Book review: The War on Prices by Ryan Bourne

I have reached a stage in my career where younger colleagues sometimes ask me for advice. There are a few evergreen pieces of advice I like to give out for any line of work: Be easy to work with. Keep your word. Show up on time.

Another piece of advice doesn’t get taken up nearly enough: Learn price theory.

Fortunately, the Cato Institute’s Ryan Bourne and a small army of contributors have assembled an excellent guide to price theory, The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy. My latest bit of advice, for everyone, is to read it. It is accessible to high schoolers, yet tenured professors with Ph.Ds can learn from it as well.

Learning price theory doesn’t require an economics degree, and you don’t have to learn a bunch of fancy math, though those are both useful things. Price theory is more like a toolbox with a few simple tools that you can use for almost any task.

These tools include the law of demand, opportunity costs, the quantity theory of money, and how prices convey information and shape people’s incentives.

None of those concepts are difficult to understand. The hard part is applying them consistently and without mercy. That takes practice. Just like sports, music, empathy, or any other skill, price theorists have to put in the hours practicing the fundamentals.

Bourne and his contributors give readers plenty of practice opportunities, mostly by showing what happens when politicians mess with prices. A good approach, especially for newcomers, is to look at how Bourne and company reach their conclusions, not just what those conclusions are. It’s a little like that old saying about teaching someone to fish rather than just giving them a fish.

When you watch good economists at work, like the ones in The War on Prices, they are usually just applying simple price theory concepts consistently. It’s similar to listening to a musician who doesn’t show off their virtuosity, but writes the perfect part for the song, and plays it note-perfect every time. For rock music fans, the approach is more like Malcolm Young, and less like Yngwie Malmsteen.

Or for economists, more like Frederic Bastiat and Armen Alchian, and less like what the American Economic Review has become over the last few decades.

The War on Prices opens strong, with several chapters on inflation. It’s an intimidating topic, but the core concept is simple: the quantity theory of money. If you print a bunch of money, you get inflation.

More precisely, the quantity theory is about how fast the money supply and real output grow, relative to each other. If the money supply grows faster than real goods and services, you get inflation. That’s what happened during COVID, when the money supply grew by 40 percent in just two years, and real growth didn’t come anywhere near matching that pace. That’s why the dollar has devalued by more than 20 percent since 2020; the exchange rate between money and goods changed.

Deflation can also happen. The Great Depression happened because the money supply shrank by a third. This caused deflation and general havoc with the prices that people rely on to make decisions.

Good monetary policy is a matching game. If you want zero inflation, then the real economy and the money supply need to grow in sync. Bourne, Pierre Lemieux, Bryan Cutsinger, Brian Albrecht, and others apply that basic quantity theory insight to different aspects of monetary policy with clarity and consistency seen in few other places.

Subsequent chapters deal with price controls on rent, oil, interest rates, junk fees, health care, and more. Readers not only see the law of demand at work again and again in real life, but through repetition they also get a sense of the subtler aspects of price theory: how simple prices convey complex information, and how they guide people’s actions.

Readers also learn how dishonest prices lead to unintended, yet predictable consequences. Rent controls cause housing shortages and reduce housing quality. Minimum wages have tradeoffs that go beyond job losses. These include reduced hours, reduced benefits, fewer opportunities for younger workers and minorities, and more.

The great Deirdre McCloskey makes moral arguments for market-set prices, which most other economists ignore at our peril. Other contributors apply price theory insights to gender discrimination and pay gaps, CEO pay, and dynamic pricing, such as Uber and other companies use.

Price theory is about using simple tools to understand a complex world. Even a basic knowledge of prices is like getting a new pair of glasses that helps you see the world more clearly. You might even see the invisible hand.

Bourne and his contributors have done a great service with The War on Prices. Whether you have only a passing interest in public policy or have been in the field for decades, my new favorite advice stands tall: read it for both content and delivery.