Why We Don’t Need Prices Within A Family

In reading The Price of Everything, by Russell Roberts, I came across a passage explaining why prices aren’t needed within a family. He describes a situation in which a mother has two cookies to share among three children, and asks if the mother should auction off the cookies to the highest bidder. The notion is ridiculous to even the most ardent free-market economist, and the reason is because the mother has the knowledge to determine which of her children should receive the cookie. For example, maybe she knows that one kid had a candy bar for a snack that afternoon, so that kid can do without the cookie. Or one kid can offer to be nice and let his brother have one, or perhaps they give each kid 2/3 of a cookie.

In a small town the case is often the same, and prices aren’t needed to allocate scarce resources in times of emergency. I quote,

“In a small town, most citizens do the right thing either because they care about each other or because being selfish when there is a crisis has costs – people might shun you in the future. So when there’s an earthquake in a small town, the hardware store owner doesn’t raise the prices of the portable generators. And even if they sell out, someone who desperately needs one can probably find one to borrow. But in a big city, there isn’t as much love or knowledge to go around. Higher prices substitute for the lack of love [emphasis mine]. They encourage people to step aside and let strangers who are willing to pay the higher price, get the goods. And higher prices give business people an incentive to stock up on crucial items and bear the costs of inventory.”

This distinction is really important. Many people have heard the childhood song, “Sharing Is Caring” and assume that sharing is best. As children, we are admonished by our parents to share our toys with others, because at an individual level, this makes us a pleasure to interact with. But you can’t just blindly apply the maxim “sharing is good” across all levels of society. We can share within a family because we have the knowledge and emotional bonds to make optimal decisions (although this doesn’t mean we always do). We also bear the costs of bad decisions. At a societal level, where we live and interact with hundreds, thousands and millions of people we don’t know, we can’t expect people to have the same love for strangers that they do for their closest of kin. And it is impossible for us to gain and use the knowledge of each individual’s situation when figuring how who gets the cookie.

To remedy this lack of “love and knowledge” prices emerged, and do the work for us.

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