The Price of Coffee Is a Miracle
Every morning, millions of people drink coffee. The coffee beans were grown in Brazil, roasted in a factory in Germany, ground in a cafe in your town, and served to you by someone who arrived at exactly the right time with exactly the right amount of coffee on hand.
Nobody planned any of this. There is no central office of coffee distribution that decides how many beans each cafe in each city should get. And yet, almost every cafe has coffee. Almost every shop has milk. Almost every gas station has fuel.
How?
The answer is prices.
Prices Are Messages
Imagine you live in a town where, suddenly, everyone decides they want to eat avocados for breakfast. The shops sell out. The price of avocados goes up.
Now three groups of people have new information:
- Farmers see the higher price and think: “I should plant more avocados.” They do. Six months later, there are more avocados.
- Shop owners see the higher price and think: “I should order more avocados.” They do. The shops restock.
- Customers see the higher price and some of them think: “Maybe I will have toast instead.” They buy fewer avocados.
Nobody wrote a memo. Nobody held a meeting. The price did all the communication. It told farmers to produce more, shopkeepers to stock more, and customers to save money. All at once.
Prices Contain Information No Single Person Has
Think about what goes into the price of a pencil. (This example is from Leonard Read’s famous essay, “I, Pencil.”)
The wood comes from a tree grown somewhere. The graphite was mined in Sri Lanka. The rubber eraser came from a rubber plantation in Malaysia. The brass ferrule (the metal bit that holds the eraser) used copper and zinc from different mines. The paint was made from chemicals processed in factories. The whole thing was assembled by machines designed by engineers, operated by workers, powered by electricity from a grid.
Nobody in the world knows how to make a pencil from scratch. The tree farmer does not know how to mine graphite. The graphite miner does not know how to refine crude oil into paint. But the pencil exists anyway, because prices coordinate the efforts of millions of people who do not know each other and do not speak the same language.
The price of wood tells the tree farmer how many trees to plant. The price of rubber tells the plantation owner whether to tap more trees. The price of the finished pencil tells the shop how many to order. Every price is a signal that carries knowledge from one part of the world to another.
What Happens When Prices Are Wrong
If the government sets a maximum price for a product below what the market would charge, something interesting happens. The price loses its ability to send messages.
Suppose the government says bread cannot cost more than 50¢ a loaf. Normally, if there is a wheat shortage, the price of bread would rise. That rising price would tell people to use less bread and tell bakers to find alternatives. It coordinates the response to the shortage.
But if the price is stuck at 50¢, the message cannot be sent. People keep buying bread at the old price. The shortage gets worse. Shelves go empty. People queue for bread. And eventually, the baker stops making bread altogether because he cannot afford to buy wheat at the new higher price and sell bread at the old fixed price.
The shortage was not caused by the wheat harvest. It was caused by the price being prevented from doing its job — telling people that bread is now more valuable and should be used more carefully.
The Real Miracle
Prices are not just numbers on tags. They are the communication system of a global economy that nobody designed and nobody runs. A system that coordinates the efforts of billions of people who do not know each other, do not trust each other, and often do not even like each other.
And it works. Every morning, millions of people drink coffee because the price system told someone in Brazil to plant beans, someone in Germany to roast them, and someone in your town to have them ready when you walked in.
Try to imagine designing that system on purpose. You cannot. It is too complex. Which is the point of the next article.
Next: The Information Problem — Why Central Planning Fails →