No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Five: Supply & Demand: Markets at Work 113 of tin has been eliminated. It does not matter for our purpose— and it is very significant that it does not matter —which of these two causes has made tin more scarce.” All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. As Hayek notes, most tin users don’t need to be able to identify where the urgent needs exist; nor do they need to know how to conserve supplies in order to meet that need. They simply respond to the price incentives to curtail their consumption in favor of higher valued uses of the tin, even with little or no understanding of what those alternative uses are. The key point we want to reemphasize is stated above: with the price system as the rationing device, very little information must be transmitted to people to achieve the desired outcome of preserving gasoline usage for the most highly valued usage. The current price conveys much of the information, and futures markets will provide the best estimates of future prices (so people can understand how long they’ll need to reduce consumption from previous levels). And how do we know what the most highly valued uses are for the gasoline? With the price system, we (as in the sense of some government planner or outside group trying to achieve a social goal) don’t need to know ! Further, as Hayek points out elsewhere in the article referenced above, we cannot know ! The values of each use are subjectively determined by millions of users of gasoline—there is no one at the Federal Reserve or the Department of the Treasury (or the WWII Office of Price Administration) that can know how highly you value your Sunday drive. A short government propaganda film on the dangers of prices produced by the OPA can be found here: Prices Unlimited U.S. Office of Price Administration’s WWII Propaganda on Prices The free market system simply assures that if you value it highly enough, you can purchase that gasoline—but you will be forced to give up other highly valued assets that you could have purchased with the money spent on gasoline. Further, market processing of information in prices is very quick. Studies have shown that stock markets will price new information in under 15 minutes (usually in seconds). While the prices you’ll see at your gas station aren’t that quick to change, the criticism is often that they are too quick to change (at least in the upward direction)!