The price mechanism is the single most important element of the market economy

Broken supply-chains are the story of the moment but what I find truly remarkable is that virtually no one any longer understands that it is the price system, and the price system alone that allows the supply-chain to operate. I have discussed this before. This is virtually no longer part of the economics curriculum but if you would like to understand why it matters, there is this that you might find of interest: I, Mechanical Pencil: Why a socialist economy can never work.

This has come to mind having come across this today: “There are only nine meals between mankind and anarchy”. This is the introduction to the article.

Alfred Henry Lewis’ observation dating back to 1896 still rings true. There is a thin line between society and anarchy. It’s thinner than we want to admit.

Here is the final para of the article:

There is a thin line in society, between food and anarchy, freedom and repression, liberty and tyranny, safety and street violence. It’s thinner than we want to admit, and it’s being pushed to its limits on purpose by ideologies that want to deconstruct our society. Tearing down society is a dangerous game.

Absolutely true, but nowhere mentioned in the article is the essential role of the price mechanism in bringing food to your table, along with everything else. It is the price mechanism that makes the capitalist system indispensable. That this is not common knowledge makes our way of life vulnerable to being driven into the sand by socialist loons such as the American President who has done much to undermine the supply-chain networks across the United States.

11 thoughts on “The price mechanism is the single most important element of the market economy”

  1. Thank you Steve -and it was ever thus as it appears to be the aim now of the Reset crowd

    when the perpetual struggle for existence, depriving men of all interest and understanding in politics, has made them eager to sell their birthright for a pottage, and ignorant of the treasure they resigned.

    Only one comfort – there are more of us than there are of them but that did not/has not stopped the likes of Stalin, the CCP and Obummer, Bernie Sanders, Occasional-Cortex and their fellow travellers.


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  2. How has the relentless reduction in consumer packaging sizes over the last few years been measured in the pricing mechanism?
    And now that inflation is de jour, will we see any attempt to quantify that.
    It’s unfortunate that most economists know that published CPI is crap, but like to operate within the rails.

    And the USA Supply Chain destruction was engineered by Newsom’s AB5 legislation to destroy independents with 10yo+ trucks, in favour of his union buddies. The price mechanism is a byproduct.
    Instead, why not try talking about how the Yuan has managed to maintain it’s relativity to the USA’s world’s “reserve” currency, despite it becoming the world’s “reserve” factory?
    Let’s see what price mechanism works there.


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  3. Tearing down society is a dangerous game.

    By elevating John Maynard Keynes to become its chief economics witchdoctor, the left decades ago began its long obfuscatory march through the free market.

    As Steve Kates has regularly pointed out over the past decade, there is not a single economist in business or the Treasury who isn’t a Keynesian and who therefore is clueless about how economies really work.

    But it wasn’t until early this century – around 2007, I reckon, about the time the anti-social coding nerds of Silicon Valley started weaponising that became their social media monopolies, which have now largely banned dissent – that the left abandoned its white-anting of the West and switched to an all-out communist revolutionary war strategy.

    What we’re seeing now is what happens when the revolutionaries and their allies in the Deep State (Down Under read: public service) are allowed to shake the foundations of the free market system that relate to supply chains – specifically, giving bureaucrats the power to ban anyone from work if s/he has a cold.

    That is why the left is celebrating its discovery of fear as a political weapon: it allows its useful idiots to advance the revolutionary strategy – onwards to Beijing, death to the free market, let’s destroy everything!


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  4. “How has the relentless reduction in consumer packaging sizes over the last few years been measured in the pricing mechanism?”

    That is called “shrinkflation”. So your packet of potato chips went from 250g to 220g to 175g. Price the stayed the same, so those sleeping on the job (of shopping) don’t notice. And don’t think people notice this sort of stuff – they don’t. I’ve pulled up several people buying flour, sugar etc and said “You know that if you buy two 1kg packets, it’s actually cheaper than one 2kg packet?”. They typically frown, look at the pricing on the shelf and then say “Oh – yeah, you’re right. Thanks.” Sure, that’s a different thing, but it’s still a “don’t pay attention, get ripped off” thing. And it has even kept happening after supermarkets starting putting “$0.90c / 100g” type stickers on the shelf.


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  5. “Instead, why not try talking about how the Yuan has managed to maintain it’s relativity to the USA’s world’s “reserve” currency…”

    The same way the Australian dollar used to, or the USSR did, or any number of other countries did – the exchange rate is “regulated”. Much easier under a totalitarian regime of course.
    The CCP well knows that by pegging the yuan to the US dollar, they can more easily undermine US manufacturing with “stable” pricing and also not worry about energy costs, as oil et al is typically in US$. If they had “floated” the yuan, then as their manufacturing increased and they became richer, they would have been more expensive and not gotten as much business. IIRC, a couple of years ago they “increased” it to US$0.15 from US$0.12 or something like that.


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  6. Good post.
    Always good to be reminded of the most basic element of our system.
    Please shove this down the throat of Politicians and Public Serpants.


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  7. The CCP well knows that by pegging the yuan to the US dollar, they can more easily undermine US manufacturing with “stable” pricing and also not worry about energy costs, as oil et al is typically in US$.

    Not really. PPP ultimately wins out and there’s no such as a longterm free lunch. Prices would ultimately adjust to their respective PPP.

    If they had “floated” the yuan, then as their manufacturing increased and they became richer, they would have been more expensive and not gotten as much business. IIRC, a couple of years ago they “increased” it to US$0.15 from US$0.12 or something like that.

    Again, this is realistic as there’s a wall of money looking to leave china and that’s not changing anytime soon. A float would have the impact of weakening the Yuan in the short to medium term because of outflows.


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  8. No better shown than in the fights over the few remaining toilet rolls last year!

    Seriously though, I would not have expected, in my lifetime, that the actual supply chain for daily life requirements would break down. Didn’t think I would become a “prepper” in my lifetime.


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  9. What is it with Mr Kates? He pursues clinical agendas with no knowledge or evidence. Then, for no apparent reason, starts banging on about how prices will somehow repair supply chains that have been broken in large part by teh effects of pandemic. Perhaps he should offer his services to Apple, which is struggling right now with supply chain problems? Though his lack of business experience might be handicap.


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