If rising gasoline prices frustrate you, it might help to consider the larger picture. From the standpoint of the entire economy and our general well-being, those prices are not necessarily good or bad.

What economists call the “price system” is possibly the most crucial mechanism in the keeping an economy functioning and efficient. The thing to keep in mind about the price system is that it is a hierarchy of relative prices.

The price of any item or commodity is a purveyor of information. It is an indicator of how “scarce” or costly that item is relative to everything else. Furthermore, the price also embodies an incentive. A high-priced item tells us to use it carefully. It tells us to use substitutes if possible. Wasteful use of the high-priced product is detrimental to our financial well-being.

All resources are scarce in an economic sense. We don’t have an unlimited availability of anything. There is a cost to everything, nothing is free. The price system is a big part of why we can have economic freedom and why a market economy is “decentralized.” For the most part, no one is told specifically how to economize.

There are a gazillion ways to economize on fossil fuels. It’s much easier for some people and companies to cut back than for others. Let each person find his or her own least-cost solution. Maybe it’s moving closer to work, buying a smaller car, or taking mass transit — to name a few.

It is said that “necessity is the mother of invention.” Higher prices are a kind of necessity by degrees.
Rising energy prices are painful, but they are the least-damaging alternative for dealing with our energy problems. Rising prices send a message throughout the economy and give every decision-maker the freedom to adapt in his or her own way. Dictates from Washington or Sacramento reduce freedom and flexibility.

Should we solve our energy problems with legislation or the price system? Those are really the only two real-world alternatives. We can address our problems with centrally-dictated directives or allow dispersed, decentralized decision-makers to adapt as they think best. Mileage requirements, mandated efficiency requirements for appliances, and mandated use of ethanol are current examples of using legislation and central directives to bring about less energy usage. Compared to how the price system works, these mandates are crude, ham-handed, too narrowly focused, and ultimately limited in effectiveness.

It is sometimes argued that allowing prices to rise hurts the poor. Does that mean we should keep gasoline prices artificially low as a means of helping the poor? Would that help poor people who don’t own autos? The “benefit” of lower gasoline prices would accrue to people in proportion to how much gasoline they purchase.

The fundamental problem of being poor is not having enough money. Attempting to keep the price of housing, fuel, food, or whatever artificially low is an extremely inefficient policy. It would partially solve one problem at the expense of creating countless others.

We could keep prices the same and order people to use less, or we could allow the price to rise and let them use as much as they want. There is a price that would achieve whatever level of usage we desired. The price system could handle the entire job if we let it.

Some people think we are using up our fossil fuels at too rapid a rate, that we will run out of low-priced oil within a few decades. That position is basically arguing that the current price of oil is too low relative to the future price of oil.

Ron Ross is an investment advisor with the Premier Financial Group in Eureka and a former professor of Economics at Humboldt State University. He lives in Arcata.