Market prices are essential to a free, flourishing society

• Due to scarcity, all economic goods must be rationed in some way
• There are only two methods of rationing: market prices or centralized direction
• Without market prices, rationing is left to the whims political calculus of bureaucrats and politicians

All economic goods must, by definition, be allocated by some mechanism. Because the world’s resources are insufficient to satisfy all human wants, some process must be used to determine to what end these resources are to be utilized.

How a society confronts this reality of scarcity determines its level of prosperity. It can ultimately make the difference between a well-fed populace or mass starvation. Allocating resources and productive effort toward the wrong goals can be fatal. For instance, the former Soviet Union produced mass surpluses of steel, while much of its population starved.

The stakes are high, and one might presume that the choices among allocation methods are numerous and complex. But it’s surprisingly straightforward.

As London School of Economics economist Arthur Seldon (1916–2005) wrote: “The alternative to allocation by price is thus allocation (‘rationing’) by government.”

Those are the only options, he declared in Volume 4 of his collected works. “There is no third choice in the world as it is other than rationing by price or by direction,” adding that those denying this must “escape from reality by imaging that humans are selfless or resources infinite, so that rationing is unnecessary.”

It’s important to note here that when Seldon refers to “rationing by price,” he means a process whereby prices emerge in a market process based on private ownership of property featuring individuals and businesses engaging in voluntary exchange.

“And price describes the terms on which we exchange, swap, trade, buy, sell and borrow — or, in short, serve one another. It is unique information created only by people coming together to exchange in the light of unique knowledge of their affairs,” he wrote.

We live in a complex world, one with millions of unique individuals with specific tastes, needs, and desires. Resources like lumber, steel, computers, labor, chemicals, minerals, and countless others can be combined in infinite ways to satisfy society’s needs and wants.

In order to “allocate those resource among numerous alternative uses,” Seldon wrote, “we require a sign, or measure, or signal that tells us where resources are best used. We can then shift them from where they are used less well to where they are used better.”

Market-based pricing is the only mechanism that efficiently — and most accurately — provides that sign. “Without price there is no guide to relative costs or values or the sacrifices required to obtain desired goods or services,” Seldon noted.

For instance, a high price indicates a high demand relative to the supply of a good, representing high opportunity costs. Buying this good will require you to sacrifice more alternatives. It sends a signal to consumers to buy less. And for business inputs, a high price tells producers that the input is in high demand, perhaps more urgently for use in a different product, and thus helps direct that input to its highest valued use.

Compare this to the rationing of resources by government direction, often referred to as central planning. In such cases, the benefits of the price system are absent, and the planners are essentially flying blind. As Seldon wrote, “government judgement is based on no specific, real information at all, such as that provided by prices and the real personal opinions and valuations of individual men and women. In practice it is based on hunch, the spurious accuracy of estimates, guesswork, prejudice and calculation of political advantage.”

Government interference into the freely adjusting market pricing process corrupts the valuable information that prices contain, resulting in a less efficient allocation of resources. A glaring example is so-called economic incentive programs, in which politicians and government bureaucrats dole out taxpayer dollars and political privileges to select companies to give them an advantage.

As Seldon warned, the selection of the recipients of such cronyism is largely based on hunch, guesswork, and a calculation of political advantage. It rewards those companies with the best lobbyists and diverts some of the economy’s scarce resources away from uses determined by market prices.

Instead of the unique, localized, and dispersed knowledge of the masses of people executing their plans informed by the signals conveyed by market pricing, government incentive programs direct resources according to the whims of the few who happen to be wielding political power.

Government direction — including economic incentives — concentrates economic power into the hands of the few at the expense of the many.

The rationing of economic resources is unavoidable. The question is: Who will do the rationing? Voluntary rationing by entrepreneurs and consumers informed by market prices is not just the only efficient means of allocating resources but is also required for a free society.

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