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 chapter 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 chapter follows both, and then takes up the third of the three old ideas, the mutualist case against interest.
What prices know
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 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. It is not a congestion charge. It is collected on an empty road as on a full one, and it pays the gatekeeper, not the road. 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.
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. 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. The auction can be honest and the deal still stacked. 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 chapter 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. The statute writes the demand; the insurer only collects. 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” (2007), 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. Keep the test, not just the usual suspects.
What the weights add up to
Prices weight every want by money, and the weights come from the property rules. Here is what they add up to now. In the Federal Reserve’s accounts for mid-2026, the richest 1 percent of American households held 32.5 percent of household net worth, the highest share since the series began in 1989. The bottom half held 2.3 percent. That is Johnson’s concentration with a number on it: taken together, half the country brings about a fourteenth as much to market as the top hundredth. Every price is bid at those odds.
The usual defense is that this is the price of growth. Arthur Okun’s leaky bucket (1975) loses some of every dollar carried from rich to poor, so the more you carry, the less arrives. In 2014 three IMF economists, Jonathan Ostry, Andrew Berg and Charalambos Tsangarides, checked. Using data that separate inequality before taxes and transfers from inequality after, they found that lower inequality went with faster growth and with growth spells that lasted longer. Redistribution did no measurable harm except at the extremes. This chapter doesn’t need that remedy, only the finding: predistribution stops the inequality at the pass, before anyone has to carry a bucket. The trade-off had been taken on trust. Measured, it mostly wasn’t there.
James Livingston reads the same facts from the left in “How the Left has Won” (Jacobin, 2012). Since the 1920s, he argues, growth has depended less on new investment out of profits than on consumer and public spending, so profits with no investment to do pile up and wait for the next bubble. By the figures he cites, transfers had grown to about one dollar in five of American household income. He calls this socialism already here, and he is content with the mix. His most useful witness is Irving Kristol, the founding father of neoconservatism, who asked whether people can live in a free society they have no reason to believe just. Kristol denied that accidents of the market give a lasting title to power and property, any more than accidents of birth do.
Where I part ways with Livingston is over that fifth of income. In Johnson’s terms, a transfer lets out a notch on the belt and leaves the bones where they were. The same rules pile up the same wealth, and the transfers follow behind. Paying people back after the toll is not taking down the gate.
The Austrian defense of the ledger starts from the single trade. Murray Rothbard called it the double inequality of value: no one trades unless each values what they get above what they give, so every voluntary exchange leaves both better off by their own lights. Sheldon Richman built a 2011 Freeman column on Bastiat around it. If every trade is a gain for both, how can the sum of them wrong anyone? Shawn Wilbur’s answer, in “A note on Bastiat and double inequality” (2011), is that the gain is measured against whatever alternatives each trader faces, so it is compatible with material loss. The tenant under a ratchet who signs the only lease in reach gains by her own lights too. Wilbur calls that kind of profit cold comfort. He sets it beside Proudhon, for whom a price is a convention struck because no exact measure of value exists, and equality is the standard the bargain is judged against, not a result it guarantees. Consent shows the trade beat the alternatives. It doesn’t show who set them.
The strongest case against this section is Robert Nozick’s, and some of the evidence is on his side. In Anarchy, State, and Utopia (1974) he starts from whatever distribution you think just and lets a million fans each pay Wilt Chamberlain twenty-five cents to watch him play. Chamberlain ends the season far richer than anyone else, and no one was wronged, since each step was a free choice. Holding any pattern of equality in place would mean stopping people, over and over, from spending what is theirs. Much top wealth is also new. Steven Kaplan and Joshua Rauh found that the share of the Forbes 400 who grew up wealthy fell from about 60 percent in 1982 to about 32 percent in 2011. Worldwide, inequality between people has fallen since about 2000, as Branko Milanović has shown, mostly because markets opened in China and India. And the IMF finding is not settled. Kristin Forbes, comparing changes within countries, found that rising inequality went with faster growth over the following five years.
Nozick’s argument holds where the starting point was just and each step was free, and his own principle of rectification grants that much. The four bendings are failures of those conditions: buyers who can’t leave, sellers no one can challenge, costs that never bend, titles held under monopoly. Nothing here asks for a pattern to be enforced. It asks for the gates to come down and for the outcome to land where it lands. The new fortunes and the global numbers are gains from opened markets, which is this chapter’s case, not a reply to it. The growth evidence is mixed over five years and leans toward equality over longer spells; it does not show that growth needs wealth as concentrated as it is. Here is a test set in advance. If wealth stays this concentrated where entry is open, credit is free to issue and titles are clear, the toll account of inequality is wrong. Which gate weighs most is the next question: who may issue credit.
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. Neither was tested. Proudhon’s bank signed up thousands of members, but he was prosecuted for his press attacks on Louis-Napoléon and wound it up in 1849 before it opened, and Massachusetts never gave Greene’s bank a charter. The idea wasn’t refuted. It was stopped before it could be tried. Tucker made the money monopoly the first of his four, beside land, tariffs and patents, in “State Socialism and Anarchism“. 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. Waiting and risk are the two standard defenses of interest. The risk left is the cover for defaults, which, priced at expected loss, is a cost, not a reward.
Behind the mutualist case is a view of money that has a name. In “What Is Money?” (1913), Alfred Mitchell-Innes argued that money is not a commodity but credit: a record of a debt, a promise to be made good. A coin or a banknote is an IOU, and so was Warren’s labor note, a promise of so many hours of the issuer’s own work. If every currency is a promise, the question is not whether credit can be created but who is allowed to create it, and that is a question about law. David Graeber made the same case at length in Debt: The First 5,000 Years (2011).
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 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. The reasons were scripture and philosophy: Jesus’s “lend, hoping for nothing again” (Luke 6:35), and Aristotle’s view, taken up by Aquinas, that money is barren and charging for its use sells the same thing twice. Barred from lending to one another, Christians left much of the trade to Jews, whose law allowed lending to outsiders and who were shut out of most guilds and of owning land, 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 bans failed for the reason rent control does: they fixed the price without freeing the supply. Trade and war kept demanding credit, so lending went into disguise, in bills of exchange and partnership contracts, and cost more to cover the legal risk. The nearest thing to success was the Franciscans’ monti di pietà, pawn banks from 1462 that lent to the poor for a fee meant only to cover costs. 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 the Introduction 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.
Inflation is a separate question, and it cuts less than it seems. Prices rise when money and credit grow faster than the goods they buy, when a supply shock hits, as with oil in 1973 or shipping in 2021, and when sellers have the power to pass costs on with a margin. None of that is peculiar to capitalism. Soviet inflation was held down by decree and showed up instead as queues and savings with nothing to buy. A mutual bank issuing credit against pledged goods would grow its money with output, but it could over-issue too. What inflation justifies is narrow. A lender who charges for it is only being kept whole, which is a cost, not a gain.
Time is the harder case, and it splits the way risk does. People prefer goods now to goods later: that is a fact. That a lender is owed for it is a claim, and it holds only where someone gave something up. A worker who lends wages she saved does wait, and Warren could count that small sacrifice as a cost. But much lending comes from rents and windfalls, and banks today create new deposits when they lend, as the Bank of England explained in 2014. Then no one waited at all. The reward for waiting goes to whoever holds the money, whether or not they did the waiting.
Where that leaves this chapter: interest that covers the real cost of lending, including risk priced at expected loss and the waiting of a lender who actually saved, is a cost, and Warren’s principle allows it. Interest above that, kept up by licensing or paid for waiting no one did, is a toll. How large the toll is now is a factual question, and this chapter 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 chapter 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, December 2007). The ratchet in housing and taxi licensing. copy here
- William B. Greene, Mutual Banking (1850). Credit issued against members’ pledged property.
- A. Mitchell-Innes, “What Is Money?” (Banking Law Journal, May 1913). Money as credit, not a commodity.
- David Graeber, Debt: The First 5,000 Years (Melville House, 2011). The credit theory at length.
- Benjamin R. Tucker, “State Socialism and Anarchism: How Far They Agree, and Wherein They Differ” (written 1886; Liberty, March 10, 1888). The four monopolies, money first. copy here
- Eugen von Böhm-Bawerk, Capital and Interest (1884–89). Time preference; the strongest case that interest is not only a monopoly price.
- Michael McLeay, Amar Radia and Ryland Thomas, “Money Creation in the Modern Economy” (Bank of England Quarterly Bulletin, 2014 Q1). Banks create deposits when they lend.
- 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.