The social function of price rationing
May 21, 2012 – 8:48 am by JohnI liked this article about marginal pairs and the price system by Daniel J. Sanchez, especially the last section, "The Social Function of Price Rationing":
Why is it important that markets clear? Why is the market-price system, characterized as it is by competitive bidding, important? Of all the possible standards for rationing, why is the standard of exchange "capability" (maximum buying price or minimum selling price) the best?
One factor that determines exchange capability is how direly the person wants the good in question. This cannot be quantitatively measured, but using our historical understanding, we can perceive a difference between, say, Farmer Frida wanting the horse to plow her field so she can feed her hungry family and Polo Pete wanting the horse for sport riding on the weekends. And we can easily imagine how the relative direness of Frida's need versus Pete's need would provide a relative boost to Frida's exchange capability.
Most people look kindly on the notion of such a difference expressing itself in a market outcome.
But then another factor that determines exchange capability is how wealthy the market participant is. For example, Jockey Jane, like Pete, also wants the horse for recreational purposes. Yet, perhaps because she has more money, she is able to outbid the desperate Frida.
Many people do not look kindly on that kind of a market outcome, and thus are severely critical of the market-price system.
What such critics miss, however, is that the market-price system's primary importance is not the bare fact that it rations already-produced goods a certain way on the spot. Its primary importance for humanity is the role such rationing has in coordinating and optimizing future production. As Mises put it,
The allocation of portions of the supply already produced and available to the various individuals eager to obtain a quantity of the goods concerned is only a secondary function of the market. Its primary function is the direction of production.
As Mises characterized it, the market is distinguished by "consumer sovereignty." Consumers vote with their dollars to shape the productive structure to best satisfy their wants.
For example, let us say Jane and Frida were entrepreneurs and had actually been bidding for the horse for use in the production of other goods. If Jane is able to outbid Frida due to her superior wealth, this indicates that the consumers considered Jane to have been a better past steward of the means of production than Frida.
By voting for her with their dollars, they have put Jane in a more prominent place at the helm of production. Since everyone is first and foremost a consumer, and a producer only subordinately (production being for the sake of consumption), it is in the interest of everyone that the means of production be directed toward those who best arrange them according to consumer wants.
If, irrespective of bidding, a horse was rationed to Frida instead of Jane, this may be a one-off boon to Frida. But if such rationing were the rule, and the sovereign consumers were dethroned across the board, Frida would lose as a consumer far more than she gained as a producer.
One might then object that, in our earlier construction, Jane and Frida were not bidding for the horse as an intermediate good. Both Jane and Frida were bidding for the horse as a final good: Jane for riding, and Frida for subsistence farming. What does Jane's superior bidding power have to do with the market's structure of production in this case?
Jockey Jane may indeed have more votes than Farmer Frida in the consumer's democracy. But, insofar as her wealth was acquired on the market, its level is a function of how much she (or her benefactor), as a producer, contributed to satisfying consumer wants.
The more commensurately her past contribution is rewarded, the more she will be guided toward maximizing her future contribution. And this is true of all producers, including producers of horses, like Breeder Bill.
The market-price system that gives Jockey Jane more purchasing power than Farmer Frida, is the very same market-price system that guides and enables Bill and his fellow breeders to produce an abundance of horses. You cannot have one without the other, for they are one and the same.
With this system, horses (as well as other goods and services) will more likely be abundant and cheap enough for both Jane and Frida to get what they want. Without it, horses (as well as other goods and services) will more likely be so scarce and expensive that neither will.
[emphasis added]
