January 24, 2022 1:43 pm

Who Invented Prices? Why do they have to exist?

On a television show, a boy from a poor family was asked to express three wishes. One of which was: “That you don’t have to pay for anything.” Impeccable intuitive formulation that an economist would have put like this: “Let all prices be zero.” We know who invented the electric light, the polio vaccine, and the double-entry principle, but; Who invented prices? More importantly, if they are so evil, why do they have to exist?

In this regard I spoke with el norteamericano Gilbert Warren Nutter (1923-1979), who together with James Mc Gill Buchanan founded the “Virginia School of Economics”, where they attracted such colleagues as Ronald Harry Coase, Alexandre Kafka, George Joseph Stigler, Gordon Tullock and Leland Bennett Yeager. During Richard Milhous Nixon’s first presidency, he was undersecretary of defense. His studies of the Soviet economy showed that official statistics overestimated growth, and that growth was slowing.

–Paul Craig Roberts, one of your students, prefacing a book containing his essays, recalled the perspective with which you approached the teaching of price theory.

-It was in 1961, when Microeconomic Theory: A Mathematical Approach was in vogue, which James Mitchell Henderson and Richard Emeric Quandt had published in 1958. I did not teach price theory as formal pyrotechnics, but as the analysis that explains how markets incorporate aspects of reality. In particular, the perspective of the process. The teachers erase the diagrams they put on the blackboard, and they start again from scratch; but in reality there is no draft.

–Also according to Roberts, you always doubted the possibility that the technique and terminology of economic analysis could be transplanted to the rest of the analysis of human action; because too narrow assumptions of human behavior are used.

-That’s how it is. For conventional economic analysis, the human being is a decision-making animal, for whom all goods are measurable and substitutable. Consequently, the human being is happier in the market. Well, the world is more than a market, and many securities are not subject to commercial transactions. No theory of social behavior is complete unless it includes the passion of the crowd, the fervor of the martyr, the loyalty of the palace guard, and the insatiability of the egomaniac. Therefore the true problems of society will never be explained or resolved by economic or political analysis.

– How did the prices come about?

–We all learned in college that if any human being needs three hours to hunt a partridge, and six hours to hunt a pig, the relative price will be two partridges for one pig, or –which is the same– half a pig. per partridge. More importantly, neither of the two prices will be zero, because hunting, such as producing, distributing, trading, etc., implies using resources, which are always scarce and have alternative uses. As we do not live in Paradise, gratuity as a general principle requires rationing by other methods, for example, accommodation with the rationer.

–Why will the relative price be two to one?

-Because if, for example, the State decided that partridges and pigs should be exchanged 1 to 1, it would be convenient for everyone to hunt partridges and exchange them for pigs. The problem is that all human beings would be on the same side of the counter: all offering partridges, no one offering pigs.

-I understand. By the way, if the relative price were 2 to 1, who would trade what with whom?

– Excellent point. If the abilities of all human beings were identical, the relative price would indicate the difficulty of hunting each animal, but there would be no exchange. There is exchange, precisely because from the point of view of our abilities or preparation, human beings are different. Those who need less than three hours to hunt a partridge exchange products with those who require less than 6 hours to hunt a pig; and both win with the exchange.

– I loved the example, but it would seem that the prices observed in practice obey very different criteria of the effort and use of resources required to produce them.

–When competition rules, and the State neither subsidizes nor charges taxes, the prices of the products reflect the resources used in their production. Because as soon as some bidder tries to increase his prices, he is displaced by the competition. When we sell, we all pretend to be monopolists, but this is very difficult for a bar installed in a block where there are three other bars. The exercise of monopoly power requires the inexistence of close substitutes for the product to be sold, precisely “at monopoly prices.”

–The prices do not reflect the resources involved in its preparation, due to government action.

–Because there are taxes and subsidies. In Argentina, more than half of what smokers and motorists pay are taxes. In the first case, the State seeks that, via circumvention, the plaintiff stops smoking; in the second, that it helps to finance public expenditures. At the other extreme: no one can think that vaccines against Covid 19 came out of nowhere. On the contrary, it was spent on research, and it is spent on producing, distributing and applying them. That whoever receives it does not pay, means that someone pays: the taxpayers, and the holders of pesos, via inflation.

– You raised extremes.

–That’s right, but as a general rule, not only on the tax level, state intervention affects prices. By the way, in your country there is a curious case.


– The provision of the cabotage air service. The current government, and some people who support it, when they speak of inflation accuse the hegemonic bidders, and promote laws such as “gondolas”, to facilitate competition. But in the case of the cabotage air service they did exactly the opposite.

“Explain yourself, please.”

–Aerolíneas Argentinas, whose quality of service is reasonable, ended up being monopolistic in the domestic market, when Latam withdrew. And do not come to me with the pandemic, because the company did not withdraw from other countries in which it provided the service. And now they set minimum airfares, which affects the so-called low-cost airlines.

– How is this explained?

– It is not explained, and for this reason, beyond the style of the current government, which never explains anything in a plausible way, they do not explain it because there is no way to explain the inexplicable.

–Don Gilbert, thank you very much.


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