Part I · Chapter 2 · Machinery · lesson 2
What a price is transmitting
11 min
Builds on What money is for
Part I · Chapter 2 · Machinery · lesson 2
11 min
Builds on What money is for
A cocoa harvest fails. Eleven weeks later, in a city eight thousand kilometres away, a woman who has never heard of the region puts a smaller bar of chocolate in her basket and buys biscuits instead.
Nobody told her. There was no announcement, no appeal, no explanation. A number on a shelf edge went up, and she rearranged her week around a drought she will never know happened.
A price is not a description of a thing. It is a message about how scarce that thing has become relative to how much people want it, compressed into a single number so that it can travel between strangers who share no language and no information.
That compression is the point. Nobody in the chain has to understand the drought. The farmer, the shipper, the wholesaler and the shopper each need one number, and acting on it produces roughly the behaviour that the shortage requires — less consumed, more grown, elsewhere.
The same number is read by two audiences and tells them different things.
To everyone who wants the thing, a higher price says: there is less of this to go round than there was, so use less of it, and let it go to whoever needs it most. It does not have to explain why. It does not know why.
To everyone who could make the thing, the same number says: there is money in this now, so make more of it. The response is slow — cocoa trees take years — but it is the only mechanism that gets more cocoa planted, and it starts the day the price moves.
A price that is not allowed to move sends neither message. That is not an argument about whether it should be allowed to move. It is a description of what happens mechanically when it does not: the shortage stays, and it has to be settled some other way — by queues, by rationing, by who knows the shopkeeper.
What would you do
A price is a summary, which means information is lost on the way in. Two completely different events can produce the same number.
Predict
How much a quantity moves when a price moves is not a constant. It depends on whether there is anything else that will do.
Salt has no substitute and takes up almost none of a household budget, so its price can double and people will buy the same amount. One brand of biscuit has a dozen substitutes on the same shelf, so a small rise moves a lot of people.
This is why the same percentage price rise is a catastrophe for one seller and free money for another, and it is also why the things people feel most strongly about — housing near work, medicine, a commute — are the ones where the price can move a long way before the quantity does. Necessity and substitutability are the two dials, and both of them are properties of the buyer's situation rather than of the product.
What would you do
The thing a price is doing that is genuinely difficult to replace is not the rationing. It is the aggregation.
Deciding how much cocoa the world should grow next year requires knowing how much every buyer wants it relative to everything else they might buy, how much every possible grower would need to be paid to grow it rather than something else, and what the weather will do. That information exists, but it exists in several hundred million heads in pieces, most of which are held by people who could not articulate them if asked.
A price is a mechanism for acting on knowledge nobody possesses. That is a strange sentence and it is the most interesting thing about markets. It is also the strongest form of the argument for them, and it is a claim about information rather than about fairness — which is why it does not settle the argument in the generator shop.