Price Point – not only is it a signal of relative value in which the producer thinks what an offer is worth but also signals back to the producer what the consumer thinks about it (too high, or too low).
The great achievement of his [Adam Smith’s] famous discussion about the division of labour was the recognition that men who were governed in their efforts, not by the known concrete needs and capacities of their intimate fellows, but by the abstract signals of the prices at which things were demanded and offered on the market, were thereby enabled to serve the enormous field of the ‘great society’ that ‘no human wisdom and knowledge could ever be sufficient’ to survey.
-F.A. Hayek ( New Studies in Philosophy, Politics, Economics and the History of Ideas)
Prof. Don Broureaux adds:
This Smithian insight is indeed profound. As such, it has vast implications – only one of which is that so-called “corporate social responsibility,” sincerely pursued, would make society poorer than it will be if corporate managers aim exclusively at maximizing shareholder value. (Note that the case for maximizing shareholder value implies that corporate managers serve as faithful agents for their principals – that is, shareholders.)
For a potential producer, it also signals whether or not they can produce a good at a price both acceptable to a consumer and give the producer confirmation that it would result in a reasonable return on investment (e.g., profit).
Anyone can “make” a thing – the price point determines if it is worth it and determines a rational allocation of resources.
Communism, Socialism? They will set a price based on political outlook. Most of us have seen when such Governments subsidize goods – eventually, it is unsustainable.
Like the Federal Government heavily subsidised sloth; paying people more to stay on the couch than to be self-sufficient. Or totally distorting a given marketplace, by “legally” allowing people to live rent-free in other peoples’ housing units.
How sustainable is either?
(H/T: Cafe Hayek)
