Costs versus prices

Thomas Sowell
Posted: Jul 31, 2000 12:00 AM

A cynic is said to be someone who knows the price of everything and the value of nothing. The same could be said of economic illiterates, many of whom are in politics and the media.

Politicians who say that they are going to "bring down the cost of health care" or make housing "affordable" are confusing costs and prices. Often such politicians are themselves among the prime reasons why both health care and housing are so expensive.

Costs are not just prices arbitrarily put on things. Whether the economic system has prices or not, there are real costs for everything. Whether under capitalism, socialism, feudalism or any other system, the real cost of building a bridge are all the homes, factories and other structures that could have been built with the same labor and materials that went into building the bridge.

Even if the government provides the bridge "free" it is still not free to the society as a whole, which has fewer homes, factories, etc., as a result of spending the resources required to build the bridge. That is why economists say that there is no such thing as a free lunch.

When politicians talk about "bringing down the cost of health care" they do not mean that they have found a way to produce the same health benefits with less medicine or less time spent by doctors treating patients. They mean that they have some scheme for preventing these costs from being charged directly to the patient.

If these politicians were really going to bring down the cost of health care, they would have to do such things as stop so many medical resources from being diverted to enriching lawyers who win bogus lawsuits against doctors, hospitals and pharmaceutical companies. They would have to stop giving blanket subsidies to people who waste doctors' time with trivial ailments that they would ask their local pharmacist about if they had to pay a doctor out of their own pockets.

Politicians are not about to do any such things -- which is to say, they are not going to bring down the cost of health care. Health care is going to keep on costing us as much as ever, whether we pay the money to the doctors and hospitals directly or pay it to the Internal Revenue Service, which then routes it to the same places.

Passing laws controlling prices is a lot easier than actually reducing costs. That is why politicians have created all sorts of price controls for centuries -- usually with bad economic consequences, such as shortages, waste, waiting lists and quality deterioration. Whether the prices being controlled have been the prices of medical care, housing or numerous other things, these results have followed, time and again, in countries around the world.

Back in the days of the Soviet Union, the government controlled prices all across the country. Everything should have been "affordable" then, if we believe those who confuse prices with costs. In reality, costs were higher in the USSR, precisely because people did not have to pay prices that reflected those costs.

It took more electricity, metal, cement and other resources to produce a given output in the Soviet Union than in the United States, because those who ran factories there did not have to worry about keeping their costs down, as those who run American factories must do in order to protect the bottom line.

As two Soviet economists wrote, during the brief era of glasnost under Gorbachev, factory managers in the USSR "take everything they can get, regardless of how much they actually need, and don't worry about economizing on materials." Why should they? They didn't have to worry about prices that represented costs.

Freedom from prices is freedom from responsibility. You can simply pass laws, using the magic wand of government to satisfy your own desires at unspecified costs to be paid by others.

People who want "open spaces" do not have to consider the costs imposed on other people who want to do other things with the land that is being "saved." When costs are reflected in prices, that is when you find out just how much open space -- or anything else -- is really worth to some, compared to how much it is worth to others, who have different ideas and are ready to put their money where their mouth is.

That is why the self-righteous and the self-indulgent do not want prices to reflect costs -- and why they confuse the two.