The Genius of the Price System

By Jeffrey Tucker
Jan. 06, 2012

The other day, a local hamburger joint was advertising a 99 cent hamburger, and I took the offer. It was great. I wondered how they can make money this way. A few days later, my head still swimming with memories of that great experience, I went back. This time, I dug in a bit deeper and upgraded the order, including fries and a drink, and this time shelling out for my passenger too. The total bill came to $16. Wow. That's how they make money!

This was an interesting case of how a company uses a loss leader to draw you in and then makes up the difference on the upgrade. Of course, I could have stuck with the low-priced burger, but I did not. I behaved exactly as the burger joint hoped I would. This is dazzling in so many ways. They know me better than I know myself. And good for them.

To be sure, some cynical people would regard this as a rip-off. I don't see it this way. I didn't have to return to the drive-through window, didn't have to upgrade my preferences, didn't have to buy for the person next to me, didn't have to order fries and a drink. These were all decisions that I made on my own. Nor do I regret them: The food was better than ever. I'm free to refuse to go back, but I will go back.

A wise man once told me that in this life, you can obey balance sheets or bullies. In the end, those are the only two paths. He was drawing attention to an unavoidable reality in a world of scarcity. All scarce things must be allocated among competing ends. This can be done top down by people in control, or it can be accomplished bottom up with the signaling system that emerges from voluntary exchange. The two approaches don't mix well.

Of course, prices do not exist apart from human will. They can be played with, but not finally controlled, by producers in the market. There are vast surprises along the way. It's not the case that only the rich thrive in this environment. Who would have thought that the sci-fi machine in old movies that provides instant answers to all questions would eventually be provided for free by one of the world's biggest companies? I'm speaking here of Google, but the same good could be said of the many alternative search engines out there.

Who would have thought that the world's largest communication networks -- email and social networking -- would be free also, funded mostly by selling ad space and upgraded products? In the same way, most of the world's most-useful software is free, as is the cloud-based word processing system I'm using to type this article. So too for the music that filled my living room for 12 straight hours yesterday, all selections from the 16th and 17th centuries, all provided to me for free. Amazing.

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