April 25, 2014

What Do Prices “Know” That You Don’t?

January 5, 2013

If you want to do good for the world, Prof. Michael Munger has a piece of advice: Listen to the price system. He compares prices to a genie that knows everything in the world and tell you exactly what goods and services humanity needs most.

He tells a story of two hypothetical farmers. One ignores the price system and tries to plant what the world needs most. Overwhelmed by the quantity and complexity of the data needed to figure out what crop is most needed, he eventually fails. The other farmer is selfish and profit-driven. He doesn’t understand that the high soybean price reflects increased demand for a new soy-based product in Asia — he just wants to make money. But by listening to the price system, he produces exactly what the world needs most.

Learn More!

In a podcast, Prof. Munger discusses how the market responded to shortages induced by Hurricane Sandy: http://www.econtalk.org/archives/2012/11/munger_on_john.html

A 1989 chart from the CIA shows that how the Soviet Union failed to feed its citizens in the absence of a price system: http://chnm.gmu.edu/1989/items/show/182

Learn Liberty video explains the importance of the price system to a well-functioning economy: http://www.learnliberty.org/content/price-system-part-i-information

Academic article examines whether scarce resources are best allocated by the price system or central rationing: http://www.jstor.org/discover/10.2307/3003300?uid=3739936&uid=2&uid=4&uid=3739256&sid=21101489024873

An economist explains how the price system led Wal*Mart to help the victims of Hurricane Katrina: http://www.youtube.com/watch?v=0TJ7Mkw3rME

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