if economists wore T-shirts what they'd say is PRICES MAKE THE WORLD GO ROUND. Conventional economists are obsessed by prices. It took me ages to realise that economics isn't actually about the economy. It's about markets. So economists tend to ignore those parts of the economy that don't involve markets, such as the production and consumption of goods and services that go on inside households.
Economic sociologists also study markets and what they see is the way unwritten rules of social relationships influence the behaviour of producers and consumers, sellers and buyers.
Economists, however, don't see any of that. What they see is the way prices adjust until supply and demand are in balance ("equilibrium"). They see the price mechanism as the fulcrum on which the market economy rests.
Sometimes economists say economics is the study of incentives. That's just a fancy way of saying they study prices. Lower prices are an incentive to consumers to buy more, but an incentive to producers to produce less. Higher prices create the opposite incentives. Higher wages (which are a price) are an incentive to work more, and so forth.
But what fascinate economists are relative prices - the price of this item compared with the prices of other items. They think changes in relative prices have an almost magical ability to change people's behaviour.
Inflation involves rises in the level of prices generally. Economists disapprove of inflation mainly because when the prices of everything are rising this makes it harder for people to see and react to changes in the thing economists really care about: relative prices.
Last week an assistant governor of the Reserve Bank, Dr Philip Lowe, gave a speech in which he predicted the resources boom would cause a significant change in the structure of Australia's industries. What would bring this change about? Changes in relative prices, of course.
The most basic relative price in this story is our terms of trade - the prices we get for our exports relative to the prices we pay for our imports. The super-high prices we're getting for our coal and iron ore make our terms of trade possibly the most favourable they have ever been and about 90 per cent better than their average for the 1990s.
The change in this relative price is the main reason for the change in another key relative price: our exchange rate - the price of our dollar relative to the price of the US dollar, the yen or the euro.
But Lowe points to some relative price changes that are much less remarked. One is the price of manufactured goods (such as clothing, footwear, furniture and floor coverings, vehicles, audio, visual and computing equipment) relative to the price of other goods and services.
The prices of manufactures have been falling relative to the prices of services around the world for many years. This is because productivity in manufacturing has improved faster than productivity in services and because more of the world's manufacturing is being done in developing countries where labour is cheap.
But in recent years that process has been accelerated in Australia by the appreciation of the dollar. So much so that the Australian retail prices of manufactured goods (many of which are imported) have not only been falling relative to the prices of other goods and services, but also falling in absolute terms.
Looking at the consumer price index over 2010, the prices of other goods and services rose by about 7 percentage points more than the prices of manufactured goods.
The next important change in relative prices is the price of "investment goods" (machinery and equipment) relative to the price of "output" (all goods and services produced in Australia). When the price of new machines is low relative to the price of the goods and services produced using those investment goods, investment in new machines tends to be high - which is just what we've seen over the past decade.
The relative price of investment goods tends to be cyclical, but there is also a clear downward trend over time. This secular decline is driven largely by technological improvements lowering the price of computing power. But, again, the decline over the past decade has been particularly large because of the high dollar (much machinery is imported).
The final key change in relative prices is the price of labour. For workers, what matters is their wage relative to the price of the goods and services they buy with that wage. Economists call this the "real consumption wage".
For firms, what matters is the wages they pay relative to the prices they get for the goods and services they produce and sell. This is the "real producer wage". Usually, these two relative wages should be pretty similar because the goods and services people buy are much the same as the goods firms produce.
In recent years, however, this correspondence has broken down because of the improvement in the terms of trade. By definition, Australian firms produce exports but not imports, but Australian consumers buy imports but not exports.
Since 2000, the economy-wide ("aggregate") real consumption wage has risen by about 25 per cent (great news for workers), whereas the aggregate real producer wage has risen by only about 10 per cent (good news for firms).
But these aggregate figures conceal big differences between industries.
In industries where productivity is improving quickly - such as manufacturing - the real producer wage tends to rise because competition passes the benefits of the higher productivity through to customers in the form of lower prices.
By contrast, in many service industries real producer wages have been pretty flat. And in mining the real producer wage has fallen significantly: although miners' wages have grown very strongly, the prices the mining companies have been getting for their coal and iron ore have risen infinitely faster.
See where this is leading? All the relative price changes we've discussed will be working to change the allocation of resources within the economy in the same direction: away from manufacturing (and other export or import-competing industries, such as tourism) and towards mining and those parts of the manufacturing and services sectors that hang off it.
Mining's share of total annual private and public sector investment spending has reached almost 20 per cent - roughly double its usual share - and may rise as high as
25 per cent before long.
However, the great bulk of the economy - the services sector, accounting for more than three-quarters of total employment - will be little affected.
