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Another Conception of Depression
In a free society, the prices of goods and services are the primary means by which commercial considerations (such as a capitalist’s decision whether or not to build a factory, or a consumer’s decision whether or not to buy a particular good or service) are calculated. Millions of consumers, whose tastes differ from one another and whose preferences change over time, constantly choose among innumerable different commodities and services; similarly, hundreds of thousands of producers, in order to decide what and how much to produce and where to produce it, choose from countless possible resources and methods of production. Accordingly and more generally, prices are also the primary means by which the actions of capitalists, producers and consumers are co-ordinated.
No central planner or committee oversees these myriad choices and decisions. Quite the contrary – in a free society decision-making is decentralised to the level of the individual consumer and producer. Each consumer draws upon information that only she can know (such as her current and prospective income and budget, preference for one good or service vis-à-vis another and the next-best use of the resources at one’s disposal) in order to decide which combination of goods and services, and how much of each, she will purchase. Individual consumers’ purchases provide the revenues by which producers demand the resources necessary to produce the goods and services desired by consumers; and the payments to the owners of resources provide the incomes with which, as consumers, they can demand various commodities and services.
Prices co-ordinate these activities. (I, Pencil by Leonard Read is an outstanding elaboration of the indispensable role of the price system as a mechanism that co-ordinates the actions of myriad people.) More importantly, prices provide the means by which each individual contributes a sliver of knowledge to a whole that no one individual, committee or central planner can possibly command. As an example, if tastes change such that at given prices consumers demand more beef and less of other meats, then they will seek to purchase more beef and less beef-substitutes such as mutton, fish, pork, etc. If so, then the prices of beef will tend to rise and those of other meats will tend to fall. In response to the signals and hence economic incentives generated by these absolute and relative changes of prices, graziers and other primary producers will seek to produce more beef and less mutton, pork, poultry, and other types of meat.
To the extent that their capital base allows them, in other words, they will seek reallocation of resources away from the production of competing meats and towards the production of beef. Producers are unlikely to possess direct knowledge of consumer preferences and changes therein; indirectly, however, i.e., through the signals transmitted by prices and changes of prices, their incentives quickly change in a manner that is consistent with the alteration of consumers’ tastes. Also in response to these changes of absolute and relative prices, abattoirs will seek to ship more beef (and less mutton, etc.) to wholesalers; wholesalers will seek to ship more beef (and less mutton, etc.) to retailers; and retailers will seek to sell more beef and less of other meats to consumers.
A change in consumers’ preference for beef vis-à-vis other meats, then, has through the price mechanism generated commensurate changes to the structure or chain of production of this commodity from primary producers to final consumers. As with beef and other meats so too with myriad other goods and services: if in one market (say, beef) at the current price the quantity demanded by consumers exceeds the quantity supplied by producers, then in another market(s) at the current price(s) the quantity demanded will tend to be less than the quantity supplied. Changes in the absolute and relative prices in these markets will tend to induce producers and the owners of resources to shift production from the latter markets towards the former market. Price changes will also tend to induce consumers to shift from the former markets (where prices are tending higher) towards the latter market (where prices are stable or tending to fall). In this way prices and changes of prices enforce the sovereignty of consumers and the efficiency of producers. Prices co-ordinate the structure of production that harnesses the actions of producers to the demands of consumers. Countless marginal adjustments of prices and relative prices occur constantly. The effect of these adjustments is to allocate scarce resources towards the production of those goods and services (and in those quantities) that consumers desire.
Prices, then, are simple and content-rich bits of information that enable specialisation and exchange to occur. Prices are a necessary condition of a division of labour; and efficient and specialised exchange co-ordinates production and consumption. Clearly, information never corresponds perfectly to the preferences, incentives and behaviour that it measures; the movement of information through space is never instantaneous; and its interpretation is never flawless. Error and misjudgement, in short, is a necessary accompaniment of a price system. Yet the historical record – particularly an examination of attempts to fix, thwart or suspend prices – indicates that an unfettered system of prices generally works reasonably well (see, for example, Tom Bethell’s eminently readable The Noblest Triumph: Property and Prosperity Through the Ages, Palgrave Macmillan, 1998, ISBN: 0312210833).
A price system enables capitalists and producers to detect and adjust reasonably quickly and efficiently to changes in consumer demand. It also enables them to react to changes in the supply of various resources. In a free market, relative to a hampered market or no market, wastage and unemployment of resources is minimised. The price mechanism is a robust but not an indestructible mechanism. Because prices are the primary co-ordinating agents in a market economy, and because prices are expressed in monetary terms, it follows that disturbances to the monetary system may disrupt the price system’s ability properly to co-ordinate the actions of capitalists, producers and consumers. Indeed, a recession or depression occurs when something – particularly a monetary disturbance – disrupts the relatively smooth and accurate operation of price signals (see in particular Murray Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, Ludwig Von Mises Institute, 2002, ISBN: 0945466331). The greater the extent and duration of the disruption, the less the extent to which owners and producers can accurately identify and respond to changes in consumer tastes.
 
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