Sunday, April 10, 2011

Simple Explanation of Prices

One of the podcasts I listen to is Russ Roberts' "Econtalk". In a recent podcast on Hayek, he was talking with Bruce Caldwell about the price mechanism and how markets adjust when circumstances change. They referred to Hayek's article "The use of knowledge in Society", a classic article I've heard of many times. This is the place where Hayek conclusively settled the Socialist Calculation Debate, which had raged for a couple of decades to that point. It's remarkably readable.

The podcast also referenced Roberts' own short article "How Markets use Knowledge". This article gives a concrete example of how markets adapt to changing circumstances, using a simple intersection of supply and demand curves. As circumstances change, suppliers and consumers adapt, by changing the amount they produce or consume, and the changing price gives each all the cues they need to choose a new course of action. Roberts shows how their adaptations respond to the context and the information they each have so different economic actors make different choices in differing circumstances. It's simple and elegant.

1 comment:

Robert Ayers said...

Thanks for the interesting post with the good references!
When I was getting started in the computer business (circa 1962), I recall reading about Wassily Leontief and his "input output modelling". At the time (post the Hayek article) it sure looked to me like Leontief hoped to extend the IO model to entire (socialist) economies as computers became more powerful.