Prices are Signals

June 6, 2010

I always say that NPR’s Planet Money has good economics, and yet it seems I only write about this program when I want to criticize them. I’ll try to amend that now.

In Planet Money‘s bonus “Deep Read” podcast this week, I was pleasantly surprised by and eventually impressed with Adam Davidson’s description of the market process. NPR prejudice dies hard, and my initial reaction was “No way, they can’t be so right.” But they were. Here’s Adam Davidson on how markets work:

“When oranges start costing more, that’s a signal that they are rarer, or there’s more demand for them, so there should be some effort made to increase the supply. And it all happens very chaotically, there’s no central governor saying, ‘Alright, oranges should now be 30 cents. ‘ And when you do have a central planning authority, like the Soviet Union did, the general conclusion is, it seems true, that any one small group of people cannot know enough information to actually allocate resources correctly.”

Nailed it. Perfect. When people say, incredulously and sarcastically, “I bet you think the free market can take care of that problem,” it’s because they don’t understand what Davidson is saying here. Yes, I think that if you want to solve a problem, you have to use a method of solving it that has some reasonable expectation of working. For the problem of allocation resources in a world of scarcity, the price system works.

Planet Money doesn’t always get everything right, as when they suggested, in line with the Zeitgeist, that the earthquake in Haiti is a great opportunity to finally reform Haiti from the outside (They should  talk to William Easterly about that). But the Planet Money reporters definitely “get” economics in a way that most people don’t, and I recommend them enthusiastically.

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