The importance of free prices

Grafik mit steigendem Pfeil nach oben
Price increases are supposed to trigger adjustment processes in times of crisis. (Image: Adrian / pixabay)

Politicians almost everywhere are trying to override market forces. Yet price shocks are essential for technical and economic innovations.

In times of crisis the call for the state is always loud. But, is it always so helpful? “No,” says the well-known economic historian Harold James, who teaches at Princeton University in the United States.

The best example, he says, was the oil price shock in the 1970s. Back then, the U.S. government responded with price controls when Arab supplier countries tightened their oil supplies.

Impetus for solutions

“Europe and Japan, on the other hand, let prices run wild. While car-makers in Europe and Japan quickly developed more fuel-efficient cars, the Americans continued to produce their gas-guzzlers,” the economics professor told the current “Wirtschaftswoche” newspaper, for example, explaining the problem.

“Free prices are extremely important for adjusting to economic shocks,” the expert continued. So Switzerland should pay attention here.

Prices will fall

The scientist also rejected the gas price brakes brought into play in many places – in view of rising gas prices. “It would be better to let prices rise and to give the socially weak a helping hand with direct income transfers,” the 66-year-old emphasized.

“Gas prices will not stay high forever,” he said, putting the situation into perspective.

In general, however, a distinction must be made between supply and demand shocks, he pointed out. When there is a lack of demand, the state often steps into the breach.

Pressure on governments

However, in the event of supply shortages, i.e. supply crises, governments quickly come under pressure and have to use resources more efficiently as well as more sparingly, it was said.

Although economic crises are usually associated with personal hardship, they are often catalysts for innovation, said the economist.

When weather-related crop failures caused famine in the 19th century, governments pushed cross-border trade, liberalized business laws and made it easier to set up joint-stock companies.

Corona sends its regards

All this helped to reduce the supply risk through trade and the division of labor. Thus, in addition to the example of the gas guzzler, the professor comes up with another example.

According to the economist, crises help existing technologies achieve a breakthrough, as was demonstrated by mRNA technology, which has been known since the 1990s as a means of combating tropical diseases.

The steam engine, too, had been patented as early as 1769, he said, but did not achieve a breakthrough until the mid-19th century, when the hunger crisis required a sudden improvement in food supplies for the masses.

One-size-fits-all solution?

In crisis situations, such as the coronavirus pandemic or the current energy crisis, there are often calls for international cooperation among governments. But there, too, James weighs in.

“When supply shrinks, what’s needed most is free trade to get goods to where the need is greatest,” he explained.

Competition, he said, unearths better ideas and solutions. International cooperation in the sense of a centralized one-size-fits-all solution does more harm than good, the economist warned.

Nonsense in China

It would be a big mistake not to advocate free trade or, say, linking China to the world at this time, James said. “The country owes much of its economic rise to its integration into the international division of labor,” the economic historian indicated.

Problems such as climate change and international security can only be solved with China, he stressed.

Currently, however, China is also committing a historic mistake, according to James. “Head of state, Xi Jinping, is relying on state control instead of market freedom,” he said.

Delaying adjustments

Xi’s course is more like that of Russia’s president Vladimir Putin than the reform course of Deng Xiaoping – who made China great – where he reminded us again of open markets.

Free price formation immediately produces innovations. Suppression of market forces merely delays constructive adjustments.


The importance of free prices

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