It has been a while since all the hysteria over the price of oil was front page news, but I am sure readers recall all the claims that prices were "too high". The claims that somehow politicians "knew" that competition from China and India alone could simply not account for all the price increases we saw. According to these brilliant men, these modern Solons, they could simply look at all the economic factors and determine that, with just competition from India and China, prices should have been $3.89 a gallon.

The problem with this approach is that prices are not really that easily determined.

Let me start with something seemingly unrelated. Sweetness. We all know sugar is sweet and vinegar is not, but could you put numbers to it? Of course not. You could not say vinegar is -12 on the sweetness scale and sugar is +45. Scientists try to do so, but even then it is mostly guess work dressed up with numbers. So when they say something is "100 times sweeter than sugar" in reality they are just guessing. Could we really determine if something is only 999 times sweeter or is 101 times sweeter? If not, then those numbers are mock precision. The same sort of mock precision I brought up in my earlier post about the "sting pain" index. It makes people think they know something precisely to know chemical X is a 4.5 on the Fubar Sweetness Index, but in reality it is simply the application of arbitrary numbers to estimates.

The problem is, experiences such as sweetness and pain are subject, non-quantifiable experiences. We can create ordinal indices for them, saying saccharine is sweeter than sugar, or that Splenda is much sweeter than saccharine, but we can't honestly say that Splenda is 10 times sweeter than sugar.

And that is the problem with "scientifically" determining prices. Prices are themselves numeric, but the underlying desires are not. Underlying prices is a constantly fluctuating set of relative valuations by every human with even a single cent to spend. Their relative valuation of every imaginable good, when combined with the same valuations done by every human, gives us our prices. However, those prices are not a deterministic outcome. We cannot say that any particular configuration of human desires will result in a price of X for good Y. It is more like an auction, but one conducted simultaneously with auctions for every imaginable good. We can say we know the man with the combination of the greatest desire and greatest wealth will set the final price of any good, but we can't say with certainty what that price will be, and the same with prices established on the market. We know a relatively high desire will result in higher prices, but we can't know where those numbers will fall.

And that is the absurdity of people who say that prices are "too high" or "too low". There simply is no "right" price or even range of right prices. Prices are what they are, established by varying desires and varying supplies. There is not determinism, that a supply of X will result in a specific price, even if we "know" demand is the same. Prices simply are not that rigid.

Sadly, economists have perpetuated this myth by using the visual aid of supply and demand curves. And they are useful to illustrate general concepts. However, the market is not as deterministic as the charts would imply. First, the demand "curve" is more a broad stripe than a single line, and it is constantly wiggling, jumping and redrawing itself as desires change for this and other goods. Likewise, those changing desires effect the prices of the component parts, as well as labor, causing the supply "curve" to writhe and jump just as does the demand curve. And even where they cross, that is not so much the fixed price as an indication somewhere in the neighborhood of the final price.

Why? First, because the market is not precognitive, so prices sometimes lag behind market condition changes. Second, because buyers are not all knowing, so sometimes they bid either too high or too low for the good they desire, thus pushing the market price away from the "true" price. Finally, as the curves are constantly moving, any given moment's price is likely the aggregate of many past crossing points, representing not the current market conditions but a amalgam of past prices. So, even if we could magically know supply and demand at a given instant, still we would not likely know the "true" price, as the real world lacks the sort of omniscience and instantaneous changes that such curves presuppose.

And that is why it is absurd to talk of prices being "wrong". They simply cannot be wrong. Markets are what they are, and no one can know with anything approaching certainty what a price "should be" at any instant, or even come close to knowing it. We lack the sort of knowledge that would require.

So, next time someone argues that prices are "too high", take it with a massive grain of salt. Far more likely they are simply looking for a scapegoat to blame so they can enact some pet measure of their own.

POSTSCRIPT

I was going to include in this a bit of discussion about supposed "price gouging" and "evil speculators", but decided to save those for essays all their own. Just to give a brief synopsis, increased prices in times of shortage cause sensible economization and also serve to attract new supplies, so "price gouging" is actually much more helpful than the idiotic price controls usually used to stop "gouging". And speculators serve the very important function of cushioning markets against price shocks, in both directions, as well as ensuring some supply will be available during event he worst scarcity. Though many may be envious of their wealth, or think they somehow drive prices up, without ever causing them to decrease,t he truth is speculators serve an essential function.

But more of that in future essays, as each topic deserves a lot more detail than I can give here.

POSTSCRIPT II

Before someone argues that sweetness measurements are somehow scientific, I would mention that the current theory of sweetness still is unable to reliably determine if a substance will be sweet before testing.Currently there are mechanical means for measuring sweetness, but only by measuring the sugar content,  and cannot measure accurately sweetness based on non-sugar sources. So sweetness, far from being a numerically quantifiable attribute is still simply a number attached to a non-quantifiable subjective experience. And, while we would laugh at saying "I love Jane 7.8 times as much as Lois," we are not similarly skeptical of saying "saccharine is 11.2 times as sweet as sugar," though they are equally dubious assertions.