Why prices will always matter

Prices matter. Now, I’m a free market, capitalistic type, so of course I’m going to insist that everyone be tied down to mere gilt and pelf in how they live their lives. Yet it is still true that prices really, really matter.

Let’s walk through why that’s true, regardless of your political tribe. Any one thing – any economic resource, fresh water, human labour, cash, capital itself and so on – can be used for a multitude of different things. At any one time, the market price for that thing is the balance between the supply of it and the value in using it to do – in aggregate – all those multitudinous things. Yes, we can even mutter that perhaps the information doesn’t flow here instantaneously and perfectly efficiently. Nevertheless, in its simplest terms, what something costs reflects the value of whatever uses we can put it to.

If we decide that we want to do something new, we need a measure of whether we should or not. In a world where resources are finite, the resources we’ll consume doing this new thing already have prices, thanks to their use in all the other things we’re already doing. So, this new thing we desire to do must add value. We must make a profit doing it. No, this doesn’t mean something that tophatted capitalists get to squirrel away in their subvolcanic secret lair. Rather, it means that the value of the output must be higher than the costs of the inputs. If that’s not true, then we are subtracting value from those resources. Other people could have used them to do their thing and generated value instead.

If something makes us all poorer, we shouldn’t do it. But that’s exactly what happens whenever we use valuable resources to do something which is of less value than the price we pay to do it. Say, for example, recycling disposable vapes:

Vape sellers will have to pay for the disposal of the devices under plans announced by the government.

Ministers said they would ‘end the UK’s throwaway culture’ as they revealed measures to fund the recycling of electrical waste.

Recycling these vapes’ electronic waste uses more resources than not recycling it. This is why we’ve got to find someone to pay for it – because the value of the resources required to do the thing is greater than the value of having the thing done.

Now I am not against recycling per se – I cannot be, having dealt in scrap metal. I once shipped lorryloads of Soviet nuclear scrap off to be made into fancy car wheels for boy racers’ Escort XR3is. My only whine about that was not also gaining the furry dice concession. Even so, I made a house-sized chunk of money doing it. That’s because I’d added value by working out what the scrap could be used for and getting it to where it could be used to do just that.

But if we mandate a recycling system that makes no profit, adds no value and in fact requires an outside input of money into financing it, then we’re throwing away value and making ourselves poorer. The prices are telling us we should not be doing this thing. That’s why we ignore prices at our peril.

We can and should extend this to cases that generate negative prices. These impoverish us just the same. Now, of course we can’t expect degrowth advocate Jason Hickel to grasp such economics. To judge from his proud commitment to making us less rich, we cannot expect him to grasp matters economic at all. My best reading of his belief system is that we must be poor so that we can be socialist. This is either very odd indeed or he’s not explaining himself very well. Still, I plump for odd as this recent Tweet of his is also very, very odd:

The FT reports that, during some parts of the year, energy prices are negative. This is great for citizens, and great for the planet, but bad for capitalist profits. Remember, capital does not care about prices, it cares about profits. Renewables are cheaper than fossil fuels, but they are not as profitable. 

Well, no. Renewables – for a reliable supply – are not cheaper than fossil and so on. If they were, then we’d not have a climate change problem: we’d all be off using renewables and leaving fossil fuels to slumber another few aeons.

The bit that Hickel is missing is the difference between capitalist profits – what the owners of capital can expropriate – and value added in a process. Whether the undervolcano lair fills with gold or not is unimportant. That a process we undertake using economic resources adds value is vital. For, as above, those resources can be used elsewhere to do other things. Thus anything we use them for must add value – because the current market price is the value as inputs into those other processes.

What is a negative price? It’s something of so little value that you cannot even give it away. This is worse than trying to give away courgettes now that they’ve all ripened – having to chase the neighbours down the street to press a few pounds upon them. Think more like the difference between water in the bathtub – which you happily pay the water company for – and water in the cellar, which you’ll less happily pay someone to take away. A negative price for too much water in the wrong place.

So it is when the electricity generated by renewables has, at times, a negative price. We’ve used scarce economic resources to produce something that not only has less value than the resources, but it has less than no value at all – we’ve got to pay someone to agree to take it.

Forget the rhetoric about capitalist profits. Using resources to produce something with less than no value is societally impoverishing.

Prices are important because they tell us what is worth doing. More importantly, what is not.

Of course, Hickel then goes on:

There’s an obvious solution to this problem: nationalization. Spain should create a national solar energy company and undertake the necessary development directly, totally irrespective of profits. 

We should have government build lots more solar, as only government has the power to waste enough resources to make us all really, really, poor. There’s a reason we don’t gain our economic insights from the anthropologists. Or, perhaps, a reason why we shouldn’t.

Prices tell us what is valuable to produce and also what isn’t. This is nothing to do with capitalism or indeed any other method of running an economy. They’re just the information we need to know what’s worth doing. Given how many things there are that we can do and the need for a method of sorting through them, prices help us choose with a simple question: what adds value?

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