What is Price

In this series we will elaborate Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

Economists are in general (not universal) agreement that prices are the key to a well-functioning economy. Prices integrate an economy into a system and tie everything together. We will understand this before we are through, but first we have a question to answer which is not easy.

What is a price?

Let us concentrate on keeping the answer as close to direct perception as possible. If we do that, “a sum of money” or “an amount of money” is what everyone understands as the meaning of “price.”

Then what is money?

The traditional definition in economics is “the medium of exchange.” “Medium” is needlessly abstract, so let us say “means.” Money is the means of exchange, the means of making exchanges. When we buy, we give money in exchange for what we buy. When we sell, we receive money in exchange for what we sell.

Because money is the means of exchange, it also is the means of saving. The traditional term for this function of money is “a store of value.” In this context, “store” means an accumulation and “value” means the ability to buy goods and services. When we save, we build up or accumulate the means to buy goods and services. In whatever form we save (stocks, bonds, physical assets, gold, silver), the value of our savings is what those things can be sold for, that is, their value in money.

Other functions sometimes are attributed to money, but these are the two primary ones, and of these, medium of exchange is fundamental. Money functions as a store of value only because it is the medium of exchange.

Back to price: every price is a sum of money. But there are many sums of money which are not prices, for example, the amount of money in my checking account or a businessman’s line of credit with the office supply store, or the current payoff on a lottery ticket.

A price is a sum of money with a particular end or goal attached to it; it is an amount given or received in exchange for economic values. In this context, an economic value is a good or service. $36,499 for a new car is a price. $36,499 invested in Apple stock is not. $1.59 for a can of tomatoes is a price. $1.59 in my pocket is not. $600 round trip air fare from New York to Los Angeles is a price. $600 in a money market fund is not.

So far, so good. But now we come to a question that has bedeviled economists for ages. Adam Smith, the father of economics, was the first to ask “what is the real measure of exchangeable value?” “Exchangeable value” is a product’s price, so he was asking “what is the real measure of a price?” He also asked, “Wherein consists the real price of all commodities?” (1776, 46) “The real price” and “the real measure of a price” are equivalent concepts. If you get one, you will have the other.

Modern economists’ version of this question is, “What is the real cost of a good or service?”—a slightly different question because price is a cost only to the buyer.

Let us put the question this way: what is the real meaning of a price? If I tell you that I paid $4.00 for a slice of pizza, $4.00 has a definite meaning in your mind. What is that meaning?

Price measures something. What is it? What is the real price? I will take up these questions next time.