Explore: The Price System: What It Does and How It Works - Dr. Brian Baugus.   

The reading below has 9 videos to watch.  It should take you about 1 hour and 30 minutes to complete.  

Economics is largely a science about information. Many people think it is about money and profits and getting rich or poor. There is of course some of that but those are results, not goals. Our primary goal is to be good stewards of God’s resources, and that means making sure that they are used in the best way possible, that is, in a way that serves other people and honors God. Profits are a sign that we have served well, but the key to serving well is making good decisions based on good information.

That means that the fundamental economic problem is: how do we know where resources will be used best? 

We can think of the economy as a body of water that flows. Like water, it can flow based on natural causes or it can flow because it is forced to flow due to dams and canals and other man-made reasons. Resources (of course water is a resource too) flow like this as well, either naturally or due to man-made force. If they flow naturally then they flow to their best use and create prosperity. If they are forced to flow due to man-made reasons then they are often wasted. Just like a river whose course has been changed, there can be floods and puddles and dry spots and a desire to get back to the natural flow.

Let’s start by talking about the natural way.

A Free Market: Prices Tell Us What to Do, Not Government

The natural flow of the economy is for people to trade things of value. This is the flow as goods and services and resources move from one person to another through trade. Anything that prevents or hinders that flow wastes resources and is poor stewardship, dishonoring to God, and serving others poorly. 

In nature, gravity and wind and geography are the types of things that influence how a river flows; in the economy it is prices. Like the video you watched in the last lesson, I, Pencil, people do things because the price tells them that it is their best option. High prices are like gravity: they attract seller and workers and businesses to try to serve that market that needs help. That is what a high price is: a signal for help, a signal that resources need to flow in that direction. If the government sees that high price and passes a law preventing it from being high then that signal is never sent and those people suffer; resources do not flow to their best use and people are not served well.

We may not know why the prices are high and we may like to know that, but we do not need to know that to make a good decision. One client or customer wants to pay more, and that is all you need to know. You may want to know so you can make good use of that information to better serve later but you do not need to know to make a good decision now.

Low prices have the opposite effect. Resources flow away from low prices as they seek out better, more valuable uses. In this manner resources flow from low prices towards high prices and in doing so that causes the low prices to increase (fewer resources makes each resource more valuable and higher priced) and the high prices to decrease (as more resources flow to the higher price the price of each falls).

The two videos below will help explain the point.  



But How Do We Know What Is Valuable? 

We are talking about resources flowing to their best use, to where they are most valuable, but how do we know? This is a very important question; don’t we need someone to tell us or at least help us figure what is valuable? The answer is no.

Value is subjective, no two people will value something the same. Value is subject to your judgment and what you think is valuable. This is why one person will be willing to pay much for something and another is not willing to pay anything for it. Someone with no TV may value a TV much more then someone who already owns one. It is the same TV, but the two people are in different situations and value the TV differently. A new mother will value baby items much more than an old person with no kids or grandkids. Value depends on how useful something is to a person and only the person can tell that. 

This is the great magic of the price system. If the government sets prices, it places a value on something that everyone has to agree to, but the free market can let you sell something and earn a good profit that some people may not care for or want but others do. If we value everything the same then a government system could work and resources would not flow because we would all value each item the same, so why trade? But God made us differently and we do not all see the world the same. You see an opportunity to profit where someone else sees no opportunity, so we need to be sure we allow that flowing system to work so I can sell something I do not need or want to someone who has a better use for it. 

The two videos explain subjective value.




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