By Russ Roberts
There was an interesting moment in this week’s episode when Cesar Hidalgo said the following when I was asking why he ignored the role of prices:
like Hayek said it, and basically it gets regurgitated even nowadays in every common section of every newspaper more or less when people are discussing the economy–since the role of prices in revealing information about supply and demand has been said, I tried to focus on aspects of information in the economy that had not been so much discussed in the literature.
Hidalgo’s take on prices reminded me of this EconTalk episode with William Byers. Byers makes the point that there are some concepts such as “randomness” that can be defined. But you can spend a lifetime thinking about them and still not understand them completely. You can always go deeper.
For me the role of prices in steering information and allocating resources is one of those ideas. It’s a very deep idea. But a lot of people (and Hidalgo seems to be in this group) treat it as been-there done-that idea. Let’s move on to the more interesting stuff. Like when they don’t work. Or they’re good for explaining buying and selling so let’s talk about trust and cooperation among networks of people, which is what Hidalgo finds more interesting.
But the role of prices in supply and demand is just the beginning. Of course it doesn’t work perfectly except in textbooks. But what do we know about when it works better and when it works less well? And prices do a lot more than just take care of supply and demand–they create the division of labor and decide what receives attention from innovators and entrepreneurs. Prices coordinate undesigned cooperation across firms and across space ad across time. Prices encourage collaborators to work on some things and not others. Freely adjusting prices don’t solve all problems. They aren’t perfect. But their effects are not fully understood or appreciated. See Venezuela for one example.
And finally, not all prices are monetary. Commercial transactions are not the only results from a well-functioning price system. Again, see Venezuela. I have a feeling there isn’t a lot of trust in a system where the price system isn’t allowed to function.
I understand Hidalgo’s interest in going beyond (or maybe it’s beside) the role of prices. But I wonder if he’s thought enough about them. I haven’t and I think about them a lot. I do concede that they are often my hammer looking for a nail. (After all, I wrote a book about how prices create order and prosperity and flourishing.) I’m just encouraging Hidalgo to take a closer look at the hammer. It might be more interesting than it appears at first glance.