Basic Economics: A Citizen's Guide to the Economy

By Thomas Sowell | Go to book overview

Chapter 2
The Role of Prices

In a market economy, prices play a crucial role in determining how much of each resource gets used where. Yet this role is seldom understood by the public and it is often disregarded entirely by politicians.

Many people see prices as simply obstacles to their getting the things they want. Those who would like to live in a beachfront home, for example, may abandon such plans when they discover how expensive beach-front property is. But high prices are not the reason we cannot all live on the beach front. On the contrary, the inherent reality is that there are not nearly enough beach-front homes to go around and prices are just a way of conveying that underlying reality. When many people bid for a relatively few homes, these homes become very expensive because of supply and demand. But it is not the prices that cause the scarcity, which would exist under whatever other social arrangements might be used instead of prices.

If the government were to come up with a "plan" for "universal access" to beach-front homes and put "caps" on the prices that could be charged for such property, that would not change the underlying reality of the ratio of people to beach-front land. With a given population and a given amount of beach-front property, rationing without prices would now have to take place by bureaucratic fiat, political favoritism or random chance -- but the rationing would still have to take place. Even if Congress or the Supreme Court were to decree that beach-front homes were a "basic right" of all Americans, that would still not change the underlying reality in the slightest.

Prices are like messengers conveying news -- sometimes bad news, in the case of beach-front property desired by far more peo-

-7-

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Basic Economics: A Citizen's Guide to the Economy
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface ix
  • Acknowledgements xi
  • Chapter I - What Is Economics? 1
  • Part I - Prices 5
  • Chapter 2 - The Role of Prices 7
  • Chapter 3 - Price Controls 21
  • Chapter 4 - An Overview 39
  • Part II - Industry and Commerce 57
  • Chapter 5 - The Rise and Fall of Businesses 59
  • Chapter 6 - The Role of Profits -- and Losses 73
  • Chapter 7 - Big Business and Government 89
  • Chapter 8 - An Overview 105
  • Part III - Work and Pay 125
  • Chapter 9 - Productivity and Pay 127
  • Chapter 10 - Controlled Labor Markets 149
  • Chapter 11 - An Overview 167
  • Part IV - Time and Risk 173
  • Chapter 12 - Investment and Speculation 175
  • Chapter 13 - Risks and Insurance 193
  • Chapter 14 - An Overview 207
  • Part V - The National Economy 213
  • Chapter 15 - National Output 215
  • Chapter 16 - Money and the Banking System 223
  • Chapter 17 - The Role of Government 237
  • Part VI - The International Economy 267
  • Chapter 19 - International Trade 269
  • Chapter 20 - International Transfers of Wealth 283
  • Chapter 21 - An Overview 297
  • Part VII - Popular Economic Fallacies 303
  • Chapter 22 - Non-Economic Values 305
  • Chapter 23 - Prices and Purchasing Power 315
  • Chapter 24 - Business and Labor 329
  • Chapter 25 - An Overview 343
  • Sources 347
  • Index 359
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