Comments (34)

• AbuHatem

  Very good article on something that many people don't understand. However, I differ with you on one tiny point. While prices are not "objective" and the "just price" is a myth, I would disagree with your contention about natural law.

  Prices are set by natural law. The natural laws of the market and its spontaneous and natural order, which are determined by the subjective values of consumers and their marginal utilities. As a devout Muslim, this is what I believe, as the Prophet Muhammad (saw) forbade price controls. So, in effect, natural law theory can be made compatible with the subjective theory of value (in fact Francisco Suarez, the Thomist Scholastic, affirms something similar to this nature in his writings, as does the Islamic scholar Ibn Khaldun).

  Published: June 5, 2008 11:41 PM

• Sukasah Syahdan

  One word only from me. Beautiful.

  Published: June 6, 2008 4:04 AM

• DBratton

  According to Wikipedia, Ibn Khaldun professed a labor theory of value. That would put him in the objective value camp assuming wiki is accurate.

  Published: June 6, 2008 5:08 AM

• DougM

  The gas station owner does not want the highest price possible, he wants the highest margin possible (the difference between his cost and his sale price). In the current environment, the refiners aren't doing particularly well because the price of oil is rising faster than the price of gasoline.

  Published: June 6, 2008 8:24 AM

• AbuHatem

  DBratton,

  Ibn Khaldun firmly affirms the subjective theory of value in the Muqaddimah. Wikipedia is not accurate in this regard. I have read the Muqaddimah a few times and will attempt to find you the part. But for now you should listen to Dr. Dean Ahmad's interview with Antiwar radio.

  Published: June 6, 2008 10:37 AM

• N. Joseph Potts

  Clearly, Jesus hadn't received the latter-day wisdom about information asymmetry. Every party to a prospective transaction MUST know ALL the same things, and no other things, about the thing being traded, regardless of differences between their respective interests in it, don'cha know?

  This socialization of information is fully as good an idea as the socialization of property.

  Published: June 6, 2008 12:04 PM

• billwald

  The gas station owner wants people to come into his store to buy beer, ciggy butts, and Twinkies. He is happy to break even on the gas.

  Same with lotto tickets. I only know of one store that made money on selling lotto tickets.

  I am suspicious of the term, "natural law." How does one differentiate natural law from God's law?

  Published: June 6, 2008 1:16 PM

• Jake

  Thank you for a great article Jeffrey !

  Now let's wait and see if a friendly Socialist/Communist comes along to try and refute it ! :-)

  I couldn't help put chuckle when I noticed the Mises Calculator advertised next to this article. The "Socialism can't calculate" slogan is so very appropriate. :-D

  Published: June 6, 2008 1:25 PM

• Matt

  Just Prices? heck there are no such things in the world today. There are thousands of unjust taxes feeding and affecting every transaction. No mention was made of the unjust Anti-trust laws they too feed into every nook and cranny of every transaction.
  Justice is one thing we do not have and it starts in Washington, politicians are voted-in by a majority of economic, envious ignoramuses.

  Published: June 6, 2008 2:31 PM

• Sam

  "the Prophet Muhammad forbade price controls"

  Aren't the Muslim laws, or at least teachings, against charging interest on loans a kind of price control? This isn't meant to be a facetious question - it really seems to me that the ideas of Islamic finance/banking are contrary to this approach. So please correct me if I am mistaken.

  Published: June 6, 2008 4:30 PM

• Sam

  "the Prophet Muhammad forbade price controls"

  Aren't the laws, or at least teachings, against charging interest on loans a kind of price control? This isn't meant to be a facetious question - it really seems to me that the ideas of Islamic finance/banking are contrary to this approach. So please correct me if I am mistaken.

  Published: June 6, 2008 4:40 PM

• josh m

  It's unfortunate that a whole article is necessary to explain what should be immediately understood in just one sentence: "there's no such thing as a just price; prices are just information." (That said, excellent article).

  Published: June 6, 2008 4:54 PM

• Eric

  I don't think housing prices go up, on average. Yes, in some places they go up, others they go down as neighborhoods change. But what boosted housing prices was really the drop in the value of the dollar.

  After all, how can the value of houses, which wear out over time, increase? That makes no sense to me. My car never gets more valuable and loses value the more it wears out. Sure, you can add on to a house to increase its value, but I'm talking about the overall housing market, the average of all housing prices. The only way this can go up overall is if the value of the currency drops or demand changes. Given that the prices collapsed after FED tinkering, I would think this is evidence that it's a money issue, not a housing issue.

  As to the comment about gas prices not going up as fast as oil - it's $4.50 today in CA. About a week ago it was under $4.00. With today's price of oil hitting near $140, I suspect we might see $5 gas real soon here in CA.
  

  Published: June 6, 2008 5:22 PM

• Chad

  Eric said: "After all, how can the value of houses, which wear out over time, increase? That makes no sense to me. My car never gets more valuable and loses value the more it wears out. Sure, you can add on to a house to increase its value, but I'm talking about the overall housing market, the average of all housing prices."

  This has puzzled me, too, and I have come to think that cars and houses are apples and oranges, economically speaking.

  First, people changing houses in reaction to price changes (either moving or building a new one after tearing down the old one on your plot of land) is a much more dramatic and disruptive undertaking than changing cars, so people place far more subjective value on houses, especially if their house is their "home."

  Second, a house's value, regardless of how old it is, is largely influenced by its fixed location and proximity to other resources unlike a car. This means that an old house in a quaint neighborhood near where people wish to work could be worth far more than a brand new house out in the middle of nowhere. Heck, two houses can be -exactly- identical in every way, but one will sell for more than another just based on where they are placed on the same road (ex. corner lots).

  Third, no one really perceives a car as an "investment" (unless it is some uber-expensive car like a Ferrari). The market value of a new car plummets as soon as you drive it off the lot! On the other hand, our society perceives a house, even one that is steadily crumbling, as the primary investment for a family, and like with most investments, they expect for the value of that house to appreciate or stay the same at worst no matter what.

  Of course, I might be totally wrong on all that, but that has been my amateur impression on the subject.
  

  Published: June 6, 2008 10:04 PM

• Robert

  Chad wrote "This has puzzled me, too, and I have come to think that cars and houses are apples and oranges, economically speaking."

  You are on the right track...if you bring the concepts of net present value and future value into your calculus, you will have it. A 30 year mortgage generally carries a 21/2 to 3 times multiplier in terms of future value. So, monetary policy and fed tinkering aside, our money system is based upon 2-3% base inflation per year (looks like we are entering a period where real inflation will be higher for a while). A $100,000 dollar house paid for on a 30 year fixed mortgage will cost about $300,000 at payoff.

  The genius who thought this up understood the future value concept and time value of money. Interesting stuff.

  
  

  Published: June 6, 2008 10:33 PM

• TLWP Sam

  Actually Chad said is correct - in a ordinary situation a house should lose value like a car. A house that is old with defects by rights shouldn't command a higher price than a brand new one just as a clunky old car shouldn't command a higher price than a new car. From what I've heard the house has no real value beyond its functional value rather it's the land that's doing the appreciation.

  Still how does saying transactions arise from 'natural law'? A buyer and seller come an agreement despite various options. Who's to say even taxes are coercive then? If people still grudgingly pay taxes then they have grudgingly agreed to the price.

  Published: June 6, 2008 11:53 PM

• Brent

  "Who's to say even taxes are coercive then?"

  People don't pay taxes "grudgingly". They pay taxes to avoid the obvious coercive alternative -- prison.

  Published: June 7, 2008 12:07 AM

• Paul Marks

  "Natural law is God's law, and if God did not exist natural law would be exactly the same".

  The scholastic view - very different to the Calivinist view that God's law is whatever he feels like saying is good or bad (there being no objective morality to the Calivinist "voluntarist").

  Regardless of the existance or nonexistance of God, the subjective basis of ECONOMIC value is an objective fact (the buyer and the seller tend to value the same thing differently, otherwise voluntary exchange would not take place - the man who likes bread more than fish and the man who likes fish more than bread............).

  The above paragraph is NOT ethics - it is simply "value free" economics.

  However, ethics does come in.

  If a government (or a private individual or group) uses violance or the threat of violence to try and rig prices (to either force the seller to sell for less than he was willing to sell for, or to force the buyer to buy for more than he was willing to buy for) then this is not just a violation of economic law - leading to economic damage.

  It is also a violation of moral law - a violation of that principle of morality known as "justice" (a very different thing from "social justice").

  Justice (to each his own) is NOT all of morality (there are other moral principles - such as virtue of charity, the virtue of voluntarily helping others), but a place does not respect the principle of justice is not a civil society.

  Such a place will not prosper in the long term - and nor is such a place in accord with the moral principle of justice.

  Published: June 7, 2008 4:04 AM

• AbuHatem

  Dr. Dean Ahmad has his own arguments on "interest" at the Minaret.org website.

  I will just say this. Muslims do in fact believe that usury and interest are sins for MUSLIMS to partake in. So, yes, you are correct in pointing out that this may be a "price control" Muslims would oppose. However, two points. Firstly, Islamic business law prohibits the government from setting price floors or price ceilings, in fact there is only one extreme case where the classical scholars of the Hanafi school dissent and that is in the case of a monopoly hoarding of a staple food during a drought, a very rare situation indeed. Instead, Islamic business law, such as the great Ottoman manual "Al-Mejelle" which is still used as standard business law in some countries today, states that the "price" of a good is that which is "agreed upon by voluntary offer and acceptance by buyer and seller."

  Secondly, just because Islamic law bans interest as sinful for Muslims, this does not logically entail that government force or coercion ban interest for Muslims or non-Muslims. The details in this regard in Islamic law are extremely complex and classical scholars disagreed upon them.

  Also when I said "by natural law," maybe I should have clarified my terms. As the Persian mystic al-Ghazali writes "when meanings are set there is no use quibbling over names." Natural law, by Aquinas and others (including Muslim classical theologians such as al-Ghazali and al-Taftazani) also has the meaning of set laws in the universe or nature (i.e. that fire causes burning). All I meant to say is that the spontaneous order of the market and freedom causing prices to run smoothly and the utilitarian benefits of the market as described by Hayek and Mises are a "natural law of the market."

  In the end, we come from differing religions and may disagree on the virtuousness of interest, yet this doesn't mean Muslims cannot be Austrians in economics and that there cannot be collaborations amongst peoples for the cause of liberty. Muslims may personally not engage in interest, but this does not mean we are going to vote (we're not) for it to be banned in the USA by government coercion. That is something else. There is a difference between a sin and a crime (as Mises and Rothbard and others write about).

  Published: June 7, 2008 7:21 AM

• Joshua Katz

  I do wonder, as a matter of pure economics, if taxes can drive the price up, at least in the short run. Suppose that gasoline was selling for $2.00 per gallon, and a $.50 per gallon tax is then imposed. Will this be paid entirely by the customer, so that the customer now pays $2.50 per gallon? Well, the customer doesn't really care about where the money goes, so if the store can now increase the price to $2.50, why wasn't it already $2.50? It seems that, approximately, the price should have been set at the point where, if the price is increased, volume decreases so that the revenue decreases - that is, on the elastic/inelastic boundary point. So if the store just pushes the price up, making the customer pay the tax, the fall off in volume will be enough to cut into revenues. Instead, it seems that the price should remain at $2.00, and the store should take the hit and pay the $.50 per gallon itself to avoid a larger loss. The relevance is that the oft-cited notion that "$.40 of the price of a gallon of gasoline is taxes" is correct, but doesn't imply what it's taken to imply - that eliminating the tax will drop the price by $.40. Instead, it seems it would increase revenue by $.40, and leave prices alone. If the store could profit by lowering the price, they would have done so.

  Now, long term, the taxes might well have an impact, because they cut into the profitability of the enterprise. Therefore, expansion may be slowed, and competitors may be discouraged from entering the business - businesses may even close, reducing supply down the road. But I don't think it's helpful to suggest that eliminating taxes will reduce prices by the amount of the tax.

  Now, on the point of the article, I understand the economic analysis, and it makes perfect sense - in a free market. Given the existence of corporate welfare, of special privilege, and most particularly of the Fed and it's impact on pricing, I'm not sure what I'm supposed to take from the article. The idea is that prices serve, as Hayek said, to transmit information. What precise information is transmitted today by prices, as inflation begins in the banking sector and spreads outward? What does it really mean when the price of housing and oil goes up? That there's less supply and more demand for these? Not likely - instead, it seems to be telling us that the dollar is a lousy currency, and I don't know what the housing and energy markets are supposed to do with this information.

  Published: June 8, 2008 12:39 AM

• newson

  joshua katz says:
  "The relevance is that the oft-cited notion that "$.40 of the price of a gallon of gasoline is taxes" is correct, but doesn't imply what it's taken to imply - that eliminating the tax will drop the price by $.40. Instead, it seems it would increase revenue by $.40, and leave prices alone. If the store could profit by lowering the price, they would have done so."

  this windfall gain from a tax reduction will be shared between gas vendors and gas customers in an unpredictable manner, depending on the competitive nature of this market. but i can't see why the price wouldn't drop substantially. maybe the lower price would stimulate gas consumption, hence the price may not match the tax-cut cent for cent - but so what? if either gas vendors or the consumers get the moolah, it's still money that's going to be put to use productively.

  Published: June 8, 2008 6:55 AM

• Joshua Katz

  Newson, I agree with your conclusion - whoever gets the money, it is being used more productively than if the government gets it. (Actually, I regard government spending as not just non-productive, but anti-productive - it would be better if they taxed us and simply distributed the money equally to all the politicians than to spend it politically.) However, I'm not convinced of your first point - that the windfall would be shared in some manner. My argument is that it would all go to the producer and/or distributor, and not to the customer at all. The reason I hold this is what happens in the forward case - it seems to me that introducing a tax ought not to raise prices at all at the pump, and only hurt the gas producer - which is a very bad thing. As a result, it seems to me that eliminating the tax ought to also leave prices unaffected.

  Published: June 8, 2008 12:11 PM

• Eric

  Chad wrote "This has puzzled me, too, and I have come to think that cars and houses are apples and oranges, economically speaking."

  I can understand how one might sell for more than the other, and that houses last longer, and have all sorts of positive attributes. However, that only explains why the prices of housing may be high - compared to autos.

  But it doesn't explain (to me, anyhow) why these housing prices (overall, not in a specific location) continue to go up - except that one can factor in the drop in the value of the dollar. Maybe the real answer is that we look at housing pricing over a longer time frame and can see the inflation effects, whereas autos wear out much quicker, and so we don't get a chance to see how they fare vs. inflation.

  On the other hand, every time I go to buy a new car, I'm struck by how much more the new cars cost - in dollars.
  

  Published: June 8, 2008 5:56 PM

• newson

  joshua katz says:
  "it seems to me that introducing a tax ought not to raise prices at all at the pump, and only hurt the gas producer - which is a very bad thing. As a result, it seems to me that eliminating the tax ought to also leave prices unaffected.

  this is counterintuitive - competitive pressures ensure that windfall gains are shared between consumers and producers. your point begs the question - why don't vendors sell their gas @ $10 gallon? certainly not for altruistic reasons.

  look at how the falling dollar affects us importers. first they take the pain through shrinking margins (fearful of losing market share), perhaps hopeful that the currency will rebound. poor returns will be tolerated only so long, and then the higher import prices get passed on to the ultimate consumer. but how the pain is shared between importer and customer depends on a myriad of unknowable factors (company strategy, competitiveness of industry, etc).

  you're right about "anti-productive" as a word to describe many political initiatives. if only they spent the money on hookers, vodka and racehorses, and went easy on the legislating.

  everytime i see fireworks displays put on in my city, i hear people complain about the cost - "money going up in smoke". i personally feel that tens of thousands of taxpayers dollars shot into the night sky is small beer and at least gives you some bang for the buck, compared to the billions frittered away out of the public eye. (saying that, when i was young you could buy all manner of firecrackers and people could quite easily have their own guy fawkes night. now, the health and safety authorities have shut all that down, and fireworks are a public monopoly.)

  Published: June 8, 2008 9:36 PM

• P.M.Lawrence

  Joshua Katz, your reasoning about what would happen with a tax increase is sound if we assume that petrol prices are nearly up against a stop, so to speak (the point where elasticity goes asymptotic). But even if that is the case, it doesn't necesarily follow that all the gains from a tax cut would go to the producers, because that movement is in the other direction where you don't reach another stop until prices get to zero.

  Published: June 8, 2008 10:06 PM

• Sukasah Syahdan

  I have yet to reread Dr. Ahmad's paper. The last time I read it was quite some time ago, but so far I could remember I agree completely and comfortably with his opinion on interest rate.

  Ibn Khaldun's economic ideas were great and far ahead of his time, although some were not in line with Austrian.

  Published: June 9, 2008 3:10 AM

• Michael A. Clem

  it seems to me that eliminating the tax ought to also leave prices unaffected.
  
  If a tax is removed or at least reduced, the margin for profit is increased, and I'm sure sellers would be happy to maintain the current price sans taxes. But the higher profit margin also increases the opportunities for competition, because the lower tax is effectively no different than if the sellers had raised their price by that amount. The easiest way to compete is to lower the sale price--a lower profit margin is certainly acceptable if you gain more customers. Thus, there is economic pressure to pass the benefit of the lower taxes on to the consumer.

  Published: June 9, 2008 9:28 AM

• Alex

  AbuHatem: Is borrowing or lending money a sinful activity for Muslims? If not, how are borrowers expected to find willing lenders if lenders are not to be paid for lending money?

  Do you have any explanation as to why the Islamic faith regards the charging or paying of interest as sinful?

  Published: June 9, 2008 11:24 AM

• Alex

  I (and perhaps most of us) personally know people who have made fortunes through inside information -in particular, by buying up property before government information concerning various development activities become public. I, and I'm guessing most of you, could not sleep very well if you carried out such transactions.

  Published: June 9, 2008 11:33 AM

• Francisco Torres

  I do wonder, as a matter of pure economics, if taxes can drive the price up, at least in the short run.

  Yes, if the retailer is obligated to collect these taxes for the State (a totally different situation if it were just obligated to pay for these taxes). The retailer would have to raise the price accordingly, in order to comply with the law. This is why the State raises the tax on gasoline slowly and incrementally, so as not to impact the intended victims with a great (and politically suicidal) shock.

  Published: June 9, 2008 2:07 PM

• Nate

  While I like this article, I completely disagree with the author's interpretation of the parable. The man who found the treasure in the other guy's field, HID IT AGAIN, and then offered to buy his property is both dishonest and stupid. Being on the landowner's property, it belonged to the landowner. Secondly, the fact that the guy just went and sold everything he had to get the property, without knowing if there was any other value to the property is just stupid.

  Let's not start taking economic lessons from a man who preached that the moral thing to do is sell everything and go work for the poor, or, at the very least, give ten percent of everything you own away for nothing in return.

  Published: June 9, 2008 4:09 PM

• AbuHatem

  Nate, there was a good article on Mises.org a few months ago discussing how just because we accept the natural right to private property and economic freedom we don't necessarily accept materialism and reject charity. In a free market you have the right to give as much money as you want to the poor.

  Published: June 9, 2008 4:22 PM

• Nate

  AbuHatem, I agree. You also have the right to give nothing. I'm taking issue with the teachings of a man who taught that it was a moral necessity.

  Published: June 9, 2008 8:30 PM

• John Williams

  I just wanted to say that I think you completely missed the point of the Parable of the Treasure in the Field like most parables it is not literal it is not about ripping off some guy who does not know he has treasure in his field for all we know it could be the Kings land. It is about where the man invested his perceptions and beliefs the treasure signifies a broader perspective encompassing mankind and when he "sold all he had" that signifies leaving old fear driven survival perceptions behind in exchange for a broader perspective based on compassion, understanding, charity and all other real worthwhile pursuits. So in other words when he found the treasure in the field (realized this broader giving/sharing perception) was there he put it back and gave up all his other belief patterns so he could come to fully realize the true perception (buying the field the treasure was in) it is about where we invest our beliefs not about physical greed.

  As far as prices go the best determinant for fair prices is healthy competition which increases efficiencies and keeps prices at a fair level. Unhealthy competition such as monopolistic accords between competitors or strict monolopies are recipes for unfair pricing through hoarding or price gouging. Any regulations set up to disadvantage competition is also unhealthy and will lead to unfair pricing. All the talk about free markets is not exactly true since the ideas fall apart in certain situations we have anti-competition laws to stop predatory pricing that would enable the richer company to put the smaller company out of business and attain a monopoly. Cornering markets and price fixing are not allowed but in a completely free market it would be. The idea of free markets is not as true as the idea of a competition market and is reflected in the fact that ideally laws that are set up to enable the latter not the former. What I do not understand is why when we do not allow one company to corner a market and dictate prices as a monolopy do we allow many in accord to do almost the exact same thing. If one is negative surely the other is negative too the fact that the people paying pay a little bit less and the people profiting are many more does not justify the practice it is still harmful. In the case of oil it could have good consequences by speeding up alternative energies since they become more cost effective but that would happen anyway given enough time. Increasing conservation is also good but long term education is better than using prices to force conservation since that hurts the ones who are not wasting since they do not have the money to waste and affects the more wasteful people with more assets that do need to cut down less. One ends up having to go out of business while the other has to trade in his SUV for a smaller car.

  Alot of people are wondering why house prices go up and I wonder the same thing about most products. With the ever increasing efficiencies of production and to a lesser extent services shouldn't prices be always coming down to reflect the fact that the man hrs per good are always coming down. In the past increased efficiencies such as the production line caused prices to come down why not now?

  Since it is relative it should still be reflected by the ratio of wages to good cost decreasing once a product comes to market but this does not seem to be the case. I believe this is a reflection of severe inefficiencies in our monetary system since that is the only thing that has changed since always decreasing good prices was actually the case. Alot of people would seem to think that situation would be bad but I cannot understand why if this year it takes me 4 years of work to buy a house and next year it takes 3 while the house builder is still making the same profit that would be a good thing for everyone (by helping to distribute wealth to everyone) not a negative thing.

  I am not muslim but I do agree that interest plays a large part in the inefficiencies in our system directly and indirectly most people dismiss this idea immediately but if they keep an open mind, they research it and are willing to reinterprate what we have been conditioned to believe about money they will find it is true. When you consider that at some point in time money was just created maybe with the collateral of someones house (not the banks) and then they charge interest on it (money that basically represents that house) you have to wonder how interest on this money could be considered anything but fraud. At the crux of it they are charging you interest for something you own. I suggest the book Web of Debt to really understand how this works.

  Published: August 16, 2008 2:26 AM