Asking people where prices come from gets more embarrassing answers than asking small children where babies come from. It is not nearly as funny, however, because adults vote on economic policy-- and some vote in Congress.
Many people think that high prices come from greed, while low prices come from sellers being reasonable, humane, responsible, and other Boy Scout virtues. It is the economic equivalent of believing that the stork brought you. Even those who have been told "the facts of life" about supply and demand can drift back into believing that rents go up because landlords are greedy and food prices rise because supermarkets are ripping us off.
If prices were determined by the arbitrary will of sellers, it would be hard to explain why they fall into such regular patterns. For example, housing costs in Los Angeles generally rise as you go west toward the ocean, and fall as you go east toward the smog. Greed must increase as you get near fresh air and decrease as you get into the smog. Who would have thought that smog had such moral benefits?
As for supermarkets, they average about a dime of profit on $10 worth of groceries. Even if they were in business just for their health, this would still have very little effect on grocery prices. They make their money on volume, not markup.
Prices convey information about what is scarce or plentiful, what is hard or easy to make, what is an effcient or inefficient way to do things. When prices convey information that people don't want to hear, they are quick to blame somebody. Motorists in Boston believe that their unusually high auto insurance rates are a plot by the insurance companies. Anyone who has seen Boston drivers in action will find nothing mysterious about their high auto insurance rates. If you want to see a car changing lanes in a tunnel, or challenging an emergency vehicle for the right of way at an intersection, go to Boston-- and watch from a safe distance.
High prices in low-income neighborhoods bring out the moral crusaders in force. It does no good to tell them about the high crime rates in such neighborhoods, and its effect on the cost of operating a store. They just know that sinister forces are exploiting helpless victims. But why "greedy" store owners are leaving poor neighborhoods is a puzzle, if that is where they are reaping big profits.
Politicians encourage us to believe these moral theories of prices. Then they can play knight in shining armor, rescuing us from economic dragons, and living happily ever after in Washington. Rent contro, wage-price guidelines, interest-rate ceilings are all political ways of soothing the symptoms of facts we do not want to face-- such as the scarcity of housing or inflationary government deficits. As with other treatments of symptoms, the disease itself often gets worse. Rent control is a proven way to create and maintain a housing shortage. Interest rate ceilings, to help the poor, force the poor to resort to loan sharks, uho ignore the legal limits on interest and have their own ways of collecting.
Perhaps the biggest reason why politicians want us to believe that prices are determined by greed is that they don't want the voters to blame them for the inflation that always follows in the wake of continued government deficits. Better we should be made at the butcher, the baker or the candlestick maker. Hence the psycho-drama of the president coming on TV to sternly warn those who raise prices, while the government keeps printing money as fast as the presses will turn. The only way prices will come down is if the Bureau of Engraving runs out of green ink-- or the Office of Management and Budget stops using red ink. Neither of these things is very likely. Reprinted from the Lost Angeles Herald-Examiner.