Many debates on economic topics hinge on a set of familiar words: production, prices, costs, value. These terms appear constantly in political speeches, news articles, and policy discussions. Yet they are rarely used with much precision (at least where academic economists are concerned). As a result, people often talk past one another while believing they are in agreement — or disagreement — about the same thing.
Confusing colloquial meanings with technical definitions can lead to deeply flawed conclusions about how markets work and what governments can realistically accomplish. When it is asserted, for example, that governments “produce” value or that sellers “set” prices, these statements seem plausible, but precisely because the words involved are doing too much work. Clarifying what economists actually mean by these terms goes a long way toward dissolving common economic myths.
Two simple examples — one involving production and the other involving prices — illustrate how careless language leads to poor economic reasoning and, ultimately, misguided policy.
Colloquial Language Versus Economic Concepts
Many words carry different meanings depending on context, and often this causes no issue.
Economist Walter Block illustrates this with the word work. If you hold two heavy jugs of milk with your arms extended, we would say you are doing a great deal of work. In physics, however, no work is being done unless an object moves through space. This discrepancy seldom causes confusion because most people understand that different disciplines use words differently. Economics appears to be more susceptible to confusion, with many making claims about how the economy works while actually relying on, at best, loose metaphors.
This is especially true when discussing production.
When Production Isn’t Production
Suppose that after a rainstorm, you make a literal mud pie. You have produced something in the everyday sense of the word: a tangible object that did not previously exist. But have you engaged in production in the economic sense?
Economic production is not solely defined by effort, creativity, or physical output. It requires the creation of value as demonstrated through voluntary exchange. If no one is willing to purchase your mud pie, then no economic production has taken place. What you engaged in instead was a form of consumption — you enjoyed the activity for its own sake. Either that, or it was merely a failed attempt at production. Any value created was internal to your experience, not reflected in the allocation of scarce resources across society.
This distinction becomes far more important when we move beyond childish examples. Governments are routinely described as producers of goods and services, including roads, schools, healthcare, and national defense. In a colloquial sense, this is understandable. Physical infrastructure is built, employees are hired, and services are rendered.
Economically speaking, however, production cannot be separated from profit and loss accounting. Market production requires prices for inputs and outputs that emerge from voluntary exchange. These prices enable producers to assess whether they are utilizing resources in ways that consumers value more highly than alternative uses.
Government activity is funded through taxation, not voluntary exchange. This means that tax revenue does not accurately reflect the demand for specific services by consumers. Instead, it merely reflects the government’s power to compel payment. Since the state, then, sets its own revenue amount through taxation, it lacks genuine market prices for many of its inputs and outputs. Accordingly, it cannot calculate profit and loss in any economically meaningful sense.
Without profit-and-loss feedback, there is no way to know whether a project creates value or destroys it. From an economic perspective, government provision is therefore better understood as consumption by state agents rather than production — regardless of the intentions behind it or the visible outputs it generates.
When Prices Aren’t Prices
The same linguistic confusion arises with prices. Let us return to the mud pie. Suppose you list it online for $1 million. No one buys it. What is its price?
The answer is not one million dollars. In fact, the mud pie has no price at all.
A price, in the economic sense, exists only when an exchange takes place. Until then, what we observe are merely offers. The sticker price on a shelf is not yet a price; it is a proposal that buyers are free to accept or reject. If no transaction occurs, no price has emerged.
This distinction matters because it undermines the common belief that sellers determine prices. Sellers can propose prices, sure, but they cannot unilaterally create them. If consumers refuse to purchase a good at a given price, sellers must either lower the price, alter the product, or leave the market altogether.
This also helps clarify the relationship between prices and costs. While production costs may influence the prices sellers hope to receive, they do not determine market prices. Prices are governed by consumers’ subjective valuations — by how much value buyers believe they can derive from a good relative to other options.
This is why cost-of-production theories of price fail to explain real-world markets. They ignore the central role of consumer judgment and treat prices as if they were deliberately determined, rather than emerging from exchange.
Why Precision Matters
Confusing offers with prices leads to the mistaken belief that firms exploit consumers by arbitrarily raising prices. Confusing government spending with production leads to the belief that public projects can be evaluated independently of market feedback. In both cases, the underlying error is conceptual rather than empirical.
Economic reasoning depends on disciplined language. When we use economic terms loosely, we smuggle in assumptions that the theory itself does not support. The result is not merely academic confusion but policy proposals built on faulty foundations.
If we want better economic debates — and better economic policies — we must begin by taking economic concepts seriously. Without such precision, sound analysis is impossible.
