Why Price Matter

Prices act as a rationing mechanism. The state of mankind is one of the infinite wants coupled with finite resources. The task of economics, then, is to figure out what is to be produced with our scarce resources. It is through prices that the resources we have get put to their highest-valued use in the economy. In order for this allocation to work, however, prices must be allowed to fluctuate freely. Let us look at an example.

Let’s imagine that there is a large forest fire, wiping out a large portion of the supply of wood. As a result, the supply of wood has drastically decreased. This decrease in supply would raise woods price, causing a reallocation of wood throughout the economy. Since it would now cost more to use wood for production, only those uses where the producers viewed the raised price as still worth it would continue to use it. Those who decided that using wood was no longer viable would simply alter their business model. Wood would still continue to be used in, say, housing construction, but it would be used in fewer amounts for the construction of less-needed goods like birdhouses. In other words, this price increase would shift the remaining wood supply to its most-valued ends in the economy

The term just price is customarily disguised with a euphemism. So, just like SCHIP, Medicare, and Medicaid are never called socialized medicine, and just like refundable tax credits are never referred to as income transfer programs, attempts to establish a just price are usually cloaked in terms of market failure remedies or consumer protection laws. The mention of just price theory either invokes a blank stare, or, in the case of those familiar with the term, the dismissal of the notion as a discredited medieval religious doctrine.

All myths, of course, are not created equal. For instance: The use of the term just price is very different from another widely held myth — that of the just war. The principle of the just war underlies our protracted war in Iraq, as well as our global crusade against terrorism. In its essence, the doctrine concerns the use of force: when force should be used and what kind of force is acceptable. Although many would now argue that the war in Iraq does not meet the criteria for a just war, they fully accept the concept as legitimate. In fact, it is the norm rather than the exception when discussions about the war turn to just war theory. Americans who don't view themselves as particularly religious, as well as those who have never studied the finer points of theology and don't generally participate in theological discussions, have suddenly taken to cloaking their positions with the rhetoric of just war theory.