the determination of the share of each individual.
Now, go read it Mr. President.
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