What is a Price?

A price is the social costs of using a resource

In the first post of this publication, I stated that “Supply and Demand” requires the concept of ownership.

In the most recent post, I stated that “Supply and Demand” also requires concepts of price, product, and money.

One challenge of “Supply and Demand” is that the second part, “Demand”, is very hard to define. This struggle to define “Demand” is where we get conceptual monstrosities like Say’s Law.

Before we talk about Say’s Law, let’s look at the word: “Demand”.

Give me all your money! I Want It Now!

Demands are expressed with aggression or violence. If someone asks nicely for something, or volunteers something in exchange, I would use the words request or offer.

“But Derek! You’re doing it wrong!! It’s called demand because your are demanding freedom and mutual, voluntary, respect! That’s how free markets work: mutually beneficial exchange!”

You make a good point there, imaginary libertarian friend. But markets often involve mutual threats, not only mutual benefits.

Demand, in a market context, highlights the withholding of a wanted or needed thing unless a condition is met. You can produce all you want, but that doesn’t create “demand” unless someone wants those things, and you withhold them. You express your demand by creating conditions that lead others to make demands of you.

Even assuming our resource management follows the social conventions of market exchange, demand is not expressed not through production alone, but by exercising powers such as ownership or production to create a program of conditional exclusion.

Say’s law is the claim that demand is expressed through production. It is wrong.

Here are better descriptions of “Supply” and “Demand”:

  • Supply — Distribution of control of access to a resource or product.
  • Demand — Exercising powers such as ownership or production to implement a program of conditional exclusion, for the purpose of acquiring a different product or resource in exchange.

That’s a mouthful!

If you look closely, those descriptions are very similar. Both of them involve control of resources. You can’t separate them— Supply and Demand are mirrors of each other. Markets seek to organize society by balancing mirrored mutual benefits and mirrored mutual threats.

By applying these concepts as I just described them, we can organize our society around “Supply and Demand”, but at what cost? It involves everyone using their powers to pursue individual interests. Organizing common efforts is possible, but it is precarious and volatile.

The social balancing act fails when only the interests of individuals are valid. Individual interests are too hard to balance and cooperative efforts fail.

We need cooperation as larger social groups, pursuing both the interests of the group and individual interests. We organize common efforts around social narratives about group goals and needs. We formalize group existence by creating institutions governed according to written laws. We create forums for discussing legal rules and social conventions. All this allows us to develop common resources, facilitate public good, and create common abundance.

Finance is an indispensable part. It can certainly be abused, but without finance, our larger social structures would not exist. There would likely only be tiny, fractured communities and short-lived religious movements. Finance facilitates human cooperation, achievement, and group identity.

Prices are accounting weights given to actions claiming or using resources. A price is the social cost of exercising a resource claim.

In market social narratives, prices are framed in terms of exchange or transfer. But often, prices are really about creation or transformation. Sometimes the thing you are paying for simply does not exist before you pay for it.

Creation and transformation are the narrative of investment. We create something by paying for it, when it did not exist previously. Creative actors are rewarded by just society through claims to present and future value, whether that value exists in public or private spheres.

Sometimes the obstacle of resource use is not creation, but rather organization. We use many resources that existed long before ourselves. In such cases, the cost is socially organizing resource allocations. The price is whatever is required to convince the group that our use of the resource is fair and just, and aligns with common interests.

To initialize a resource claim on an unallocated resource, a price must be paid, not to a previous owner, but to the social group that recognizes the resource claim. The social entity recognizing the claim issues assets that qualify actions as satisfying prices affixed to socially defined resources.

Sometimes social group entities may affix ongoing maintenance prices to resource claims. This makes sense if there are ongoing costs associated with the resource that are borne by the social group and not the owner. Otherwise, such prices are unnecessarily inhibitive, reducing individual and common wealth for no reason.

Show your support

Clapping shows how much you appreciated Derek McDaniel’s story.