Kale was once a lowly green that we fed to guinea pigs or used as disposable garnish on a platter.
Now it’s a “superfood” being chopped, pureed, and roasted into salads, smoothies, and chips. What do you think happened to the price of kale as a result of this transformation?
You guessed it. The price of kale rose over 80 percent from 2013 to 2016. Kale consumption has risen by 30 percent each year for the past several years, according to one report.
Now add to that a wrinkle in the supply chain. Even though production initially increased with demand, kale farmers experienced a shortage or scarcity of seed availability for a period, which led to demand out-pacing supply. What do you think that did to the price of kale?
You get the picture. The volatility in kale supply in relationship with demand is all communicated through price.
Prices send important signals without requiring the buyer or seller to deeply understand all the intricacies of supply and demand and the conditions at the production end, with regard to distribution, and at the consumer end.
As a result, prices serve to coordinate the behavior of large groups of individuals who, because of the knowledge problem, don’t have the capacity to know all they need to know to make good decisions about what to produce or what to buy.
As Christians, finding ways, like through prices, to make good decisions with limited knowledge is important; we are called by God to employ good stewardship with the resources he has entrusted to us.
Prices Convey Complex Market Processes to Consumers…
Another example is toothpaste. We all use it and buy it multiple times each year. But what goes into the price of each tube? I honestly have very little idea. I don’t even know the ingredients of toothpaste, besides fluoride, and the mysterious minty taste. But I suspect there is a complex process that is involved in its production. Ingredients are mixed together and put into a tube with a label. All of that happens separately: the production of the actual toothpaste, the tube, and the label. They all require separate and specific skill sets and production processes.
The beauty of prices is that they convey all of the activity that goes into the production of a product. As a consumer, I don’t need to know anything about how a product is made or the shortages at the production end. All I really need to know is the price.
Prices send important signals to me about how much I want one brand of toothpaste over another or one type of leafy green over another. I can measure the price against what I would be willing to pay for an item and then decide what to do. This is described in economics as subjective value.
Prices allow me to “economize” on the information I need to make a decision. If prices increase dramatically, I will most likely adjust my behavior. In the above examples, I may temporarily buy less kale or make different choices at my favorite “fast casual” salad joint. Or if fluoride production becomes more costly and toothpaste prices increase, I may decide to buy less toothpaste or I may try to waste less so that I can purchase less.
My subjective value is now communicating something to producers of the products I buy.
Economist Thomas Sowell, in his book Basic Economics, writes:
Prices in a market economy are not simple numbers plucked out of the air. While you may put whatever price you wish on the good or services that you provide, those prices will become economic realities only if others are willing to pay them—and that depends not on whatever prices you have chosen but on what prices other producers charge for the same goods and services, and what prices the customers are willing to pay.
…And to Producers
But what about the producers of goods and services? Sellers are consumers too. Prices do the same things for producers as consumers. Scarcity of kale seeds may cause a kale farmer to switch temporarily to spinach production. A rise in fluoride prices may cause toothpaste producers to search out feasible fluoride substitutes. In a highly specialized economy, it takes the complex interaction of many people to produce any given item.
Free Markets and Prices Help Us Work Together
An awareness of how prices work has implications for how societies are run. We need an economic system that allows prices to do the heavy-lifting of harnessing knowledge because we are not capable of knowing everything ourselves. Prices require that we depend on one another.
We discuss the advantages of the price mechanism and the type of economic system that best supports it in IFWE’s homeschool curriculum, Biblical Foundations for the Economic Way of Thinking:
In a market where individuals have choices, scarce resources can move freely to their highest valued use…This creates potential profit opportunities, which induce or encourage those potential and existing sellers to fill the most urgent needs of consumers. This rationing mechanism sends important signals that no central planner or even a very good president, could ever know. Market systems do not require us to find the best and smartest people to run them; they rely on a system of property rights, prices, and profit/loss signals to coordinate dispersed and self-interested strangers.
So, prices, which are expressed in terms of currency, should not be viewed with disdain. They require a nuanced understanding. If we understand prices in terms of the role they play in helping consumers convey subjective value and producers convey scarcity or abundance—overcoming the vastness of the knowledge problem—we can instead embrace them as a gift.
Editor’s Note: Learn more about how to apply the economic way of thinking to everyday decisions in IFWE’s curriculum, Biblical Foundations for the Economic Way of Thinking. It’s designed for homeschoolers but relevant to other audiences.
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