From Sicilian Pasta to U.S. Gas Stations: Decoding the Language of Prices

Via Maqueda is one of the most prominent streets in Palermo, Sicily's historic central district. It intersects Via Vittorio Emanuele at the Quattro Canti —officially Piazza Vigliena— a small Baroque plaza featuring four facades completed in 1620.

Just a little north, the Nessun Norma pasta at Taverna Dei Canti is a beautiful combination of siccagno tomatoes and local Sicilian eggplants that are more round than the aubergine typically found in an American grocery store. The dish was well-balanced, flavorful, and for €13, it seemed like a steal, especially when you consider that tipping is not required.

Prices, Pasta, and Pay

At about 8:00 pm on a Monday in August 2023, five waiters served Canti's dozens of patrons seated in ten columns of four small round tables each. The men worked in unison. They were calling out to each other in strong Italian voices, collectively taking orders, clearing tables, and delivering meals not as individual waiters but as a team.

It wasn't easy to catch all of their names since none introduced himself, but we heard Paolo, Marco, and Sam addressed directly.

As they moved quickly between the table columns, dropping off plates of food, wine, and cocktails, the waiters spoke Italian to the locals, French and Spanish to those nations' respective tourists, and English to just about everyone else, including some bilingual Bulgarians.

The entire operation seemed machine-like as if each column of four tables with two chairs was a sports car engine, pistons pumping faster and faster toward the 9:00 pm hour when the locals would start to outnumber the tourists.

It was sad to learn that according to Payscale and the Economic Research Institute, waiters and waitresses in Sicily earn an average of €7.55 to €8.00 per hour, which at the time of writing was like $8.50 an hour.

The fellows working an outdoor restaurant in dirty, hot Palermo would need to put in more than an hour and a half of effort to buy the Nessum Norma many of their customers were devouring in just a few minutes.

Pasta and labor have prices, and in a market economy, prices play a vital role in determining how resources are used.

The Role of Prices

Prices are one of the most important tools an economy has to allocate scarce resources that have alternative uses, according to the excellent economist Thomas Sowell.

The price you and I are collectively willing to pay for some good or service (including wages) determines how the resources needed for those goods or services are used. Here is how Sowell put it in his acclaimed book "Basic Economics."

"The fact that no given individual or set of individuals controls or coordinates all the innumerable economic activities in a market economy does not mean that these things just happen randomly or chaotically. Each consumer, producer, retailer, landlord, or worker makes individual transactions with other individuals on whatever terms they can mutually agree on. Prices convey those terms, not just to the particular individuals immediately involved but throughout the whole economic system —and indeed, throughout the world."

Prices are how we communicate what we are willing to trade for some resource, be it our time or our pasta.

Although the unemployment rate for Italy was about 7.8 percent in August 2023, the conditions in Sicily are much worse, with some estimates putting the unemployment rate at about 16 percent.

If Elon Musk suddenly decided to build a giga-factory just outside of Palermo and started hiring thousands of workers at $20 per hour, the market for waiters would be impacted. Paolo, Marco, and Sam might go to work at the factory, leaving the Canta management with choices to make about what the proper price for labor should be.

Gas Prices

For July 2023, the average price of a gallon of gasoline in the United States was just under $3.60, according to the U.S. Energy Information Administration.

While gas prices had increased with the summer season, July's average gas price is some 21 percent lower than the previous year when Americans paid an average of about $4.56 per gallon.

That decrease came even as the U.S. annual inflation rate ended up 8 percent in 2022 and up more than 3 percent in July 2023.

So why are gas prices going down? Sowell would probably say it had to do with the allocation of scarce resources that have alternative uses.

In a well-functioning market economy, the price we pay at the pump reflects all of the complexity in the oil industry, including things like the fact that the U.S. has drawn down its strategic oil reserves, was downgraded in related credit markets, and many, many more factors that work together to drive decision making.

Mixed-market Economy

Prices can, however, get out of wack.

"Since we know that the key task facing any economy is the allocation of scarce resources which have alternative uses, the next question is: How does an economy do that?" wrote Sowell.

"Different kinds of economies obviously do it differently. In a feudal economy, the lord of the manor simply told the people under him what to do and where he wanted resources put: Grow less barley and more wheat, put fertilizer here, more hay there, drain the swamps. It was much the same story in twentieth century Communist societies, such as the Soviet Union, which organized a far more complex modern economy in much the same way, with the government issuing orders for a hydroelectric dam to be built on the Volga River, for so many tons of steel to be produced in Siberia, so much wheat to be grown in the Ukraine. By contrast, in a market economy coordinated by prices, there is no one at the top to issue orders to control or coordinate activities throughout the economy," wrote Sowell.

In the United States, we don't have a free market economy but rather a mixed market economy with characteristics, if you will, of both a free capitalist system and socialism.

When the government intervenes with a subsidy, regulation, or policy, it is dictating to some degree how prices should be organized regardless of the market conditions or the demand for a given resource. Put another way, market forces are ignored.

Thinking About Prices

As the sun dipped below the horizon in Palermo, the heat eased. More people ventured out on the dirty, graffiti-covered Via Maqueda, where every transaction tells a deeper story of how our world functions. It's a dance of supply and demand, of resources and their allocation, choreographed by the often invisible hand of prices.

These prices don't merely dictate the value of commodities; they narrate the stories of countless lives, like Paolo, Marco, and Sam. They bridge Palermo's bustling streets with the U.S.'s fluctuating gas prices, illustrating the interconnected tapestry of global economics.

Understanding the nuance behind each price tag is not something we will use all the time or even think about often, but it should be something we consider as we vote, bank, and make economic decisions.