At the Foundation for Economic Education, Tim Worstall explains the importance of prices in a free market economy:
Prices matter. Now, I’m a free market, capitalistic type, so of course I’m going to insist that everyone be tied down to mere gilt and pelf in how they live their lives. Yet it is still true that prices really, really matter.
Let’s walk through why that’s true, regardless of your political tribe. Any one thing — any economic resource, fresh water, human labour, cash, capital itself and so on — can be used for a multitude of different things. At any one time, the market price for that thing is the balance between the supply of it and the value in using it to do — in aggregate — all those multitudinous things. Yes, we can even mutter that perhaps the information doesn’t flow here instantaneously and perfectly efficiently. Nevertheless, in its simplest terms, what something costs reflects the value of whatever uses we can put it to.
If we decide that we want to do something new, we need a measure of whether we should or not. In a world where resources are finite, the resources we’ll consume doing this new thing already have prices, thanks to their use in all the other things we’re already doing. So, this new thing we desire to do must add value. We must make a profit doing it. No, this doesn’t mean something that tophatted capitalists get to squirrel away in their subvolcanic secret lair. Rather, it means that the value of the output must be higher than the costs of the inputs. If that’s not true, then we are subtracting value from those resources. Other people could have used them to do their thing and generated value instead.
If something makes us all poorer, we shouldn’t do it. But that’s exactly what happens whenever we use valuable resources to do something which is of less value than the price we pay to do it. Say, for example, recycling disposable vapes:
“CBD Living Vape – Disposable” by weedporndaily is licensed under CC BY 2.0
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Vape sellers will have to pay for the disposal of the devices under plans announced by the government.
Ministers said they would “end the UK’s throwaway culture” as they revealed measures to fund the recycling of electrical waste.
Recycling these vapes’ electronic waste uses more resources than not recycling it. This is why we’ve got to find someone to pay for it — because the value of the resources required to do the thing is greater than the value of having the thing done.
Now I am not against recycling per se — I cannot be, having dealt in scrap metal. I once shipped lorryloads of Soviet nuclear scrap off to be made into fancy car wheels for boy racers’ Escort XR3is. My only whine about that was not also gaining the furry dice concession. Even so, I made a house-sized chunk of money doing it. That’s because I’d added value by working out what the scrap could be used for and getting it to where it could be used to do just that.
But if we mandate a recycling system that makes no profit, adds no value and in fact requires an outside input of money into financing it, then we’re throwing away value and making ourselves poorer. The prices are telling us we should not be doing this thing. That’s why we ignore prices at our peril.
