Why are prices necessary? To anyone who buys or sells anything, the answer seems obvious. Most of us accept pricing as a fundamental component of commerce. In fact, we rarely think about what price is until we are shopping for the best deal on something we need or attempting to determine what prices should be for the products or services we are offering in the marketplace.

However, as Daniel J. Smith, Assistant Professor of Economics at Troy University explains, price provides critical information to everyone participating in the market, containing more information within a number than could ever be possessed by any single individual or institution.

The pricing system offers an information-generating, -gathering and -transmitting process that’s able to call up widely disbursed information that no central planning agency, let alone that any individual, can know possess or control on their own.

The message here is that it is not just statistics that influence prices, but that actions and reactions by speculators, producers and consumers will cause changes to pricing. For example, consumers will automatically adjust their buying behavior based on market conditions, via the price system…at least, as long as prices are generated by a free market system. Here is the example Smith uses to illustrate his point:

Tin is a product that we use in many of the products that we use on an everyday basis. Yet many consumers, and even producers, know little about the market for tin. Without knowing the market conditions for tin, producers and consumers will automatically adjust their behavior when there is a change in price.

A disruption in the supply, say a mine collapse, will automatically lead to a rise in price of tin and products made with tin. Producers don’t need to (and usually can’t) know WHY prices have gone up… only that they can charge more for tin.

This leads tin producers to increase the supply of tin by, for example, working longer hours or using more intensive mining techniques.

Likewise, consumers seeing the price increase will use fewer products made with tin. As we have seen, both producers and consumers adjust their behavior to account for the new market conditions for tin… as a response to the new price.

The power of the pricing system to distill all the myriad market factors that produced the higher tin prices, followed by the higher tin-related product prices, and ultimately the drop in demand, is both extraordinary and efficient. Prices, more than any manipulated system created by a government agency, generate, aggregate and transmit market knowledge throughout the world.

In a FREE MARKET, prices adjust automatically to changes in conditions, preferences and technology.

Despite the inherent efficiencies of the pricing systems, throughout history governments have attempted to contravene these systems through central planning boards or price controls. History demonstrates that time and again these attempts to manipulate price have consistently led to the misallocation of scarce resources and eventually to economic decline.

For a sound economy, it is necessary to let the PRICE SYSTEM function… FREE from government interference.

Price as a function of free markets is a powerful phenomenon, one that, left undistorted, can light the way to economic health and prosperity. As WealthCycles wrote in 2010:

In the end, free markets will overwhelm any forces that go against them. But once you understand the ideas that drive free markets, you can make them work for you.