I've been making a sad attempt to learn more about economics and I found a very interesting resource. Have you ever heard of Milton Friedman? I hadn't either until I visited Walter Williams website and he pointed me to Milton's 10 part PBS series, "Free to Choose".
In the first video Milton talks about the basics of a market economy and how it works. I'd of course already learned about the blah, blah, blah, supply and demand, blah, blah, blah, but this video was different. I found a gem of an insight in Milton's excellent presentation: price is a complicated and subtle method of communication. It's the whole basis of the "invisible hand", but I'd never heard it articulated before. Implicit in the price of something are instructions to each producer along the supply chain. The price is tranmitting data! And not just data about how much something costs, data about how each producer can best use their time and effort.
Take Milton's example from the video. The pencil is a combination of sundry goods from all around the globe. The price that people are willing to spend for the pencil informs the pencil producer about what prices he should pay for the components of the pencils, but also whether he is efficiently combining those components, or whether he is using the right components. In turn those prices inform those that produce the components, what they should pay and whether they're producing them efficiently. The prices the producers pay further inform other producers and the web goes on and on. Part of all of that information is carried in the cost people are willing to pay for the pencil!
That is why it's generally not a good idea to mess with the market prices. Of course there are exceptions, but when you play with the price you're distorting the data the system is trying to communicate. That's also why there are almost always unintended consequences when an entity external to the market manipulates the price. The price you manipulate is transmitting data not just to one supplier or industry, but to thousands of industries. This is government foolishness at its finest. Intent on fixing one problem, their distortion in the market causes another, rationalizing further intervention.
One might argue, "But that's exactly what I'm looking for. I want to manipulate the market to behave how I think it should behave!" Beware. Even if there was a person smart enough to do this, it would be impossible for him/her to fully grasp the ramifications of their actions because, simply put, they don't have enough information. Knowledge is fragmented through out society, each individual holding a few pieces. Friedrich Hayek talks about this.
That's why this market system is so amazing to me. Is it perfect? Not by a long shot, but tell me, what's better? Of course there's a limited role government needs to play to keep things running smoothly and Milton talks about some of those cases, but taken as a whole it's amazing to me that it works so well without any central planners. In fact I'd say that it works so well BECAUSE IT DOESN'T have any central planners. If the invisible hand isn't directing people to act, then some other hand must. I think we can all agree that we'd prefer the invisible hand to an iron fist.
