Reply To: Formulation of Prices


Any and all action is taken by a person to obtain something the anticipate will be more valuable by foregoing an alternative considered less valuable. If two persons each anticipate a gain by exchanging what they have for what they want, then it’s in the interest of both of them to cooperate by finding a mutually agreeable price. The basic point of exchange between a buyer and a seller is for them to realize its mutual benefit. Sellers and buyers are free in a market economy to use whatever method they think best in formulating asking and offering prices. However, to make their trade and realize its mutual benefit, they must settle on prices that generate mutual benefit, i.e., prices above the minimum that the seller is willing to accept and below the maximum the buyer is willing to pay. The existence of billions of exchanges every day throughout the world illustrates the truth of this claim.

Of course, government coercive force can attempt to impose legally mandated prices. The NRA cartelized various industries during the Great Depression. The point was not to make prices inflexible, but to raise them back to their pre-depression levels. By the time the NRA was in force in 1933, prices had already fallen dramatically. Price were clearly not rigid downward as they fell 30 percent from 1929 to 1933. Prices were not sticky downward during the depression. Moreover, the NRA was declared unconstitutional by the Supreme Court in 1935. So, at most, the NRA codes only administered prices for two years.

As Joe Salerno has argued, the changeability of prices are one part of an entrepreneur’s strategy to cater to buyers. If buyers want prices that change rapidly in response to changes in demand, then entrepreneurs employ the technology to make this possible as in financial markets like the NYSE. If buyers want prices to change more gradually regardless of the moment to moment changes in demand, then entrepreneurs give buyers that result as in retail stores like Wal-Mart.

The billions of successful exchanges that occur every day belie the claim that the behavior of person in unpredictable. Moreover, the laws of demand and supply do not refer to predicting people’s changing preferences over time. The laws take a person’s preference as it is demonstrated in action and conjecture at that moment what would be logical for the person to have done had the price been different than it was while every other relevant factor involve in the person’s behavior remained the same.