WEBVTT

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[train bell clanging]
What If There Were No Prices?

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- To appreciate why market prices

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are essential to human well-being,

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consider what a fix we
would be in without them.

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Suppose you are the commissar of railroads

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in the old Soviet Union.

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Markets and prices have been banished.

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You and your comrades,
passionate communists all,

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now directly plan how to
use available resources.

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You want a railroad from city A to city B,

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but between the cities
is a mountain range.

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Suppose somehow you know

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that the railroad, once built,

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will serve the nation equally well,

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whether it goes through
the mountains or around.

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If you build through the mountains,

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you'll use much less steel for the tracks,

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because that route is shorter.

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But you'll use a great deal of engineering

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to design the trestles and tunnels

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needed to cross the rough terrain.

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That matters, because
engineering is also needed

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to design irrigation systems,
mines, harbor installations

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and other structures.

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And you don't wanna tie up
engineering on your railroad

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if it would be more valuable

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designing those other structures instead.

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You can save engineering
for other projects

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if you build around the
mountains on level ground.

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But that way you'll use much more steel rail

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to go the longer distance.

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And steel is also needed for other purposes.

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For vehicles, girders, ships, pots and pans

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and thousands of other things.

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Which route should you choose
for the good of the nation?

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To answer, you would need to determine

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which bundle of resources is less
urgently needed for other purposes?

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The large amount of engineering
and small amount of steel

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for the route through the mountains,

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or the small amount of engineering

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and large amount of steel
for the round about route.

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But how could you find
out the urgency of need

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for engineering and steel in other uses?

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Just one way engineering is used,

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is to build irrigation systems.

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To assess the importance of a
particular irrigation system,

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you would need to know
what the farmers know

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about how irrigation would increase
the yield of their fields.

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And to know the value of
that increased yield,

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you'd need to know what grocers know

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about their customers'
eagerness for that produce.

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That in turn, depends
on what customers know

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about the better meals they
could fix with that produce.

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How would you find all this out?

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Just one way to use steel
is to build new trucks.

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To assess the importance
of a particular new truck,

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you would need to know
what the trucker knows

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about the capacity of his current truck,

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and how much more quickly

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he could make the deliveries
his customers want,

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with a new, bigger truck.

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To know the importance
of those deliveries,

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you would need to know
what his customers know

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about the value of
getting goods delivered.

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That in turn, depends on
what still others know

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about the uses of those
goods at their destinations.

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To reason about where
to route the railroad,

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you need this kind of information

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for all possible uses of
engineering and steel.

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That's a massive amount of knowledge,

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held by millions of
people throughout society.

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How might you get it?

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You might try surveys,

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but think how many people
you would need to survey?

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All those who prepare meals with produce

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and all those who take delivery
by truck for starters.

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The numbers would be staggering.

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And often people don't
even know what they prefer

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until they face an actual choice.

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So they might not be able

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to answer survey questions accurately.

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Even if they could,

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by the time the surveys
were returned and processed,

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much of the information
would be out-of-date.

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And even if you could get
complete and timely information

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about what everyone knows

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that's relevant to every use
of steel and engineering,

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you would still need to deduce from it

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where to build the railroad.

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How would you begin to make
sense of that mountain of data?

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In the words of Ludwig von Misis,

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"You would be groping in the dark."

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You would face what is known

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as the knowledge problem
of central planning.

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The reason why comprehensive
socialism inevitably fails.

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Central planners cannot
get the knowledge they need

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in order to plan effectively.

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You, commissar, simply
cannot know on what projects

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scarce resources should be used
for the good of the nation.

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But now change the thought experiment.

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Imagine that somewhere
in the market economy

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part of the world,

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you are the chief operating
officer of a railroad company.

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You work, not for the good of the nation,

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but to generate profits for your firm.

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You want to run a railroad
line from city C to city D.

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Again, there's a mountain
range between them.

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Now, how do you decide on the route?

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You choose what's cheapest.

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You would calculate the
total cost of each route,

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for each one, multiplying the
amount of engineering required

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by the price of engineering,

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and adding that to the
amount of steel required

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times the price of steel.

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Then you would choose whichever
costs your company less.

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You might give no thought at
all to the good of the nation

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or society as a whole,

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but, and here's the marvel,

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by choosing the route that
is cheapest for your company,

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you would thereby choose the
route that's best for society.

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You would use the bundle of resources

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that's least urgently
needed for other purposes.

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Why?

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Because those market
prices you calculate with

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reflect the urgency of need
for engineering and steel

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in all their alternative uses.

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For example, suppose customers
wanting tastier meals

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would buy better, more expensive produce

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if it were on the shelf
of their local grocery.

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In effect, they're offering
grocers more for produce,

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so the grocers will offer
farmers more for produce.

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So the farmers whose yields

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would be sufficiently improved by irrigation,

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will offer more for irrigation systems.

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And those who build irrigation systems,

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will offer engineers more to design them.

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Now that designing irrigation
systems pays engineers better,

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people who want to hire
engineers for other projects,

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such as railroads,

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will have to offer them at least as much

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to make it worth their while.

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The higher price tells
everyone who uses engineering

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that it's become, for some reason,
more valuable.

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So maybe they should use less.

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In this way, the market
prices of resources

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represent the particular
knowledge and preferences

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of millions of people who directly
or indirectly, use those resources.

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And the prices communicate that knowledge

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and those preferences to everyone interested.

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Only with market prices to communicate

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this vast amount of human knowledge to us,

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can we calculate the least costly ways

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of producing the things we want,

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coordinate our activities
with the activities of others,

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use resources where
society values the most,

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and thereby satisfy as many
human wants as possible.

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[music]

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