Prices are merely signals. Mess with them at your peril.

Prices are signals.  Prices are not good, bad, high, low, right, wrong, inhumane, or incorrect.

Prices are merely prices.

A temperature or pressure gage conveys information about the temperature or pressure of the device or system it is measuring.

If your pressure gage says your tire pressure is low (say 15 psi), and you trust this pressure gage is accurate, you wouldn’t make a rule saying tire pressure shall never fall below 30 psi or grave consequences will ensue.

Instead, you’d find out why the pressure is low.  Then you’d fix it.

People generally accept that prices can be constrained, propped up, kept “affordable,” made “more humane,” or generally adjusted and tweaked by the smart people in the room.

They can’t.

People can (and very often do) mess with prices.  They may mask the downstream consequences for a short time.  Sometimes they get away with it for a while.  But prices always win in the end.

Price Floors

Price floors punish prices that are deemed “too low.”  Bad prices!  Too low!  Honestly, who has ever said that after they have purchased anything, anywhere, at any time in human history?

Well, nobody that buys anything has said that, but plenty of people who are selling something have said it.

Here’s a hint:  Labor is also a price.  Price floors are rampant.  They’re just called minimum wage laws.

Except when it’s labor calling for a price floor, they are forgetting basic economics.  Consider this:

Supply of unskilled labor and demand for unskilled labor is the same as it was yesterday.  Price of unskilled labor increases today.  Less unskilled labor is demanded today.  Supply and demand have not changed.  The quality or productivity of the labor has not changed since yesterday, but the price has increased today.  The very act of increasing the price has decreased the demand.

Another way of saying that the demand for unskilled labor is reduced is to say the unemployment rate of unskilled laborers is increased.

Probably not the intention – but definitely the result.

This can’t be repealed.  You can’t escape it.  You can delay it at best, but prices always win.  You might not like it, but prices, like pressure gages, don’t care what you like.

Prices merely report what they see.

I understand the intentions are noble, but all that happens by increasing the wage an employer must pay their employee is making them at much higher risk of getting no wage at all.  Robotic burger flipping machines don’t just flip burgers:  At a certain wage, they also flip from unaffordable to affordable.

Don’t believe me, ask all the “bottle boys” that now have robots doing their jobs.  Those automated bottle return machines were once the “too expensive” burger flipping robots of their day.

How about the full service gas station attendants?  What about the ushers in movie theaters?  Where did they all go?  Same place.

Price Ceilings

Price controls and “anti-gouging” laws put a ceiling on prices.  Well, at least they try anyway.

Let’s look at when prices get “too high.”

This is often referred to as price “gouging.”  Let’s say a natural disaster strikes some populous area.  Power is out for miles and miles and miles.  Those greedy gas stations then hike their prices up 1000% of what they were before the disaster stuck.  How inhumane!  Let’s make a law against this insidious behavior.  Let’s make it a felony to charge more than (whatever arbitrary number some bureaucrat comes up with) – say 15%.  So instead of gas prices going up 1000% they only go up 15%.

We’re saved!  Hurray!  Gas is still “affordable.”

Except you’re not saved.  You are in fact in very sorry shape – if you need gas that is.  All of the gas is now gone on the very first night and you aren’t getting any gas, for any price, until God knows when.

The high price of gas during a disaster is sending a signal.  This is the signal:   The supply of gas has been cut – indefinitely.  In other words:  We don’t know when we’re going to get any more gas, at any price.  When supply is cut and demand remains the same, the price rises.  Except during a massive power outage, demand has not remained the same.  People still need gas for their cars and their whatnots.  They also need it – and a lot more of it – for their generators.  Demand has in fact increased – substantially.

The high price of gas is sending customers this message.  This – signal – if you will:  Unless you really, really, really need this gas, you might want to wait to buy it.  It encourages say, boat owners to think about a different day to filler’ up for the weekend joyride.  Maybe wait a few days to mow that lawn.  It encourages exactly what should be encouraged during a gas shortage:  Extreme thrift of gas.

Just like when the temperature gage is high on your car, maybe you shouldn’t be racing around like you normally would.  When prices are high, maybe you shouldn’t be buying unless you really, really, really need it.

Here is the other side of the signal this high gas price is sending.  This is the part of the price signal it seems everybody forgets when they want to punish the “gougers.”  This outrageously high price signal is also received by another group:  Gas suppliers.  Here is the signal the gas suppliers see:

Anybody that can get a tanker truck through this nightmarish landscape to my gas station is also going to get paid a LOT of money for the gasoline inside it.  Word of this gets out, and a lot of people suddenly get motived for the daunting task of piloting a tanker truck through downed trees, standing water, washed out roads, downed power lines, or a dozen other things that can easily kill them.  That is exactly what you do what to happen.  As supply is restored – price comes back down.

Risking your very life and limb doesn’t sound like a smart plan for 15% bonus.  Would you do it?  I sure wouldn’t.  Hence no gas at any price.

This is why price ceilings, on any good or service, always and everywhere lead to shortages.  Price floors on any good or service, always and everywhere, lead to surpluses.  It matters not how useful, necessary, life-sustaining or even life-saving you think the good or service is.

You mess with prices, bad things happen.  Push them down – bad things happen.  Prop them up – bad things happen.  There are thousands of ways people try to make prices bend to their will.

To reiterate:  Prices are not good, bad, high, low, right, wrong, inhumane, or incorrect.

Prices are merely prices.  Don’t mess with them.

Prices are merely signals.  Interpret them.  They are telling you a story if you’d bother to look past the headline.

When looking at any price, consider both sides of it.  What signal is it sending to consumers?  What signal is it sending to suppliers?

Prices are smarter than you.  Prices are smarter than me.  Prices are smarter than dozens of economists with impressive credentials from name brand colleges.  Prices are smarter than everybody.