19 Feb One, Two, Three… Three Political Prices
What is a price? Is it simply a number that tells us the value of something? Is it a number that hurts us when it goes up and makes us happy when it goes down? What is a price?
I’m one of those economists who consider a price as one of the most important variables in an economy. Why? Because prices provide us something so useful, so important, so necessary, so vital: information. You might think, “Why should I care?” However, prices are everywhere—from the moment we wake up to when we go to sleep… even in our dreams.
When you wake up and check the time on your phone, you’re already concerned about the price of time. “Can I sleep a little longer? Should I get up now?” You begin by weighing the value of sleep against your obligations. During lean times, when you have a simple breakfast, you might think about the price of richer, more expensive, and probably less healthy foods… and then you sigh. If you don’t own a car, on your way to work you might consider the cost of transportation. If you’re running late, perhaps you start thinking about the price of a taxi. Lunchtime comes, and prices start dancing in your head: “Something tasty and expensive? Something tasty and cheap? (Does that even exist?)” At night, if you’re single, you might be tempted to go out with friends or a partner, and once again prices attack: “Will it be expensive? Will it be cheap?”
If you’re offered a job, a price comes to mind… your salary. If you’re an entrepreneur, I probably don’t need to explain how important prices are: input costs, sales prices, etc. If you decide to get married, you think about the cost of the wedding. If you decide to have a child, you think about the prices involved in bringing that child into the world. If you decide to buy a car, you consider the purchase price, fuel costs, and resale value. If you buy a house, you consider the purchase price, maintenance costs, and utility bills (electricity, water, etc.). If you decide to attend a soccer game, you think about the ticket price. If you go to the movies, you think about the cost of the ticket, popcorn, soda, and transportation. Even if you’re a millionaire, you think about the price of that piece of jewelry, the latest model car, or the price of time.
So, if a variable is this important, this vital, this central to our lives, a question should arise in our minds: Who sets the price? Let me tell you, much ink has been spilled, many books written, and heated debates have occurred (and continue) about this question. It might seem innocent, but it’s actually a monster capable of devouring every argument placed before it. I’m part of the group of economists who believe prices are determined by people’s preferences, human needs, the whims of nature, institutions, technology, political maneuvers, and other factors. Since it’s such a complex variable, many factors come into play; however, when prices respond to real conditions, they are an excellent source of information. Let’s look at a few examples:
If the price of Messi’s #10 jerseys goes up, it indicates a shift in people’s preferences… simply put, since many kids adore Messi, they’re willing to pay a lot for the jersey, so prices rise. In this case, prices reflect changes in people’s preferences.
Imagine potable water becoming increasingly scarce, leading to higher processing costs (to make it drinkable). Consequently, water prices rise. Let’s pause with this example. Someone might say it’s outrageous for water prices to increase because “water is a human right.” That’s fair. But notice the signal: if water prices go up, people might start being more careful with their use, companies might use it more efficiently, and we’ll all try to pollute less. That’s the “beautiful” part of economics.
However (and there’s always a “however”), some argue that higher water prices harm the poor because water becomes more expensive. Protests, “water wars,” and other problems arise, eventually forcing prices down. Is this a victory? Are we sending the right signal? My answer: no. The correct signal that water prices should send is that water is scarce, and therefore its price should be high, so people use it prudently. If, like everyone else, you’re concerned about the poor, the solution isn’t in lowering water prices. It’s generally about providing tools so the poor can afford a price that reflects its scarcity. Imagine the opposite scenario: if, to help the poor, we set water prices to zero, waste would undoubtedly be monumental.
One last example: 30 years ago, having a telephone line in Bolivia was expensive. For younger readers, let me tell you that buying a line was around $2,000 to connect your home to the network. Today, connection prices are almost null, thanks to technological improvements.
So, dear reader, prices are an endless source of information. When manipulated for political or partisan purposes, they stop providing the correct information, and everything goes haywire. That’s how “political prices” come to life. My good friend Pablo R. coined this term during a café discussion about subsidies.
A political price doesn’t reflect people’s preferences, technological changes, production costs, or the scarcity of a product. A political price serves political objectives: reelection, poll improvements, favors to allies, etc. That’s why, in general, political prices aren’t aligned with what people or the economy need. Instead, they align with political-party interests, which may be valid from some perspectives but don’t necessarily solve economic problems.
In Bolivia, I identify at least three political prices: the price of gasoline, the price of bread, and the price of the dollar. I believe two of these three—gasoline and the dollar—send incorrect signals to people and businesses.
Why are they incorrect? Because they create a sense of abundance. They give the impression that Bolivia’s economy has plenty of dollars and gasoline, which isn’t true. Due to hydrocarbon policies adopted in 2006, oil and natural gas production is now declining, forcing us to import fuel. Gasoline isn’t abundant. Similarly, past policies didn’t encourage exports (a source of dollars for the economy), so we now face a dollar shortage.
Current gasoline and dollar prices don’t reflect this scarcity. It’s like a father trying to hide financial troubles from his family by continuing to give them lavish gifts, such as expensive, luxury smartphones. Since the kids only see these gifts, they’re unaware of the financial problems at home and might even carelessly mistreat their phones, expecting the latest model soon. So, is it the kids’ fault for wanting new phones? Or is it the father’s fault for not sending the right signals about the family’s finances?
The classic counterargument to this view is the impact on the poor. “Sure, Mauricio, you’re asking to eliminate subsidies, and the poor will suffer for it.” “Of course, another neoliberal trying to hurt the poor.” “Once again, the right-wing attacks the noble, community-based model.” From my perspective, helping the poor doesn’t come from sending incorrect price signals. It comes through genuine policies that support them. Don’t ask the father to keep lying (sending incorrect signals); ask him to share the family’s challenges so they can find solutions. Because dear reader, cheap dollars and subsidized gasoline ultimately harm the poorest. Who has more trouble accessing dollars today? The millionaire or the woman bringing in chocolates (illegally) from Argentina or Peru?
Are there solutions? Yes, but that’s a topic for another post… this one’s already too long.
A distant “abrazo”, as Bono would say, “faraway, so close.”
S. Mauricio Medinaceli Monrroy
Istanbul
February 19th, 2024
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