Before we discuss the role of prices, I will set up a thinking experiment that we will use in subsequent discussions about the role of prices.
This article should be read before reading the series, The Role of Prices.
Complex County, a Model of Economics
In order to better illustrate the topics discussed here, I would like to introduce an imaginary place called Complex County. This county has a free-market economy. There are many towns in this county, three of which are Appletown, Woodville, and Workerland:
These villages are separated by a significant distance, lets say 150 miles.
People who live in complex county need food and shelter to survive, and food and shelter require workers to cultivate and construct. Each of the towns has unique attributes:
- rich soil and thousands of apple trees
- few workers
- moderate amount of pine trees (good for building things)
- rich with workers
- few pine trees
- moderate amount of apple trees
- rich with pine trees
- few apple trees and other agriculture
- moderate amount of workers
Each season, the apples require some sort of labor, be it picking, planting, land cultivation, etc. The apples do not require anything that can be produced from pine trees. Individual apples can be used to feed workers or ____
Each season, the pine trees require some sort of labor, be it chopping, sorting, surveying, planting, etc. They do not require anything that can be produced from apples. Individual pine trees can be used to build and repair houses or the owners can choose to not harvest and instead allow them to grow another year and produce more pine.
Each season, the workers require food – which they can only derive from apples. The workers can use pine trees to build and repair their houses. Individual workers can be used to work with apples or with pine trees.
Now that you have read this, continue on to The Role of Prices, Part 1.