Martin Elson
Cost the Limit of Price argues that where entry is open and costs can be seen, prices fall toward cost, and that what stays above cost is mostly a toll. This page asks why the prices we actually pay so rarely get there. Friedrich Hayek is right that prices carry knowledge no planner could gather. They also carry the rules they were set under: who owns the land, who may issue credit, who is allowed to compete. This page follows both, and then takes up the third of the three old ideas, the mutualist case against interest.
What prices know
Friedrich Hayek’s “The Use of Knowledge in Society” (1945) is the strongest argument for letting prices float. The knowledge an economy runs on, he argued, is mostly knowledge of particular times and places: a machine standing idle, a stock that can cover a shortfall, a skill going unused. It is scattered among millions of people, much of it can’t be written down, and no planner can collect it. Prices compress it. If tin becomes scarcer, because a mine closed or someone found a new use for it, the people who use tin don’t need to know why. The price rises, and they economize. The site’s case for spontaneous order rests on the same insight, and I accept it.
Kevin Carson accepts it too, and then turns it. In “Hayek’s Fatal Conceit” (2020) he points out that a price is only as good as the process that produced it. Property rules don’t arise from the market; the market presupposes them. Change who owns land, ideas and money and you change every market-clearing price. If the rules let some people charge others for not blocking them, the price includes that charge. Carson borrows Maurice Dobb’s picture: grant a class of people the right to put toll-gates across every road and collect a fee for not obstructing traffic, and marginal theory will call the toll their contribution to production. Prices still carry information, but part of it is about the toll-gates. Garbage in, garbage out.
Carson stays agnostic between markets and decentralized planning in a free society. But he argues that with the property rules changed, land in trusts and commons, information free, firms run by their workers, market prices would do exactly what Hayek said they do. It would be the market socialism Hayek thought could never price its inputs.
The same distinction sorts out the middlemen. Hayek defended the shipper and the arbitrageur who knows where goods are cheap and where they are dear; that is local knowledge, and acting on it moves goods to where they are wanted. A patent holder or a landlord who fences off what already exists is doing something else. The line runs between profit from knowing and rent from blocking. Finance sits on both sides of it. Finance and insurance together earn about 8 percent of US GDP; add real estate and it is about a fifth. How much of that is knowing and how much is blocking is the real question, and the page doesn’t need a bigger number to ask it.
There is a third kind of profit, and it sits uneasily with Hayek. Prices carry knowledge, but sellers also profit from its absence: from the buyer who doesn’t know the shop down the street charges less, or can’t spare the afternoon to find out. That is neither knowing nor blocking by law. It is a toll on ignorance, and the remedy is not a planner but visibility: posted costs and easy comparison, the things Warren built into the Time Store.
Whose wants prices count
There is a second problem with treating prices as pure information, and it holds even when the property rules are fair. What a price adds up is not what people want but what they want times what they can pay. A billionaire’s passing interest in a third yacht and a family’s need for a home both register as demand, each weighted by money. So the signal tells producers to make more of what the rich mildly prefer and less of what the poor badly need. Calling that information is accurate. Calling it neutral is not.
Hayek’s reply, at full strength, is that prices were never meant to measure need or merit. They coordinate, given whatever distribution of income exists. If you dislike the distribution, change it by other means; override prices to fix it and you break the coordination, and the poor suffer first, in shortages. He is right about the mechanism and silent about the weights.
The weights come from the distribution of wealth, and the distribution comes, in large part, from the property rules. That brings us back to Carson. The answer to wealth-weighted prices is not to hold prices down. It is to change what sets the weights before anyone bids: who owns the land, who may issue credit, who collects royalties. Carson, after the economist Chris Dillow, calls this predistribution. No price system weights everyone equally, and some people will always have more to bid with. What prices can’t cover, the floor and the access rights set out in What Rights Are are there to cover.
Four ways a market gets bent
Cost the Limit of Price draws a border between an honest margin and a taking, and gives it two tests: can the buyer see the cost, and can they leave? The first is about information; that page covers it, and so does the toll on ignorance above. Charles Johnson gave names to the ways the second fails. In “The Many Monopolies” (The Freeman, 2011), reading Benjamin Tucker, he sorted the distortions Tucker cared about into four patterns: captive markets, ratchet effects, concentration and insulation.
A captive market is one where the law supplies the demand. Drivers must buy car insurance, at a minimum the law sets, so the insurers have customers who can’t walk away without risking a fine. Insulation works on the other side of the counter: licensing, patents, compliance costs and bailouts keep competitors out, so the buyer can walk away but has nowhere to go. One locks the buyer in; the other locks the rivals out. Between them they are the two ways a markup can outlast competition.
The other two are slower. A ratchet is a fixed cost of living pushed up and held there: rent under zoning, care under licensing and patents, insurance under mandates. A ratchet doesn’t set any one price. It weakens the person on the other side of every bargain, because someone carrying costs that never bend can’t afford to wait for a better offer. They take the job, the loan or the lease that is in front of them. Concentration is where the proceeds land. When land, credit and tools are held by a few, most people come to market with nothing to sell but their time, and the markup is paid to whoever owns. Johnson’s earlier piece, “Scratching By” (2011), which is on this site, traces the ratchet through housing codes and taxi medallions.
Read against that border, the four are the leaving test made specific. Captive: you can’t leave the purchase. Insulated: there is nowhere else to go. Ratcheted: you can’t afford to wait. Concentrated: you have nothing of your own to fall back on. A markup held up by any of them isn’t the market’s verdict. Johnson’s image for the difference is a belt and bones. Welfare and regulation are a belt cinched around the economy, easy to see and easy to take off. The four are the bones, and taking off the belt leaves the same skeleton.
The strongest objection is that captivity doesn’t need a statute. Switching costs lock in software users, networks lock in members, a hospital’s emergency room has its patient whether or not any law helped, and a company town needed no mandate to own the only store. Johnson’s account puts the blame on law, and law is often the culprit. But the test is the same whoever builds the fence, and this site keeps the test, not just the usual suspect.
What capital should cost
Proudhon tried to found a Bank of the People in 1849. William Greene’s Mutual Banking (1850) proposed that members pledge their own property and draw notes against it. Tucker made the money monopoly the first of his four, beside land, tariffs and patents, in “State Socialism and Anarchism” (1886), which is on this site. Carson restates the case in Studies in Mutualist Political Economy. The argument runs like this. Issuing credit costs little: bookkeeping, and cover for losses when borrowers default. What keeps interest above that is law, which decides who may issue money and against what. Let any group issue credit against property its members pledge, and competition would push interest down toward the cost of running the bank. Carson adds that a mutual bank creating credit against collateral gives up nothing, so the usual defense of interest as a reward for waiting doesn’t apply to it.
The strongest case against the above is Eugen von Böhm-Bawerk’s. People value goods now above the same goods later, and production takes time. Interest is the price of that gap, and it would exist in any economy, a socialist one included. Lenders also carry risk and lose to inflation. And there is a historical test. Scotland had free banking from 1716 to 1845, with many competing banks issuing their own notes, and interest stayed well above zero. A ban doesn’t make it vanish either. Islamic law forbids riba, which most scholars read as any fixed, guaranteed return on a loan, and Islamic banks lend instead through cost-plus sales, leases and partnerships that share the risk. Yet their markups tend to track market interest rates, which critics such as Timur Kuran and Mahmoud El-Gamal read as the price of time surviving the ban under another name.
The history proves nothing about economics, but it is worth knowing, and it is a reminder that credit without interest is not a fantasy: for most of their history, all three Abrahamic traditions banned it. They let go at different speeds. The Torah forbids lending at interest to a fellow Jew while allowing it to a stranger (Deuteronomy 23:19–20). Rabbis later built a workaround, the heter iska, which recasts a loan as a partnership, and it became standard from the sixteenth century. Christian Europe went further. The Third Lateran Council (1179) excommunicated open usurers, and the Council of Vienne (1311) made defending usury a heresy. Barred from lending to one another, Christians left much of the trade to Jews, and the stereotype of the Jewish moneylender grew out of that arrangement. The ban broke in the Reformation. Calvin allowed moderate interest in 1545, and England legalized it the same year. Rome held out in principle until the nineteenth century, by which time usury had come to mean excessive interest rather than any interest at all. Islam never formally lifted its ban. Instead it developed legal devices around it, and in the twentieth century a banking system built on them. The mutualists wanted the old result, credit at cost, without the ban: remove the monopoly and let competition do what councils couldn’t.
The mutualist reply is that Scottish banks issued against gold, not against their members’ property, so Greene’s proposal has never really been tried. That may be true. It is also the kind of reply that can always be made, which is why Start Here asks for the test to be set in advance. Here is one. If credit that anyone may issue against pledged property still carries interest well above the cost of administration and default, the monopoly theory of interest is wrong.
Where that leaves this page: interest that covers the real cost of lending, including risk, is a cost, and Warren’s principle allows it. Interest above that, kept up by licensing, is a toll. How large the toll is now is a factual question, and this page can’t settle it.
What to keep
Hayek is right that prices carry knowledge no planner can gather. Carson is right that they also carry the property rules behind them. So the real fight is over the rules, not over prices, and Johnson’s four bendings say where to look first. The case against interest is a claim about banking that still needs its test. Ellerman settles who owns the product and Warren what it may sell for; this page is about why the market we have doesn’t get there yet. Each can be argued without the others.
Sources
- F. A. Hayek, “The Use of Knowledge in Society” (American Economic Review 35, no. 4, 1945): 519–30. Prices as carriers of dispersed knowledge; the tin example.
- Kevin Carson, “Hayek’s Fatal Conceit” (C4SS, December 2020). Prices are only as good as the property rules behind them; Dobb’s toll-gate; predistribution. CC0. original
- Kevin Carson, Studies in Mutualist Political Economy (BookSurge, 2007). The cost principle restated; interest as a monopoly price.
- Maurice Dobb, Political Economy and Capitalism (Routledge, 1937; rev. 1940), p. 66. The toll-gate illustration.
- US Bureau of Economic Analysis, value added by industry: finance and insurance as a share of GDP (via FRED, series VAPGDPFI).
- Charles W. Johnson, “The Many Monopolies” (The Freeman, September 2011; C4SS, 2013). Captive markets, ratchet effects, concentration and insulation; the belt and the bones. original
- Charles W. Johnson, “Scratching By: How Government Creates Poverty as We Know It” (The Freeman, 2011). The ratchet in housing and taxi licensing. copy here
- William B. Greene, Mutual Banking (1850). Credit issued against members’ pledged property.
- Benjamin R. Tucker, “State Socialism and Anarchism: How Far They Agree, and Wherein They Differ” (1886). The four monopolies, money first. Copy here (post 360).
- Eugen von Böhm-Bawerk, Capital and Interest (1884–89). Time preference; the strongest case that interest is not only a monopoly price.
- Lawrence H. White, Free Banking in Britain: Theory, Experience, and Debate, 1800–1845 (Cambridge University Press, 1984). The Scottish free-banking record.
- Timur Kuran, Islam and Mammon: The Economic Predicaments of Islamism (Princeton University Press, 2004); Mahmoud A. El-Gamal, Islamic Finance: Law, Economics, and Practice (Cambridge University Press, 2006). The riba ban, and markups that track market interest rates.
- John T. Noonan Jr., The Scholastic Analysis of Usury (Harvard University Press, 1957); Benjamin Nelson, The Idea of Usury: From Tribal Brotherhood to Universal Otherhood (Princeton University Press, 1949). The Christian ban and its unwinding; Nelson on Deuteronomy’s double standard.