Prof. Boudreaux: Everyday as a consumer you
interact with and perform minor miracles and yet you probably don’t recognize them as such.
If you think about them at all, you might consider them as nuisances or as obstacles.
But while they’re largely unappreciated, these small things actually make our modern lives
possible. What am I talking about? Prices. The prices we pay everyday for goods and services.
You might think they’re just the unfortunate cost of getting something you want but they’re
much more than that. When you learn about the vast amounts of information contained
within every price, each one becomes a marvel, a wonder that helps coordinate the billions
of choices of multitudes of people into a productive and dynamic economy. Let me explain.
Think about, say ketchup, the primary ingredient in that delicious red sauce is of course tomatoes.
Now suppose that there’s a terrible drought in California, this year’s tomato harvest
drops substantially. The demand is still there, people still want ketchup as much as they
did before for their hamburgers and fries but the supply is shriveled so farmers start
to charge higher prices for their tomatoes. That means ketchup makers have to pay more
for tomatoes so they charge grocery stores more for their product, and so in turn, grocery
stores charge higher prices for ketchup to consumers. The important point here is just
how customers respond. A few of them won’t care much about the higher price and they’ll
continue to buy as many bottles of ketchup as before but most consumers will care. They’ll
switch to mayonnaise or to mustard or just go without condiments altogether. And that’s
actually a good outcome given the drought. There simply aren’t as many tomatoes to go
around as before. People as a group need to eat fewer tomatoes. This uptake in the price
of ketchup leads some people; those who care the least about the particular condiment,
to use less of it and that means total consumption of tomatoes shrinks. From a bird’s eye view,
it might look as though this chain of events is consciously coordinated at the farmer,
manufacturer, grocery store, and customers are all working together according to some
plan or to some directive to adjust to the fact that the drought destroyed a lot of tomatoes.
But of course we know they aren’t. There’s no bureau of condiments ordering people to
hold the ketchup. Information about the need to cut back on tomato consumption was communicated
organically through prices. Or as the great economist Friedrich Hayek put it, the ketchup’s
price is, “A kind of machinery for registering change.”
Now multiply this chain of events by trillions, that’s the world economy. There are billions
of buyers and suppliers adjusting in real time, every hour of every day to shortages
and surpluses and they’re elaborately coordinating their behavior with each other and adjusting
to on the ground developments and they don’t even realize that they’re part of this great,
global chain of cooperation. All of this coordination and adjustment is thanks to prices. All those
different bits of information can be in that one little number. Think about that next time
you go to the grocery store. We understand the power of prices thanks to economists like
Friedrich Hayek. To learn more about Hayek’s essential ideas and how they help explain
our world, click here.