I’ve just finished covering, Chapter 5 of Cowen and Tabarrok, “The Price System: Signals, Speculation and Prediction.” This is a unique chapter. I’ve seen none like it in the dozen or so intro textbooks that I’ve read. The chapter’s big points are that markets link the world, link to each other and are pretty good at solving the “great economic problem” — how to arrange our limited resources to satisfy as many of our infinite wants as possible. The point that “a price is a signal wrapped up in an incentive” is one that every student of economics — including those with a few gray hairs, like me — should take to heart. You can almost hear the enthusiasm and the awe of the authors as the words leap off the page. Because of this, I’ve been looking forward to having my students read Chapter 5. On the other hand, I haven’t really been looking forward to teaching it because once they read it, there’s not much more that I can say. There’s not much to clarify and embellish because the lessons are so powerful and direct. In any case, I did my best on Wednesday, but strategically decided to spend the first part of class reinforcing our understanding of elasticity and the last part of class discussing Chapter 6 on price ceilings. This left only about 10 minutes to cover Chapter 5. Is this an optimal use of class time? I think so. Once students read this chapter, there is little need for me to belabor what has become obvious.
An entire chapter devoted to price ceilings? I was a bit skeptical, yet Chapter 6 of T&C works. Scratch that, it works remarkably well. Traditional intro textbooks, because they rush through the topic and simplify it too much, tend to underestimate the damages caused by price controls. They often ignore the deadweight loss that can arise from wasted search time. Not so T&C, whose gasoline line example and graph allow me to recount the glories of line jockeying — especially dealing with those vile line jumpers — in my high school days. The highlight of the chapter, however, is the “advanced material” which points out how lame it is to assume that the highest cost suppliers who drop out of a market when a price ceiling is imposed just happen to supply the consumers who value the product the least. Figures 6.6 and 6.7 that demonstrate the losses due to random allocation to consumers, rather than the market’s allocation to those who are willing to pay the most, isn’t exactly rocket science and it has always irked me that other textbooks don’t make this point (even in more advanced intermediate micro texts).
Finally, I love the discussion near the end of the chapter on blat – the Russian term for having connections that can be used to get favors — a practice that prevailed in the Soviet era of universal price controls. The word is almost onomatopoetic. “Blat” sounds harsh, negative, crude and somewhat malevolent. Blat sounds to me like a blot — a nasty, ugly spot that stands in stark contrast to the eternal, sublime beauty and harmony of a properly functioning price system. (And I hope my students enjoyed my hokey Russian accent and that it helped them remember this important concept.)