Book review: The War on Prices by Ryan Bourne

I’ve reached a point in my career where younger colleagues sometimes ask me for advice. There are a few pieces of advice that are always valid and I like to give them to anyone in any profession: Be easy to get along with. Keep your word. Show up on time.

Another piece of advice is not followed nearly enough: learn price theory.

Fortunately, Ryan Bourne of the Cato Institute and a small army of contributors have put together an excellent guide to price theory, The War on Prices: How Widespread Misconceptions About Inflation, Prices and Values ​​Lead to Bad Policy. My final advice to everyone is to read it. It is accessible to high school students, but tenured professors with PhDs can also learn from it.

Learning price theory doesn’t require a degree in economics, nor do you need to learn a ton of complicated math, although both are useful things. Price theory is more like a toolbox with a few simple tools you can use for almost any task.

These tools include the law of demand, opportunity cost, the quantity theory of money, and the way prices convey information and shape people’s incentives.

None of these concepts are difficult to understand. The hard part is applying them consistently and relentlessly. That takes practice. Just like in sports, music, empathy, or any other skill, price theorists must spend hours practicing the basics.

Bourne and his contributors give readers many practical options, especially by showing what happens when politicians manipulate prices. A good approach, especially for newbies, is to look at How Bourne and Co. come to their conclusions, not only What these conclusions are. It’s a bit like the old saying that you should teach someone to fish rather than just give them a fish.

When you watch good economists at work, like those in The war on pricesthey usually just apply simple concepts of price theory consistently. It’s like listening to a musician who doesn’t flaunt his virtuosity, but writes the perfect part for the song and plays it perfectly every time. For rock music fans, the approach is more like that of Malcolm Young and less like that of Yngwie Malmsteen.

Or for economists, more like Frederic Bastiat and Armen Alchian, and less like what the American Economic Review has become in the last decades.

The war on prices starts off strong, with several chapters on inflation. It’s an intimidating subject, but the core concept is simple: the quantity theory of money. If you print a lot of money, you get inflation.

More specifically, quantity theory is about how fast the money supply and real production grow relative to each other. When the money supply grows faster than real goods and services, inflation occurs. That’s what happened during the COVID pandemic, when the money supply grew by 40 percent in just two years and real growth didn’t even come close to keeping up with that pace. That’s why the dollar has lost more than 20 percent of its value since 2020; the exchange rate between money and goods has changed.

Deflation can also occur. The Great Depression occurred because the money supply shrank by a third. This led to deflation and general chaos in the prices that people rely on to make decisions.

Good monetary policy is a matching game. If you want zero inflation, the real economy and the money supply must grow in sync. Bourne, Pierre Lemieux, Bryan Cutsinger, Brian Albrecht and others apply these basic insights from quantity theory to various aspects of monetary policy with a clarity and consistency found in few other places.

Subsequent chapters cover price controls on rents, oil, interest rates, junk fees, health care, and more. Readers not only experience the law of demand in real life over and over again, but through repetition they also gain a sense of the more subtle aspects of price theory: how simple prices convey complex information and how they guide people’s actions.

Readers will also learn how dishonest pricing leads to unintended but predictable consequences. Rent controls lead to housing shortages and reduce housing quality. Minimum wages have downsides beyond job losses. These include reduced hours, reduced benefits, fewer opportunities for younger workers and minorities, and more.

The great Deirdre McCloskey makes moral arguments for market-determined prices that most other economists ignore—at our peril. Other authors apply insights from price theory to gender discrimination and wage gaps, CEO pay, and dynamic pricing, as used by Uber and other companies.

Price theory is about using simple tools to understand a complex world. Even a basic understanding of prices is like a new pair of glasses that help you see the world more clearly. You might even see the invisible hand.

Bourne and his staff did a great job with The war on prices. Whether you’re only casually interested in public policy or have been working in the field for decades, my new favorite piece of advice holds true: Read it for both the content and the way it’s delivered.