GOVERNMENT PRICE-FIXING
WE HAVE SEEN what some of the effects are of governmental
efforts to fix the prices of commodities above the levels to which
free markets would otherwise have carried them. Let us now
look at some of the results of government attempts to hold the
prices of commodities below their natural market levels.
The latter attempt is made in our day by nearly all governments
in wartime. We shall not examine here the wisdom of
wartime price-fixing. The whole economy, in total war, is
necessarily dominated by the State, and the complications that
would have to be considered would carry us too far beyond the
main question with which this book is concerned.1 But wartime
price-fixing, wise or not, is in almost all countries continued for
at least long periods after the war is over, when the original
excuse for starting it has disappeared.
It is the wartime inflation that mainly causes the pressure for
price-fixing. At the time of writing, when practically every
country is inflating, though most of them are at peace, price
controls are always hinted at, even when they are not imposed.
Though they are always economically harmful, if not destruc-
1My own conclusion, however, is that, while some government priorities,
allocations or rationing may be unavoidable, government price-fixing is likely
to be especially harmful in total war. Whereas maximum price-fixing requires
rationing to make it work, even temporarily, the converse is not true.
tive, they have at least a political advantage from the standpoint
of the officeholders. By implication they put the blame for
higher prices on the greed and rapacity of businessmen, instead
of on the inflationary monetary policies of the officeholders
themselves.
Let us first see what happens when the government tries to
keep the price of a single commodity, or a small group of
commodities, below the price that would be set in a free competitive
market.
When the government tries to fix maximum prices for only a
few items, it usually chooses certain basic necessities, on the
ground that it is most essential that the poor be able to obtain
these at a "reasonable" cost. Let us say that the items chosen for
this purpose are bread, milk and meat.
The argument for holding down the price of these goods will
run something like this: If we leave beef (let us say) to the
mercies of the free market, the price will be pushed up by
competitive bidding so that only the rich will get it. People will
get beef not in proportion to their need, but only in proportion
to their purchasing power. If we keep the price down, everyone
will get his fair share.
The first thing to be noticed about this argument is that if it is
valid the policy adopted is inconsistent and timorous. For if
purchasing power rather than need determines the distribution
of beef at a market price of $2.25 cents a pound, it would also
determine it, though perhaps to a slightly smaller degree, at,
say, a legal "ceiling" price of $1.50 cents a pound. The
purchasing-power-rather-than-need argument, in fact, holds as
long as we charge anything for beef whatever. It would cease to
apply only if beef were given away.
But schemes for maximum price-fixing usually begin as efforts
to "keep the cost of living from rising." And so their
sponsors unconsciously assume that there is something peculiarly
"normal" or sacrosanct about the market price at the
moment from which their control starts. That starting or previous
price is regarded as "reasonable," and any price above that
as "unreasonable," regardless of changes in the conditions of
production or demand since that starting price was first established.
In discussing this subject, there is no point in assuming a
price control that would fix prices exactly where a free market
would place them in any case. That would be the same as
having no price control at all. We must assume that the purchasing
power in the hands of the public is greater than the supply
of goods available, and that prices are being held down by the
government below the levels to which a free market would put
them.
Now we cannot hold the price of any commodity below its
market level without in time bringing about two consequences.
The first is to increase the demand for that commodity. Because
the commodity is cheaper, people are both tempted to
buy, and can afford to buy, more of it. The second consequence
is to reduce the supply of that commodity. Because people buy
more, the accumulated supply is more quickly taken from the
shelves of merchants. But in addition to this, production of that
commodity is discouraged. Profit margins are reduced or
wiped out. The marginal producers are driven out of business.
Even the most efficient producers may be called upon to turn
out their product at a loss. This happened in World War II
when slaughter houses were required by the Office of Price
Administration to slaughter and process meat for less than the
cost to them of cattle on the hoof and the labor of slaughter and
processing.
If we did nothing else, therefore, the consequence of fixing a
maximum price for a particular commodity would be to bring
about a shortage of that commodity. But this is precisely the
opposite of what the government regulators originally wanted
to do. For it is the very commodities selected for maximum
price-fixing that the regulators most want to keep in abundant
supply. But when they limit the wages and the profits of those
who make these commodities, without also limiting the wages
and profits of those who make luxuries or semiluxuries, they
discourage the production of the price-controlled necessities
while they relatively stimulate the production of less essential
goods.
Some of these consequences in time become apparent to the
regulators, who then adopt various other devices and controls
in an attempt to avert them. Among these devices are rationing,
cost-control, subsidies, and universal price-fixing. Let us look
at each of these in turn.
When it becomes obvious that a shortage of some commodity
is developing as a result of a price fixed below the market, rich
consumers are accused of taking "more than their fair share";
or, if it is a raw material that enters into manufacture, individual
firms are accused of "hoarding" it. The government then
adopts a set of rules concerning who shall have priority in
buying that commodity, or to whom and in what quantities it
shall be allocated, or how it shall be rationed. If a rationing
system is adopted, it means that each consumer can have only a
certain maximum supply, no matter how much he is willing to
pay for more.
If a rationing system is adopted, in brief, it means that the
government adopts a double price system, or a dual currency
system, in which each consumer must have a certain number of
coupons or "points" in addition to a given amount of ordinary
money. In other words, the government tries to do through
rationing part of the job that a free market would have done
through prices. I say only part of the job, because rationing
merely limits the demand without also stimulating the supply,
as a higher price would have done.
The government may try to assure supply through extending
its control over the costs of production of a commodity. To hold
down the retail price of beef, for example, it may fix the
wholesale prices of beef, the slaughter-house price of beef, the
price of live cattle, the price of feed, the wages of farmhands.
To hold down the delivered price of milk, it may try to fix the
wages of milk truck drivers, the price of containers, the farm
price of milk, the price of feedstuffs. To fix the price of bread, it
may fix the wages in bakeries, the price of flour, the profits of
millers, the price of wheat, and so on.
But as the government extends this price-fixing backwards,
it extends at the same time the consequences that originally
drove it to this course. Assuming that it has the courage to fix
these costs, and is able to enforce its decisions, then it merely,
in turn, creates shortages of the various factors — labor, feedstuffs,
wheat, or whatever—that enter into the production of
the final commodities. 'Thus the government is driven to controls
in ever-widening circles, and the final consequence will be
the same as that of universal price-fixing.
The government may try to meet this difficulty through
subsidies. It recognizes, for example, that when it keeps the
price of milk or butter below the level of the market, or below
the relative level at which it fixes other prices, a shortage may
result because of lower wages or profit margins for the production
of milk or butter as compared with other commodities.
Therefore the government attempts to compensate for this by
paying a subsidy to the milk and butter producers. Passing over
the administrative difficulties involved in this, and assuming
that the subsidy is just enough to assure the desired relative
production of milk and butter, it is clear that, though the
subsidy is paid to producers, those who are really being subsidized
are the consumers. For the producers are on net balance
getting no more for their milk and butter than if they had been
allowed to charge the free market price in the first place; but the
consumers are getting their milk and butter at a great deal
below the free market price. They are being subsidized to the
extent of the difference — that is, by the amount of subsidy paid
ostensibly to the producers.
Now unless the subsidized commodity is also rationed, it is
those with the most purchasing power that can buy most of it.
This means that they are being subsidized more than those with
less purchasing power. Who subsidizes the consumers will
depend upon the incidence of taxation. But men in their role of
taxpayers will be subsidizing themselves in their role of con-
sumers. It becomes a little difficult to trace in this maze precisely
who is subsidizing whom. What is forgotten is that
subsidies are paid for by someone, and that no method has
been discovered by which the community gets something for
nothing.
Price-fixing may often appear for a short period to be successful.
It can seem to work well for a while, particularly in
wartime, when it is supported by patriotism and a sense of
crisis. But the longer it is in effect the more its difficulties
increase. When prices are arbitrarily held down by government
compulsion, demand is chronically in excess of supply. We have
seen that if the government attempts to prevent a shortage of a
commodity by reducing also the prices of the labor, raw materials
and other factors that go into its cost of production, it
creates a shortage of these in turn. But not only will the government,
if it pursues this course, find it necessary to extend
price control more and more downwards, or "vertically"; it will
find it no less necessary to extend price control "horizontally."
If we ration one commodity, and the public cannot get enough
of it, though it still has excess purchasing power, it will turn to
some substitute. The rationing of each commodity as it grows
scarce, in other words, must put more and more pressure on the
unrationed commodities that remain. If we assume that the
government is successful in its efforts to prevent black markets
(or at least prevents them from developing on a sufficient scale
to nullify its legal prices), continued price control must drive it
to the rationing of more and more commodities. This rationing
cannot stop with consumers. In World War II it did not stop
with consumers. It was applied first of all, in fact, in the
allocation of raw materials to producers.
The natural consequence of a thoroughgoing over-all price
control which seeks to perpetuate a given historic price level, in
brief, must ultimately be a completely regimented economy.
Wages would have to be held down as rigidly as prices. Labor
would have to be rationed as ruthlessly as raw materials. The
end result would be that the government would not only tell
each consumer precisely how much of each commodity he
could have; it would tell each manufacturer precisely what
quantity of each raw material he could have and what quantity
of labor. Competitive bidding for workers could no more be
tolerated than competitive bidding for materials. The result
would be petrified totalitarian economy, with every business
firm and every worker at the mercy of the government, and
with a final abandonment of all the traditional liberties we have
known. For as Alexander Hamilton pointed o u t in the Federalist
Papers nearly two centuries ago, "A power over a man's subsistence
amounts to a power over his will."
These are the consequences of what might be described as
"perfect," long-continued, and "nonpolitical" price control. As
was so amply demonstrated in one country after another, particularly
in Europe during and after World War II, some of the
more fantastic errors of the bureaucrats were mitigated by the
black market. In some countries the black market kept growing
at the expense of the legally recognized fixed-price market until
the former became, in effect, the market. By nominally keeping
the price ceilings, however, the politicians in power tried to
show that their hearts, if not their enforcement squads, were in
the right place.
Because the black market, however, finally supplanted the
legal price-ceiling market, it must not be supposed that no harm
was done. The harm was both economic and moral. During the
transition period the large, long-established firms, with a heavy
capital investment and a great dependence upon the retention
of public good-will, are forced to restrict or discontinue production.
Their place is taken by fly-by-night concerns with
little capital and little accumulated experience in production.
These new firms are inefficient compared with those they
displace; they turn out inferior and dishonest goods at much
higher production costs than the older concerns would have
required for continuing to turn out their former goods. A
premium is put on dishonesty. The new firms owe their very
existence or growth to the fact that they are willing to violate
the law; their customers conspire with them; and as a natural
consequence demoralization spreads into all business practices.
It is seldom, moreover, that any honest effort is made by the
price-fixing authorities merely to preserve the level of prices
existing when their efforts began. They declare that their intention
is to "hold the line." Soon, however, under the guise of
"correcting inequities" or "social injustices," they begin a discriminatory
price-fixing which gives most to those groups that
are politically powerful and least to other groups.
As political power today is most commonly measured by
votes, the groups that the authorities most often attempt to
favor are workers and farmers. At first it is contended that
wages and living costs are not connected; that wages can easily
be lifted without lifting prices. When it becomes obvious that
wages can be raised only at the expense of profits, the bureaucrats
begin to argue that profits were already too high anyway,
and that lifting wages and holding prices will still permit "a fair
pofit." As there is no such thing as a uniform rate of profit, as
profits differ with each concern, the result of this policy is to
drive the least profitable concerns out of business altogether,
and to discourage or stop the production of certain items. This
means unemployment, a shrinkage in production and a decline
in living standards.
What lies at the base of the whole effort to fix maximum
prices? There is first of all a misunderstanding of what it is that
has been causing prices to rise. The real cause is either a scarcity
of goods or a surplus of money. Legal price ceilings cannot cure
either. In fact, as we have just seen, they merely intensify the
shortage of goods. What to do about the surplus of money will
be discussed in a later chapter. But one of the errors that lie
behind the drive for price-fixing is the chief subject of this
book. Just as the endless plans for raising prices of favored
commodities are the result of thinking of the interests only of
the producers immediately concerned, and forgetting the interests
of consumers, so the plans for holding down prices by
legal edict are the result of thinking of the short-run interests of
people only as consumers and forgetting their interests as producers.
And the political support for such policies springs from
a similar confusion in the public mind. People do not want to
pay more for milk, butter, shoes, furniture, rent, theater tickets
or diamonds. Whenever any of these items rises above its
previous level the consumer becomes indignant, and feels that
he is being rooked.
The only exception is the item he makes himself: here he
understands and appreciates the reason for the rise. But he is
always likely to regard his own business as in some way an
exception. "Now my own business," he will say, "is peculiar,
and the public does not understand it. Labor costs have gone
up; raw material prices have gone up; this or that raw material is
no longer being imported, and must be made at a higher cost at
home. Moreover, the demand for the product has increased,
and the business should be allowed to charge the prices necessary
to encourage its expansion to supply this demand." And so
on. Everyone as consumer buys a hundred different products;
as producer he makes, usually, only one. He can see the inequity
in holding down the price of that. And just as each
manufacturer wants a higher price for his particular product, so
each worker wants a higher wage or salary. Each can see as
producer that price control is restricting production in his line.
But nearly everyone refuses to generalize this observation, for it
means that he will have to pay more for the products of others.
Each one of us, in brief, has a multiple economic personality.
Each one of us is producer, taxpayer, consumer. The policies
he advocates depend upon the particular aspect under which he
thinks of himself at the moment. For he is sometimes Dr. Jekyll
and sometimes Mr. Hyde. As a producer he wants inflation
(thinking chiefly of his own services or product); as a consumer
he wants price ceilings (thinking chiefly of what he has to pay
for the products of others). As a consumer he may advocate or
acquiesce in subsidies; as a taxpayer he will resent paying them.
Each person is likely to think that he can so manage the political
forces that he can benefit from a rise for his own product (while
his raw material costs are legally held down) and at the same
time benefit as a consumer from price control. But the overwhelming
majority will be deceiving themselves. For not only
must there be at least as much loss as gain from this political
manipulation of prices; there must be a great deal more loss than
gain, because price-fixing discourages and disrupts employment
and production.
WE HAVE SEEN what some of the effects are of governmental
efforts to fix the prices of commodities above the levels to which
free markets would otherwise have carried them. Let us now
look at some of the results of government attempts to hold the
prices of commodities below their natural market levels.
The latter attempt is made in our day by nearly all governments
in wartime. We shall not examine here the wisdom of
wartime price-fixing. The whole economy, in total war, is
necessarily dominated by the State, and the complications that
would have to be considered would carry us too far beyond the
main question with which this book is concerned.1 But wartime
price-fixing, wise or not, is in almost all countries continued for
at least long periods after the war is over, when the original
excuse for starting it has disappeared.
It is the wartime inflation that mainly causes the pressure for
price-fixing. At the time of writing, when practically every
country is inflating, though most of them are at peace, price
controls are always hinted at, even when they are not imposed.
Though they are always economically harmful, if not destruc-
1My own conclusion, however, is that, while some government priorities,
allocations or rationing may be unavoidable, government price-fixing is likely
to be especially harmful in total war. Whereas maximum price-fixing requires
rationing to make it work, even temporarily, the converse is not true.
tive, they have at least a political advantage from the standpoint
of the officeholders. By implication they put the blame for
higher prices on the greed and rapacity of businessmen, instead
of on the inflationary monetary policies of the officeholders
themselves.
Let us first see what happens when the government tries to
keep the price of a single commodity, or a small group of
commodities, below the price that would be set in a free competitive
market.
When the government tries to fix maximum prices for only a
few items, it usually chooses certain basic necessities, on the
ground that it is most essential that the poor be able to obtain
these at a "reasonable" cost. Let us say that the items chosen for
this purpose are bread, milk and meat.
The argument for holding down the price of these goods will
run something like this: If we leave beef (let us say) to the
mercies of the free market, the price will be pushed up by
competitive bidding so that only the rich will get it. People will
get beef not in proportion to their need, but only in proportion
to their purchasing power. If we keep the price down, everyone
will get his fair share.
The first thing to be noticed about this argument is that if it is
valid the policy adopted is inconsistent and timorous. For if
purchasing power rather than need determines the distribution
of beef at a market price of $2.25 cents a pound, it would also
determine it, though perhaps to a slightly smaller degree, at,
say, a legal "ceiling" price of $1.50 cents a pound. The
purchasing-power-rather-than-need argument, in fact, holds as
long as we charge anything for beef whatever. It would cease to
apply only if beef were given away.
But schemes for maximum price-fixing usually begin as efforts
to "keep the cost of living from rising." And so their
sponsors unconsciously assume that there is something peculiarly
"normal" or sacrosanct about the market price at the
moment from which their control starts. That starting or previous
price is regarded as "reasonable," and any price above that
as "unreasonable," regardless of changes in the conditions of
production or demand since that starting price was first established.
In discussing this subject, there is no point in assuming a
price control that would fix prices exactly where a free market
would place them in any case. That would be the same as
having no price control at all. We must assume that the purchasing
power in the hands of the public is greater than the supply
of goods available, and that prices are being held down by the
government below the levels to which a free market would put
them.
Now we cannot hold the price of any commodity below its
market level without in time bringing about two consequences.
The first is to increase the demand for that commodity. Because
the commodity is cheaper, people are both tempted to
buy, and can afford to buy, more of it. The second consequence
is to reduce the supply of that commodity. Because people buy
more, the accumulated supply is more quickly taken from the
shelves of merchants. But in addition to this, production of that
commodity is discouraged. Profit margins are reduced or
wiped out. The marginal producers are driven out of business.
Even the most efficient producers may be called upon to turn
out their product at a loss. This happened in World War II
when slaughter houses were required by the Office of Price
Administration to slaughter and process meat for less than the
cost to them of cattle on the hoof and the labor of slaughter and
processing.
If we did nothing else, therefore, the consequence of fixing a
maximum price for a particular commodity would be to bring
about a shortage of that commodity. But this is precisely the
opposite of what the government regulators originally wanted
to do. For it is the very commodities selected for maximum
price-fixing that the regulators most want to keep in abundant
supply. But when they limit the wages and the profits of those
who make these commodities, without also limiting the wages
and profits of those who make luxuries or semiluxuries, they
discourage the production of the price-controlled necessities
while they relatively stimulate the production of less essential
goods.
Some of these consequences in time become apparent to the
regulators, who then adopt various other devices and controls
in an attempt to avert them. Among these devices are rationing,
cost-control, subsidies, and universal price-fixing. Let us look
at each of these in turn.
When it becomes obvious that a shortage of some commodity
is developing as a result of a price fixed below the market, rich
consumers are accused of taking "more than their fair share";
or, if it is a raw material that enters into manufacture, individual
firms are accused of "hoarding" it. The government then
adopts a set of rules concerning who shall have priority in
buying that commodity, or to whom and in what quantities it
shall be allocated, or how it shall be rationed. If a rationing
system is adopted, it means that each consumer can have only a
certain maximum supply, no matter how much he is willing to
pay for more.
If a rationing system is adopted, in brief, it means that the
government adopts a double price system, or a dual currency
system, in which each consumer must have a certain number of
coupons or "points" in addition to a given amount of ordinary
money. In other words, the government tries to do through
rationing part of the job that a free market would have done
through prices. I say only part of the job, because rationing
merely limits the demand without also stimulating the supply,
as a higher price would have done.
The government may try to assure supply through extending
its control over the costs of production of a commodity. To hold
down the retail price of beef, for example, it may fix the
wholesale prices of beef, the slaughter-house price of beef, the
price of live cattle, the price of feed, the wages of farmhands.
To hold down the delivered price of milk, it may try to fix the
wages of milk truck drivers, the price of containers, the farm
price of milk, the price of feedstuffs. To fix the price of bread, it
may fix the wages in bakeries, the price of flour, the profits of
millers, the price of wheat, and so on.
But as the government extends this price-fixing backwards,
it extends at the same time the consequences that originally
drove it to this course. Assuming that it has the courage to fix
these costs, and is able to enforce its decisions, then it merely,
in turn, creates shortages of the various factors — labor, feedstuffs,
wheat, or whatever—that enter into the production of
the final commodities. 'Thus the government is driven to controls
in ever-widening circles, and the final consequence will be
the same as that of universal price-fixing.
The government may try to meet this difficulty through
subsidies. It recognizes, for example, that when it keeps the
price of milk or butter below the level of the market, or below
the relative level at which it fixes other prices, a shortage may
result because of lower wages or profit margins for the production
of milk or butter as compared with other commodities.
Therefore the government attempts to compensate for this by
paying a subsidy to the milk and butter producers. Passing over
the administrative difficulties involved in this, and assuming
that the subsidy is just enough to assure the desired relative
production of milk and butter, it is clear that, though the
subsidy is paid to producers, those who are really being subsidized
are the consumers. For the producers are on net balance
getting no more for their milk and butter than if they had been
allowed to charge the free market price in the first place; but the
consumers are getting their milk and butter at a great deal
below the free market price. They are being subsidized to the
extent of the difference — that is, by the amount of subsidy paid
ostensibly to the producers.
Now unless the subsidized commodity is also rationed, it is
those with the most purchasing power that can buy most of it.
This means that they are being subsidized more than those with
less purchasing power. Who subsidizes the consumers will
depend upon the incidence of taxation. But men in their role of
taxpayers will be subsidizing themselves in their role of con-
sumers. It becomes a little difficult to trace in this maze precisely
who is subsidizing whom. What is forgotten is that
subsidies are paid for by someone, and that no method has
been discovered by which the community gets something for
nothing.
Price-fixing may often appear for a short period to be successful.
It can seem to work well for a while, particularly in
wartime, when it is supported by patriotism and a sense of
crisis. But the longer it is in effect the more its difficulties
increase. When prices are arbitrarily held down by government
compulsion, demand is chronically in excess of supply. We have
seen that if the government attempts to prevent a shortage of a
commodity by reducing also the prices of the labor, raw materials
and other factors that go into its cost of production, it
creates a shortage of these in turn. But not only will the government,
if it pursues this course, find it necessary to extend
price control more and more downwards, or "vertically"; it will
find it no less necessary to extend price control "horizontally."
If we ration one commodity, and the public cannot get enough
of it, though it still has excess purchasing power, it will turn to
some substitute. The rationing of each commodity as it grows
scarce, in other words, must put more and more pressure on the
unrationed commodities that remain. If we assume that the
government is successful in its efforts to prevent black markets
(or at least prevents them from developing on a sufficient scale
to nullify its legal prices), continued price control must drive it
to the rationing of more and more commodities. This rationing
cannot stop with consumers. In World War II it did not stop
with consumers. It was applied first of all, in fact, in the
allocation of raw materials to producers.
The natural consequence of a thoroughgoing over-all price
control which seeks to perpetuate a given historic price level, in
brief, must ultimately be a completely regimented economy.
Wages would have to be held down as rigidly as prices. Labor
would have to be rationed as ruthlessly as raw materials. The
end result would be that the government would not only tell
each consumer precisely how much of each commodity he
could have; it would tell each manufacturer precisely what
quantity of each raw material he could have and what quantity
of labor. Competitive bidding for workers could no more be
tolerated than competitive bidding for materials. The result
would be petrified totalitarian economy, with every business
firm and every worker at the mercy of the government, and
with a final abandonment of all the traditional liberties we have
known. For as Alexander Hamilton pointed o u t in the Federalist
Papers nearly two centuries ago, "A power over a man's subsistence
amounts to a power over his will."
These are the consequences of what might be described as
"perfect," long-continued, and "nonpolitical" price control. As
was so amply demonstrated in one country after another, particularly
in Europe during and after World War II, some of the
more fantastic errors of the bureaucrats were mitigated by the
black market. In some countries the black market kept growing
at the expense of the legally recognized fixed-price market until
the former became, in effect, the market. By nominally keeping
the price ceilings, however, the politicians in power tried to
show that their hearts, if not their enforcement squads, were in
the right place.
Because the black market, however, finally supplanted the
legal price-ceiling market, it must not be supposed that no harm
was done. The harm was both economic and moral. During the
transition period the large, long-established firms, with a heavy
capital investment and a great dependence upon the retention
of public good-will, are forced to restrict or discontinue production.
Their place is taken by fly-by-night concerns with
little capital and little accumulated experience in production.
These new firms are inefficient compared with those they
displace; they turn out inferior and dishonest goods at much
higher production costs than the older concerns would have
required for continuing to turn out their former goods. A
premium is put on dishonesty. The new firms owe their very
existence or growth to the fact that they are willing to violate
the law; their customers conspire with them; and as a natural
consequence demoralization spreads into all business practices.
It is seldom, moreover, that any honest effort is made by the
price-fixing authorities merely to preserve the level of prices
existing when their efforts began. They declare that their intention
is to "hold the line." Soon, however, under the guise of
"correcting inequities" or "social injustices," they begin a discriminatory
price-fixing which gives most to those groups that
are politically powerful and least to other groups.
As political power today is most commonly measured by
votes, the groups that the authorities most often attempt to
favor are workers and farmers. At first it is contended that
wages and living costs are not connected; that wages can easily
be lifted without lifting prices. When it becomes obvious that
wages can be raised only at the expense of profits, the bureaucrats
begin to argue that profits were already too high anyway,
and that lifting wages and holding prices will still permit "a fair
pofit." As there is no such thing as a uniform rate of profit, as
profits differ with each concern, the result of this policy is to
drive the least profitable concerns out of business altogether,
and to discourage or stop the production of certain items. This
means unemployment, a shrinkage in production and a decline
in living standards.
What lies at the base of the whole effort to fix maximum
prices? There is first of all a misunderstanding of what it is that
has been causing prices to rise. The real cause is either a scarcity
of goods or a surplus of money. Legal price ceilings cannot cure
either. In fact, as we have just seen, they merely intensify the
shortage of goods. What to do about the surplus of money will
be discussed in a later chapter. But one of the errors that lie
behind the drive for price-fixing is the chief subject of this
book. Just as the endless plans for raising prices of favored
commodities are the result of thinking of the interests only of
the producers immediately concerned, and forgetting the interests
of consumers, so the plans for holding down prices by
legal edict are the result of thinking of the short-run interests of
people only as consumers and forgetting their interests as producers.
And the political support for such policies springs from
a similar confusion in the public mind. People do not want to
pay more for milk, butter, shoes, furniture, rent, theater tickets
or diamonds. Whenever any of these items rises above its
previous level the consumer becomes indignant, and feels that
he is being rooked.
The only exception is the item he makes himself: here he
understands and appreciates the reason for the rise. But he is
always likely to regard his own business as in some way an
exception. "Now my own business," he will say, "is peculiar,
and the public does not understand it. Labor costs have gone
up; raw material prices have gone up; this or that raw material is
no longer being imported, and must be made at a higher cost at
home. Moreover, the demand for the product has increased,
and the business should be allowed to charge the prices necessary
to encourage its expansion to supply this demand." And so
on. Everyone as consumer buys a hundred different products;
as producer he makes, usually, only one. He can see the inequity
in holding down the price of that. And just as each
manufacturer wants a higher price for his particular product, so
each worker wants a higher wage or salary. Each can see as
producer that price control is restricting production in his line.
But nearly everyone refuses to generalize this observation, for it
means that he will have to pay more for the products of others.
Each one of us, in brief, has a multiple economic personality.
Each one of us is producer, taxpayer, consumer. The policies
he advocates depend upon the particular aspect under which he
thinks of himself at the moment. For he is sometimes Dr. Jekyll
and sometimes Mr. Hyde. As a producer he wants inflation
(thinking chiefly of his own services or product); as a consumer
he wants price ceilings (thinking chiefly of what he has to pay
for the products of others). As a consumer he may advocate or
acquiesce in subsidies; as a taxpayer he will resent paying them.
Each person is likely to think that he can so manage the political
forces that he can benefit from a rise for his own product (while
his raw material costs are legally held down) and at the same
time benefit as a consumer from price control. But the overwhelming
majority will be deceiving themselves. For not only
must there be at least as much loss as gain from this political
manipulation of prices; there must be a great deal more loss than
gain, because price-fixing discourages and disrupts employment
and production.
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