THE PRICE MECHANISM

THE PRICE MECHANISM

Adam Smith called it the Invisible Hand. He wrote in 1776 that
each individual’s pursuit of personal gain ensured that, in aggregate,
society’s wants are better met this way than if some philanthropic
enterprise had indeed set out consciously to organise the same.
Many economists have since shared this view. They argue that
the automatic functioning of unrestricted trade and free market
pricing will ensure efficient economic organisation that cannot be
bettered by the combined actions of any number of well-meaning
planners, administrators and public servants.
Prices make up the key signalling mechanism in a market economy
that indicates which needs are most urgent, which production strategy
should be utilised, who is to be employed and how much they should
be paid.
Suppose the tastes of the public change such that they are
increasingly interested in buying coffee and health-food sandwiches
and are tired of consuming additive-packed hamburgers and technicolour
pizzas? Who is best placed to signal this to restauranteurs and
fast food producers – government planners or individual consumers?
In a free market, by the pattern of consumer spending, hamburger
bars and pizza parlours will lose sales and the owners of coffee shops
will be earning extra. Prices of those products out of favour may
well fall at first to try and tempt back more custom; prices of those
commodities in hot demand may well rise at first as competitive
bidding forces them up. But if consumer trends continue there will
be an irrevocable change in suppliers’ profits – out of the pockets of
loss-making hamburger sellers and into those of coffee shop keepers.
If they cannot continue to pay their costs (typically high rents in
© 2004 Tony Cleaver
city centre locations) then owners of the former enterprises will
want to sell up; owners of the latter may well negotiate to buy them
instead.
The range of commodities on offer in Durham market place, like
any other, thus automatically adjusts to meet consumer DEMAND. A
new coffee shop is just one small piece of evidence of how markets
evolve – the prices of products and profits of entrepreneurs
signalling the way that changes must go.