Stephen Monrad

If I have a bag of apples and you have a bag of oranges, there might be something to gain by trading fruit if we both prefer variety. The gains, though, won’t be that great. An apple and an orange are functionally similar. They are both healthy foods that taste good. If the trade doesn’t happen, no great loss.

The trades that go on in modern market economies aren’t like this. Most people trade work for oranges. That is, they sell their labor for money and use the money to buy oranges. Work and oranges aren’t similar at all. If you have time on your hands and not enough food, you can gain a lot by trading work for an orange.

The main purpose of modern economies isn’t to shuffle wealth between people. it is to create it. The labor and raw materials that are used to produce all the goods and services we rely on have very little intrinsic value at the start. Iron ore in the ground isn’t doing much to help anyone. If you have nothing to do, you would likely welcome an interesting job. Not working can actually be bad if the result is boredom.

If the goods and services produced by the economy are much more valuable than the inputs used, there may be quite a bit of flexibility in how prices are set. While it would be nice to get prices exactly right and obtain the maximum benefits from trade, a lot may still be gained from getting prices roughly right. That is, it would be enough to get prices roughly right so long as the economy can still effectively convert labor and raw materials into goods and services.

If price controls could control inflation and keep the economy running at full employment, perhaps the problems of not getting prices exactly right would be outweighed by the increased productivity. Perhaps the price system should be designed to make economic production more reliable. The benefits of reliably converting the inputs of labor and raw materials into outputs outweighs the benefits of trying to make sure that the outputs are priced absolutely perfectly.