The Price of Eggs

We're into a little F. A. Hayek today. Try to keep up.

There is a generic critique of market economics making the rounds these days, that goes something like this: a free market is no guarantee that, at any given moment, things will be priced correctly, and therefore, we need government intervention to 'nudge' things - and people - back where they ought to be. The acme of examples for this notion is health care, primarily due to the fact that health care is unarguably a critical need for everyone, and its cost has wildly outpaced the ability of most people to pay for it without financial ruin. It is clear that something needs to be done about health care, and it must be done now, and the only solution that makes any sense is to spread these costs among everyone by spreading the wealth around and government is the best way to do this … because socialism.

Well, let's back up a second. Is it true that the free market is not a guarantee of correct pricing for goods and services? The naysayers cite complex economic theories and studies of distorting influences on markets, things like friction, sticky-ness, monopolies, oligopolies, and plain old fraud and greed, to make their case. But this line of argument depends on one big unstated assumption: that we can establish what the 'correct' price is independently of the market. But what independent criteria are they referring to? This reminds of the original mistake of the blessed Adam Smith, when he put forth his theory for the correct price of labor in his classic book, The Wealth of Nations. His argument was simple and straightforward and makes eminent sense. Labor is performed by human beings and human beings need to earn a minimum amount to buy food and housing, so therefore, any employer that paid less than that minimum amount would soon have no more laborers. This established a floor to wages that could be determined without regard to any particular local market forces - one need only total up the costs of the minimally necessary food and housing, and divide that by the hours a typical laborer worked, and voila! That's what employers must pay.

As I said, this argument was simple and straightforward and made eminent sense, but it had one problem. It purported to establish an objective value - a value independent of market forces - for something as fundamental in economics as the value of labor, and thereby took that science down a long road of error for close to a 100 years.

In truth, employers do (and always have) taken into account their employees need for a living wage, for the simple reason that they want them to come back tomorrow. But the real correlation of wages is with productivity - employers will pay a living wage so long as it is equal to or less than the revenues he will get from the effort of the employee. If not, then the employer will not pay the employee anything at all; he will not hire him in the first place.

This puts the price of labor squarely within the dynamic of the free market, unhitched from any other criteria to establish a value. This, of course, bothers many people, who believe a living wage needs to be imposed on the market regardless of any other considerations. But, again, they give us no serviceable objective criteria (beyond a spleen induced moral outrage) outside of the market that can serve to guide in assessing the 'correctness' of the market value of labor.

And here is the reason why they cannot furnish an appropriate objective criteria, which also answers the question whether free markets can guarantee the correct pricing of goods and services: because there is no objective price to anything until the market discloses that particular data point. Or, to put it another way, a market price is information about the price of goods and services at this contemporaneous moment, but not the future price, and the future of any system as complex as the market and prices remains uncertain at any given point in time. Or to put it still another way, they have their causation backwards: market pricing is not caused by the value of goods and services, but instead is the cause of their value, in the sense that it discloses the value, moment by moment.

For example, take eggs. I can buy a dozen eggs today for less than a dollar. But two years ago, they were more than $2.00. Which is the true, Platonic, price of eggs that I will see tomorrow? Well, I certainly want the price to be less than a dollar, but I can't offer any reason why except that I am cheap and prefer to reserve my money for other things than eggs. And this is what everyone else is doing as well, and producers of eggs with their hard working hens are wondering why they are busting their literal and metaphorical tails to give me eggs when I value them so little. So, more people are buying the cheap eggs, while at the same time producers are cutting back on eggs and furnishing more material to Chick-Fil-A for sandwiches, and the upshot will be - the price of eggs will probably rise, maybe not tomorrow, but at some point.

CONTINUED …