Here’s a question. Which embodies a greater amount of knowledge — cellphone technology or the price of a gallon of ice cream?
A cellphone is a marvel indeed. It took the human race a long time to figure out how to make a cellphone.
But, in an important way, the knowledge embodied in the price of a gallon of ice cream far exceeds cellphone technology.
The price of a gallon of ice cream is the result of countless choices by many millions of individual people in unique, local circumstances. Every gallon brought to the market embodies the knowledge behind the decisions made by thousands and thousands of entrepreneurs, workers and resource owners in figuring out the best and most efficient ways to produce, transport and market ice cream, and every gallon purchased expresses an individual buyer’s unique preferences and circumstances.
Each retail seller of ice cream wants to sell what they bring to the market at a price that yields profit. But buyers are finicky, and competition is fierce. Choosing the price is no small matter.
In other words, a market price is not arbitrary or coincidental. Behind the price of a gallon of ice cream is the knowledge behind the countless decisions of the buyers, entrepreneurs, workers and resources owners that are in any way associated with producing and consuming ice cream. It’s a mind-blowing amount of particular and highly dispersed knowledge.
And it’s all processed in the vast and complex network we call the ice cream market.
The market for a resource — a piece of land, a piece of equipment, the skills of a worker — is also a network. The market for a resource transmits knowledge about the value of the resource in competing uses. But it does more than that. The market produces that knowledge. And the knowledge is conveyed by the price of the resource.
Without markets for resources — without entrepreneurs competing to employ resources in their particular lines of production — knowledge about the value of resources in competing uses would not exist. And without that knowledge, there is no way to determine the best and most efficient way to produce a good or service.
Those insights — that a market price embodies an enormous amount of knowledge and that markets produce knowledge that otherwise would not exist — are the most important insights in economics.
When those insights are disregarded, economics goes wrong. Examples abound. The most important is socialism.
Socialism is a system in which the government owns the vast bulk of land, natural resources and capital in an economy. Almost all production is undertaken by the government, and almost every worker is a government employee. The only private businesses a socialist government allows, if it allows any at all, are very small scale.
Socialism has serious flaws. One that is often overlooked is socialism’s built-in inability to produce anything efficiently. Even if all socialist leaders, bureaucrats and workers were supremely dedicated to the socialist good, they would have no way to figure out how to produce goods efficiently.
That’s because, under socialism, there are no markets for resources. No markets for resources means no resource prices and no way to know the value of resources in competing uses. That knowledge goes unproduced.
It’s not just socialists who fail to appreciate that prices embody knowledge that only markets can produce. Advocates of economic nationalism, minimum wage laws and antitrust suits against big tech, as well as those who think imports are bad for an economy, make a version of the same error.
I’ll address each of these and more in future columns.
Reg Murphy Center