Prices is something that is grossly misunderstood by many people. Many people think that prices are a barrier to getting what we want in life, rather what prices are is an indicator to what we want through the means of supply and demand. I feel it is vitally important for people to understand the fundamental role of prices and how it relates to the market because it gives people a better understanding as to why they may see high costs of living, to help people understand the purpose of pricing in the market economy. Once people understand prices they will then understand why Socialism is destructive to the economy.
Prices are not just an indicator to what people want driven by consumers demand, but also they give us incentives, and because we can’t do everything in life for ourselves as there are a billion and one things out there to get done, we can all carry out our own individual careers and prices give incentives to get others to do those things for us. A perfect example would be myself, I’m pursuing a career in professional photography, that however doesn’t mean to say I am heading into a career of designing and building cameras, so in order for me to carry out my career I depend on the work of others. That’s the beauty of a Capitalist system over the disasters of Socialism.
A perfect example of this was in China in 1960, the Great Leap Forward where sadly millions lost their lives, a large part of this was to blame for communal agricultural policy, where the people were to leave farming behind and work collectively elsewhere, in turn that led to neglect of the farmland which led millions to die of starvation. The importance of private ownership is that we can all do our own thing individually and prices give those incentives for others to do things for us in exchange.
Prices also determine how much of each resource gets used; the higher prices signify scarcity due to a lower supply level meaning higher demand which results in the higher cost; whereas the higher supply of resources signifies a lower cost with less demand. So prices indicate that if resources are a higher cost, there will be less consumption of those scarce resources, whereas consumers are encouraged to spend more on where is in abundance of resources.
Not only are prices a good incentive for changing consumer behaviour but also they can be a good incentive to the producers; a perfect example would be a business that struggles to sell particular items, this encourages them to lower their costs of those goods to try and sell them off. Although they may make losses by lowering their costs of those specific goods, they wouldn’t be making the same losses as they would if they kept their prices high.
People confuse Capitalism as a system of just simply profits, but what they fail to realise is that Capitalism is not just a system of profits, but ‘profits’ and ‘losses’. Like explained about the incentives for producers to lower their costs, they also have the incentive to stop producing what is not selling, that’s why losses are an important indicator to prices in the market, they tell us what to stop producing; where to stop putting resources and what to stop investing in. In other words, you’re not going to increase productivity of goods that consumers do not want, not only is that a waste of resources, you’re running at a loss and the aim of any business is to maximise profits by cutting costs, and that means using fewer resources as possible.
So what do I mean when I say that losses tell the market where to stop putting resources? Well, take for example a government building project, the Scottish government wasted billions on the Hollyrood Parliament building which let’s face it, really only benefits the politicians at the expense of the taxpayers. Those valuable resources could have went to other things and if you have loss making industry such as the coal mining industry of the 1970s, the market tells us where to stop putting resources; not only are you wasting valuable resources, you’re producing what the market no longer demands. Same goes for investment, you’re not going to invest in something that runs at a loss.
So people need to understand, Capitalism isn’t just a system of profits, it is a system of profits and losses. The difference with profits, it tells the market what to produce more of, so there is an efficiency for providing for consumers without waste to run things efficiently. What we must also understand is that prices aren’t just a random number thrown out there, prices are determined by consumers demand. It’s all well thinking you can produce goods and set your own value, but when economic reality hits, it’s really down to what the consumers value the product at, what consumers are willing to pay for it. Competition plays another key role in pricing as competition charging lower prices can determine where your consumers will go.
So why then is Socialism such a problem in regard to pricing by using price controls? The simple answer is that once you begin to fix prices, you destroy the valuable information of profits and losses and as a result of price ceilings and price floor controls which I will cover later, you will see why Venezuela ended up with the food shortages they have.