Prices: Incentives and Communication Device
Prices, queuing, and coupons all can ration goods, but
there is more to an economic system than rationing. Incentives
and information are needed to get goods produced.
Prices can provide both, whereas queuing and coupons provide neither.
If a society tries to eliminate money and prices entirely, it will have
to find not only an alternative method of rationing, but also an
alternative method of giving incentives. There is good reason to
believe that alternative methods of incentives will be morally
repugnant to many people.
It may be possible to solve the incentive problem with
coercion. Studies of slavery indicate that it was a profitable system
in the old South, and studies of the concentration camps of Nazi
Germany and Stalinist Russia will probably show that they too were
profitable--that is, they produced more than it took to maintain the
camps. (However, these systems appear profitable only because they
ignore the costs imposed on those who are coerced, an omission most of
us find unacceptable.)
There is still another problem of doing away with price
and money. They not only give incentives, but they also provide a
convenient way to summarize information to decision makers about wants
and availability of goods. To see this, consider a commodity, say
copper. The supply and demand model may only approximate this market
because there are only a few producers, but the approximation is
probably fairly good.
Suppose that a new use is developed for copper that will
use 10% of available supply. The demand curve for copper will move to
the right, causing price to rise, which tells users that copper now has
increased value elsewhere and that they should try to cut back. The
rise in price will tell producers that they should try to produce more
and will reward them if they do. Hence, if an important new use for
copper is developed, it is not necessary for either producers or users
to know what it is. Prices give them all the information they need to
know to conduct their affairs.
Or, suppose that a major new source of copper is found.
This will cause the supply curve to shift right and price to fall. The
lower price tells buyers that the resource is now more abundant
relative to its uses, and that they should consider using more copper.
The message the lower price gives to producers is that they should
consider reducing their efforts to produce copper because their efforts
are now of less value, and they should consider shifting resources into
other lines of production. There is again no need for any producer or
consumer to know the details of the new supply. Prices tell them all
they need to know to make correct decisions.
To better understand how price allocates, let us see what an economy looks like when it tries to function
without price rationing or allocating.