Prices know more than you do

How much information do prices contain? A huge amount.

Which is better for making a decision? Knowing the price of something or having perfect knowledge what something should cost?

If you think the latter, then you need either a crystal ball or tremendous amount of time to accurately research every single fact in the entire world-wide market.

If you think the former, then you can just look at the price of an item.

Professor Michael Munger illustrates this in a video, What Do Prices “Know” That You Don’t.

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What are the underlying drivers of economic development? Freedom. – 3

I’ve previously mentioned that freer countries are richer countries. See

What does freedom have to do with countries getting richer?

Russell Roberts offers a partial explanation in his book The Price of Everything – A Parable of Possibility and Prosperity

The main character in the book makes a lot of great points in a monologue discussing why rich countries are rich. A few of the comments and my thoughts:

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Pricing mechanism did its job during California gas shortage – you could get gasoline if you wanted it

The recent gas shortage in California is a superb illustration of the idea that if you don’t meddle with prices and just leave them alone, they will communicate to everyone how scarce a resource is. The natural and expected result is that people who want the resource can get it.

Prices worked

The recent gas crunch shows what happens when you let the market work. Prices spiked because of a supply crunch. People who didn’t really, really need gasoline held off on topping their tank. People who really, really did need gas could get it.

Two things prove this to me.

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Rap video on government distortions of supply and demand

Check out Supply & Demand: A Thug Story

Government interference with the pricing mechanism produces shortages which are resolved by non-price mechanisms: discrimination, waiting lines, rationing, black markets, or favoritism.  Markets messed up?  Look for government messing with price signals to find the cause.

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