Economists who think they can plan for the entire economy get a lot of things wrong. The most important thing they get wrong is ignoring the role individual preference plays in determining the value of goods and services.

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Here’s a transcript of our conversation:

Brittany: Hi, Emma.

Emma: Hi, Brittany.

Brittany: So today I wanna talk about something that is kind of contrary to another thing we talked about. Now, we talked about objective truth before, and this is not really contrary, meaning like the opposite, but I wanna make sure that we understand the difference. So there are objective truths in this world. There are things that are universally true no matter what. You know, self-responsibility is one of those things that is rewarding thing that will make you more successful. Ayn Rand who we talked about before, she has a saying or had a saying that was A equals A. And what I like about this is A will always equal A. Will always be a, it won’t be anything else, no matter how bad you want it to be something else, right? murder is something different. Now, obviously, there’s things like war or the non-aggression principle, which you’ve talked about, but let’s just talk about murdering someone. Cause you don’t like them, right? You don’t like your neighbors, so you wanna murder ’em. That will always be wrong, taking a life without any form of justification. And those justifications are very slim, very few and far between is always going to be wrong. So those are universal truths. Now, when we talk about economics, it’s not so black and white. And a key to Austrian economics, which we’ve talked about many times, is this idea of subjective value. So, Emma, I hate chocolate, but I love raisins. What about you?

Emma: I don’t mind raisins. I will eat them, but I like chocolate a lot more than raisins.

Brittany: Okay? Here’s another thing, and this is probably the most controversial thing we’ll ever discuss on this show. What about pineapple on pizza?

Emma: Oh, I love it. I’m a huge fan.

Brittany: Okay, see, that’s good. Cause I, have no strong opinion, but I am like a, I either like all meat or like cheese. Like I love a good cheese pizza. Oh, yeah. So this is important. You guys are probably wondering, like, all right, why are we talking about food? Not only am I always hungry, but this has a point, I promise. So I like raisins more than I like chocolate and Emma likes chocolate more than she likes raisins. This means that if we’re both buying cookies, I will be more willing to pay for a raisin cookie, like an oatmeal raisin cookie, which, ooh, I love, no, I want an oatmeal raisin cookie. then I would for a chocolate chip cookie, but Emma would probably pay more for a chocolate chip cookie than, you know, an oatmeal raisin cookie. Now, why is this, you know, why would we pay for different things? And that’s because we both have different likes, which is also known as preferences, likes, or knees would be like a personal preference. So this means we value things differently, which is normal, right? We all have different tastes in things. What my favorite TV show might not be what your favorite TV show is. Now, a lot of mainstream economists, they like to assign value to things. Meaning they want to say like, this is how much this should cost because that’s how much we think it should cost. And that’s kind of silly because they don’t assign value. You know, we each assign value to different things. Now, this idea of subjective value, like I said, is at the heart of Austrian economics, and we talked about Ludwig von Mises before and he came up with this idea and kind of coined this idea called Praxeology. So economists like to believe that they can plan for the economy because they believe people’s behavior can be predicted. They think they know what I and Emma and you want to do, but this completely ignores the fact that people make unique decisions based on what we call their preferences. Again, I said that’s, you know, likes or needs and what they like over things they don’t like. Now, an economist does not know me and they don’t know you, so they can’t possibly know that I like raisins over chocolate or that Emma likes chocolate over raisins. So why then, why do they think they can plan for the whole economy? And it’s funny actually because a lot of times I will say I am in the minority with raisins. But it’s funny because usually if I go to like a party, like there’s always gonna be chocolate chip cookies, right? But us raisin fans are always left in the dust because it is true that mower people probably do like chocolate chip cookies, but that doesn’t matter, right? It doesn’t matter because we all have different, you know, likes and needs.

Emma: Exactly. And central planners basically believe that prices come from whatever value they place on something, which usually just accounts for the labor put into something, meaning how much work is needed to create the thing. So they also believe that the cost of resources to make something like the tree and the wood to make a pencil, if you remember miraculous pencil, if you’ve read that one, they think those things are the only thing that should determine cost but that’s not how the economy works. Demand is extremely important, and demand is driven by how much people value things and how much they want things. So people like you and me, we don’t walk into a store and think, oh, this pencil’s gonna cost more to make than this pen, so I’m gonna pay more for the pencil. Instead, we go buy a pen or a pencil based on our individual needs and what we need.So if you prefer to write with a pen, you will probably grab the pen and pay for the pen. And if you prefer, maybe you make mistakes when you’re writing and you need an eraser, you’ll probably buy the pencil. So we are the economy ultimately, so the prices are based on what we value. So, this is an interesting thing where price gouging during storms, if you’ve ever been somewhere during a hurricane, and maybe there’s been, you know, a limit on how much stores can charge for a bottle of water or for a gallon of gas. People think that it’s immoral for stores to charge way more for stuff when it’s a time of need when it’s a time of demand. And a lot of people think that it’s immoral for these business owners to charge way more during those times for products, but it’s actually not, because the thing is, people who value, who really value that gallon of gas or who really value,  that gallon of water or that pack of toilet paper if you remember when that was a thing in the beginning of COVID.

Brittany: That’s too soon, too close to home.

Emma: Right? Exactly. So if you really value that, when you go in there, you’re gonna do anything it takes to buy that thing of toilet paper or buy that gallon of gas. And if these store owners actually kept their prices the exact same regardless of an increase in demand, and they didn’t reflect that increase in demand in their prices, the stuff would get bought up so quickly that it wouldn’t be available to everyone. So that’s the interesting thing is that when the stores come in, or not the stores, I’m sorry. When the government comes in and tries to tell the stores, here’s how much you can charge for this, here’s the maximum amount that you can charge for this item. It’s really dangerous messing with the economy and messing with supply and demand in that way because it basically changes. It’s hard to explain, but they’re trying to change something about people that cannot be changed. And that’s what we desire and what we’re willing to do to get it. And the government, these central planners, you know, you hear about central planning in all of our Tuttle twin’s books, we talk about this idea that people can control things from the inside of the government. This is at the core of the issue is this vain idea that you can change how people behave just by changing the rules. So, that’s sort of the thing, my little thing about price gouging during storms and stuff.

Brittany: No, that’s perfect. So a reminder that you know, everything that free market economics is built on goes back to this belief in the individual. We’ve talked about individualism so many times, that’s the most important ism in my opinion. So you can’t plan for a massive economy because it’s made up of so many different people with different wants and needs. No one can know what everybody wants. We call this, or Hayek called this the knowledge problem. So no single person or group has the knowledge they need to plan for a whole economy because no one can know everything, right? I know that sometimes I act like I know everything, but I don’t know everything. And, we see this in so many things and we see it play out in a lot of things that maybe people don’t like. And Emma, I’m gonna put you on the spot once again. Sorry, I’m throwing all these hard ones off to you. But I was wondering if you could talk about Uber and surge pricing. Yeah. And how we might not like it, but it’s actually a good example of, you know, this idea of subjective value.

Emma: Yeah, totally. So nobody likes to pay more for something, especially if it’s more than the price that you are used to paying for it. So I get that and keep that in mind as I talk about this. But when you agree to order the Uber, you are making the individual decision to pay more, and you’re also participating when there’s a surge going on and you order an Uber.

Brittany: Did you describe for our listeners, cuz they probably aren’t driving,  what that’s what a surge price is?

Emma: Yes. Thank you. So surge pricing for Uber is basically when a lot of people are ordering Uber. So certain times of the day, maybe it’s rush hour, maybe it’s late at night, and a lot of people are coming back from being out for the evening. if you order an Uber during surge times, they’re going to charge you a higher rate per minute or per mile for that Uber. So, that’s a quick little description. And when you agree to order an Uber during surge pricing, you’re making that individual decision that I understand these valuable goods, which is basically the Uber driver services, the cars available, there’s only so many of them, and I am one of many people who wants access to that product or access to that service. So you understand that what you’re after is in high demand, but it’s valuable to you. You want to be able to get home and not have to drive, or you need to get from point A to point B. So not only are you to blame for having to pay the higher fee, and I say blame in a non-mean way, it’s blame as in you are participating in that surge. Uber is very smart to do this, even if we don’t like paying more for it. It’s their way of managing that tension in between how many Ubers they have available and how many people want to take an Uber. So that’s sort of related to this concept. If you’ve ever studied anything about the economy at all, even, I know a lot of you guys are on the younger side, so maybe you haven’t taken an economics class, but you may have heard the term supply and demand and market equilibrium which is basically that point on the graph where supply and demand meet. And this is how businesses help reach that equilibrium which changes throughout the day. Even that’s what happens with Ubers, where people, when a lot of people are going to order the equilibrium is very different than when there’s barely anyone ordering Ubers. And there’s tons of people ready to go, ready to pick ’em up and drive ’em where they wanna go. So it’s not always what we want to happen, but it’s actually, it’s a business’s way of basically managing short, short supplies of resources versus lots of people who want access to them.

Brittany: Oh, that’s absolutely right. So, one thing to keep in mind is, you know, we’re about to wrap up this episode is again, when we talk about the economy, we are not talking about some big massive thing, right? I like in the, we’ve posted the higher graphic videos a bunch of times and you know, Hayek’s character always says the economy isn’t something you can master, you know, in a class or, through some workshop because the economy is us and nobody can be a master of what you want. Nobody’s gonna be an expert on what you want, because I’ll be honest, sometimes I change my preferences, you know? , sometimes I want a pepperoni pizza, sometimes I want a cheese pizza. So they can’t plan for this because they don’t know what we want. So we will end it there. But I think this is a really good and very important discussion when we’re talking about the fundamentals or the basics of economics.

Emma: Yes, it is. Awesome. All right guys, we’re wrapping it up here. We will talk to you all again soon. Thank you, Brittany. Talk to you later guys.

Brittany: Talk to you soon.