What Comes First, Price or Cost?

In their purest form, capitalists and socialists have a fundamental difference on how a product ought to be priced in the marketplace. Let's begin with the socialists. Socialists predominantly base business enterprise decisions on cost. To arrive at an appropriate product price, they add up the labor costs, material costs, and other costs associated with taking the product to market. To this sum they add whatever profit margin they view as essential, and this brings them to a grand total: the product price.

If foreign competitors offer the product at a lower price, then socialists decry unfair trade agreements and scream for protectionist measures such as tariffs that are aimed at elevating the competition's cost, and by extension, the competitor's price. Lowering their own price is not the solution, especially when rigormortis sets in on their sacred "cost + margin = price" mentality. Who suffers from this wrongheadedness? The consumer for one and any notion of business sanity for another. The socialists have it backwards because their stale process leads to political barriers that reward inefficiencies.

By dramatic contrast, a capitalist focuses on price as the key determinant. What price will be the most attractive to capture consumers in a competitive marketplace? Once that price is established, the capitalist organizes himself to arrive at a cost structure that will permit the delivery of the product and leave a residual profit. This process forces the free marketer to develop all sorts of increased productivity measures,  sound organization, efficient use of labor, technological progress, optimal distribution channels etc... It is this very effort to construct a cost structure that can work within the constraints of the price limitation that has brought us marvelous new technology, workplace enhancements, and general business innovation. It leads to economic growth.

Here's a riddle: What happens when you cross a free market-created price constraint with a labor union/protectionist business organization? You get huge losses with no flexibility to change because the cost structure is rigid. You get Detroit.