Economics 101 for Catholics WHAT IS PRICE?

Aug 23, 2006

Recently, I heard the campaign announcement of a person running for Senate in a nearby state.  His main claim to fame was that he “stood up” to the big drug companies and the big corporations.  The assumption is that these businesses are ripping people off in terms of the price of their products.  (I am surprised that he did not specifically mention oil companies).  This leads us into a discussion of the nature of price.

Price was divided by the late scholastic thinkers, mostly Jesuits and Dominicans of the University of Salamanca in Spain into the natural price, which is the just price, and the legal price.  The natural price was set by the community.  This means that the price of a product is just if it is a function of the costs to bring the product to market, the supply and demand for the product and the price elasticity of demand for the product, i. e., how much demand for the product changes as price changes.  What this means is that the price set by the market is the just price. With the legal price, on the other hand, there is no implication that a price set by the government will be just.  The only way that would be so is if the government set is as close as possible to the natural or market price.  But then what would be the point?

Prices are set at the point of exchange.  Even if a store or company tells you that this product is this price, the consumer is free to accept or reject it.  If consumers do this on a wide spread basis, the company must lower the price to sell the product.  But sometimes they cannot do that because of the costs of bringing the product to market.  Take the sophisticated drugs we have today that our political friend was complaining about.  These compounds are extremely complex and hard to invent and manufacture.  There are also multiple tests that are carried out, many of which are government mandated. Not to mention the fact that the insurance premiums must be enormous in case some tragedy occurs to the patients because of side effects that are unknown at the time.  All of this means that the companies cannot afford to bring the drug to market unless they obtain a certain price, or they will lose money on every sale.  In addition, in order to develop new drugs, they must have a large amount of savings to pour into research and development for new and better medicines to come on the market.  This means that they must get a high price to continue to operate.

If the price of a product is too high, the consumer can choose not to buy it, to shop around or to seek an alternative.  In the case of medicines, one can get them from Canada, (assuming there are quality controls you can verify), where the production may be  subsidized by taxation.  One can also try natural remedies, such as herbs and homeopathy, chiropractic and acupuncture.

One of the things that Catholics with money can do is to set up programs to buy things like medicines for the poor who cannot afford them.  Some companies do that.  Many Catholics live very well while their brothers and sisters, while not starving, cannot get medicines that are essential for their survival.  Every parish should have such programs.  Meanwhile, Catholics should realize that sending government demagogues after the supposedly evil companies will kill their incentives to bring new and more effective medicines to market.  How do you think we got the wonderful medicines we have in the first place?