" PARITY" PRICES
SPECIAL INTERESTS, as the history of tariffs reminds us, can
think of the most ingenious reasons why they should be the
objects of special solicitude. Their spokesmen present a plan in
their favor; 2nd it seems at first so absurd that disinterested
writers do not trouble to expose it. But the special interests keep
on insisting on the scheme. Its enactment would make so much
difference to their own immediate welfare that they can afford
to hire trained economists and public relations experts to
propagate it in their behalf. The public hears the argument SO
often repeated, and accompanied by such a wealth of imposing
statistics. charts, curves and pie-slices, that it is soon taken in.
When at last disinterested writers recognize that the danger of
the scheme's enactment is real, they are usually too late. They
cannot in a few weeks acquaint themselves with the subject as
thoroughly as the hired brains who have been devoting their
full time to it for years; they are accused of being uninformed,
and they have the air of men who presume to dispute axioms.
This general history will do as a history of the idea of "parity"
prices for agricultural products. I forget the first day when it
made its appearance in a legislative bill; but with the advent of
the New Deal in 1933 it had become a definitely established
principle, enacted into law; and as year succeeded year, and its
absurd corollaries made themselves manifest, they were
enacted too.
The argument for parity prices ran roughly like this. Agriculture
is the most basic and important of all industries. It
must be preserved at all costs. Moreover, the prosperity of
everybody else depends upon the prosperity of the farmer. If he
does not have the purchasing power to buy the products of
industry, industry languishes. This was the cause of the 1929
collapse, or at least of our failure to recover from it. For the
prices of farm products dropped violently, while the prices of
industrial products dropped very little. The result was that the
farmer could not buy industrial products; the city workers were
laid off and could not buy farm products, and the depression
spread in ever-widening vicious circles. There was only one
cure, and it was simple. Bring back the prices of the farmer's
products to a parity with the prices of the things the farmer
buys. This parity existed in the period from 1909 to 1914, when
farmers were prosperous. That price relationship must be restored
and preserved perpetually.
It would take too long, and carry us too far from our main
point, to examine every absurdity concealed in this plausible
statement. There is no sound reason for taking the particular
price relationships that prevailed in a particular year or period
and regarding them as sacrosanct, or even as necessarily more
"normal" than those of any other period. Even if they were
"normal" at the time, what reason is there to suppose that these
same relationships should be preserved more than sixty years
later in spite of the enormous changes in the conditions of
production and demand that have taken place in the meantime?
The period of 1909 to 1914, as the basis of parity, was not
selected at random. In terms of relative prices it was one of the
most favorable periods to agriculture in our entire history.
If there had been any sincerity or logic in the idea, it would
have been universally extended. If the price relationships between
agricultural and industrial products that prevailed from
August 1909 to July 1914 ought to be preserved perpetually,
why not preserve perpetually the price relationship of every
commodity at that time to every other?
When the first edition of this book appeared in 1946, I used
the following illustrations of the absurdities to which this
would have led:
A Chevrolet six-cylinder touring car cost $2,150
in 1912; an incomparably improved six-cylinder
Chevrolet sedan cost $907 in 1942; adjusted for "parity"
on the same basis as farm products, however, it
would have cost $3,270 in 1942. A pound of
aluminum from 1909 to 1913 inclusive averaged 22.5
cents; its price early in 1946 was 14 cents; but at
"parity" it would then have cost, instead, 41 cents.
It would be both difficult and debatable to try to bring these
two particular comparisons down to date by adjusting not only
for the serious inflation (consumer prices have more than tripled)
between 1946 and 1978, but also for the qualitative differences
in automobiles in the two periods. But this difficulty
merely emphasizes the impracticability of the proposal.
After making, in the 1946 edition, the comparison quoted
above, I went on to point out that the same type of increase in
productivity had in part led also to the lower prices of farm
products. "In the five year period 1955 through 1959 an average
of 428 pounds of cotton was raised per acre in the United States
as compared with an average of 260 pounds in the five-year
period 1939 to 1943 and an average of only 188 pounds in the
five year 'base' period 1909 to 1913." When these comparisons
are brought down to date, they show that the increase in farm
productivity has continued, though at a reduced rate. In the
five-year period 1968 to 1972, an average of 467 pounds of
cotton was raised per acre. Similarly, in the five years 1968 to
1972 an average of 84 bushels of corn per acre was raised
compared with an average of only 26.1 bushels in 1935 to 1939,
and an average of 31.3 bushels of wheat was raised per acre
compared with an average of only 13.2 in the earlier period.
Costs of production have been substantially lowered for farm
products by better application of chemical fertilizer, improved
strains of seed and increasing mechanization. In the 1946 edition
I made the following quotation: "On some large farms
which have been completely mechanized and are operated
along mass production lines, it requires only one-third to onefifth
the amount of labor to produce the same yields as it did a
few years back."1 Yet all this is ignored by the apostles of
"parity" prices.
The refusal to universalize the principle is not the only
evidence that it is not a public-spirited economic plan but
merely a device for subsidizing a special interest. Another
evidence is that when agricultural prices go above parity, or are
forced there by government policies, there is no demand on the
part of the farm bloc in Congress that such prices be brought
down to parity, or that the subsidy be to that extent repaid. It is
a rule that works only one way.
Dismissing all these considerations, let us return to the central
fallacy that specifically concerns us here. This is the argument
that if the farmer gets higher prices for his products he can buy
more goods from industry and so make industry prosperous
and bring full employment. It does not matter to this argument,
of course, whether or not the farmer gets specifically so-called
parity prices.
Everything, however, depends on how these higher prices
are brought about. If they are the result of a general revival, if
they follow from increased prosperity of business, increased
1New York Times, January 2, 1946. Of course the acreage restriction plans
themselves helped to bring about the increased crop yields per acre—first,
because the acres that farmers took out of cultivation were naturally their least
productive; and secondly, because the high support price made it profitable to
increase the dosage of fertilizer per acre. Thus the government acreage
restriction plans were largely self-defeating.
industrial production and increased purchasing power of city
workers (not brought about by inflation), then they can indeed
mean increased prosperity and production not only for the
farmers, but for everyone. But what we are discussing is a rise
in farm prices brought about by government intervention. This
can be done in several ways. The higher price can be forced by
mere edict, which is the least workable method. It can be
brought about by the government's standing ready to buy all
the farm products offered to it at the parity price. It can be
brought about by the government's lending to farmers enough
money on their crops to enable them to hold the crops off the
market until parity or a higher price is realized. It can be
brought about by the government's enforcing restrictions in the
size of crops. It can be brought about, as it often is in practice,
by a combination of these methods. For the moment we shall
simply assume that, by whatever method, it is in any case
brought about.
What is the result? The farmers get higher prices for their
crops. In spite of reduced production, say, their "purchasing
power" is thereby increased. They are for the time being more
prosperous themselves, and they buy more of the products of
industry. All this is what is seen by those who look merely at
the immediate consequences of policies to the groups directly
involved.
But there is another consequence, no less inevitable. Suppose
the wheat which would otherwise sell at $2.50 a bushel is
pushed up by this policy to $3.50. The farmer gets $1 a bushel
more for wheat. But the city worker, by precisely the same
change, pays $1 a bushel more for wheat in an increased price of
bread. The same thing is true of any other farm product. If the
farmer then has $1 more purchasing power to buy industrial
products, the city worker has precisely that much less purchasing
power to buy industrial products. On net balance industry
in general has gained nothing. It loses in city sales precisely as
much as it gains in rural sales.
There is of course a change in the incidence of these sales; No
doubt the agricultural-implement makers and the mail-order
houses do a better business. But the city department stores do a
smaller business.
The matter, however, does not end there. The policy results
not merely in no net gain, but in a net loss. For it does not mean
merely a transfer of purchasing power to the farmer from city
consumers, or from the general taxpayer, or from both. It also
frequently means a forced cut in the production of farm commodities
to bring up the price. This means a destruction of
wealth. It means that there is less food to be consumed. How
this destruction of wealth is brought about will depend upon
the particular method pursued to bring prices up. It may mean
the actual physical destruction of what has already been produced,
as in the burning of coffee in Brazil. It may mean a
forced restriction of acreage, as in the American AAA plan, or
its revival. We shall examine the effect of some of these methods
when we come to the broader discussion of government commodity
controls.
But here it may be pointed out that when the farmer reduces
the production of wheat to get parity, he may indeed get a
higher price for each bushel, but he produces and sells fewer
bushels. The result is that his income does not go up in proportion
to his prices. Even some of the advocates of parity prices
recognize this, and use it as an argument to go on to insist upon
parity income for farmers. But this can only be achieved by a
subsidy at the direct expense of taxpayers. To help the farmers,
in other words, it merely reduces the purchasing power of city
workers and other groups still more.
There is one argument for parity prices that should be dealt
with before we leave the subject. It is put forward by some of
the more sophisticated defenders. "Yes," they will freely
admit, "the economic arguments for parity prices are unsound.
Such prices are a special privilege. They are an imposition on
the consumer. But isn't the tariff an imposition on the farmer?
Doesn't he have to pay higher prices on industrial products
because of it? It would do no good to place a compensating tariff
on farm products, because America is a net exporter of farm
products. Now the parity-price system is the farmer's equivalent
of the tariff. It is the only fair way to even things up."
The farmers that asked for parity prices did have a legitimate
complaint. The protective tariff injured them more than they
knew. By reducing industrial imports it also reduced American
farm exports, because it prevented foreign nations from getting
the dollar exchange needed for taking our agricultural products.
And it provoked retaliatory tariffs in other countries.
Nonetheless, the argument we have just quoted will not stand
examination. It is wrong even in its implied statement of the
facts. There is no general tariff on all "industrial" products or on
all nonfarm products. There are scores of domestic industries
or of exporting industries that have no tariff protection. If the
city worker has to pay a higher price for woolen blankets or
overcoats because of a tariff, is he "compensated" by having to
pay a higher price also for cotton clothing and for foodstuffs?
Or is he merely being robbed twice?
Let us even it all out, say some, by giving equal "protection"
to everybody. But that is insoluble and impossible. Even if we
assume that the problem could be solved technically — a tariff
for A, an industrialist subject to foreign competition; a subsidy
for B, an industrialist who exports his product—it would be
impossible to protect or to subsidize everybody "fairly" or
equally. We should have to give everyone the same percentage
(or would it be the same dollar amount?) of tariff protection or
subsidy, and we could never be sure when we were duplicating
payments to some groups or leaving gaps with others.
But suppose we could solve this fantastic problem? What
would be the point? Who gains when everyone equally subsidizes
everyone else? What is the profit when everyone loses in
added taxes precisely what he gains by his subsidy or his
protection? We should merely have added an army of needless
bureaucrats to carry out the program, with all of them lost to
production.
We could solve the matter simply, on the other hand, by
ending both the parity-price system and the protective-tariff
system. Meanwhile they do not, in combination, even out
anything. The joint system means merely that Farmer A and
Industrialist B both profit at the expense of Forgotten Man C.
So the alleged benefits of still another scheme evaporate as
soon as we trace not only its immediate effects on a special
group but its long-run effects on everyone.
SPECIAL INTERESTS, as the history of tariffs reminds us, can
think of the most ingenious reasons why they should be the
objects of special solicitude. Their spokesmen present a plan in
their favor; 2nd it seems at first so absurd that disinterested
writers do not trouble to expose it. But the special interests keep
on insisting on the scheme. Its enactment would make so much
difference to their own immediate welfare that they can afford
to hire trained economists and public relations experts to
propagate it in their behalf. The public hears the argument SO
often repeated, and accompanied by such a wealth of imposing
statistics. charts, curves and pie-slices, that it is soon taken in.
When at last disinterested writers recognize that the danger of
the scheme's enactment is real, they are usually too late. They
cannot in a few weeks acquaint themselves with the subject as
thoroughly as the hired brains who have been devoting their
full time to it for years; they are accused of being uninformed,
and they have the air of men who presume to dispute axioms.
This general history will do as a history of the idea of "parity"
prices for agricultural products. I forget the first day when it
made its appearance in a legislative bill; but with the advent of
the New Deal in 1933 it had become a definitely established
principle, enacted into law; and as year succeeded year, and its
absurd corollaries made themselves manifest, they were
enacted too.
The argument for parity prices ran roughly like this. Agriculture
is the most basic and important of all industries. It
must be preserved at all costs. Moreover, the prosperity of
everybody else depends upon the prosperity of the farmer. If he
does not have the purchasing power to buy the products of
industry, industry languishes. This was the cause of the 1929
collapse, or at least of our failure to recover from it. For the
prices of farm products dropped violently, while the prices of
industrial products dropped very little. The result was that the
farmer could not buy industrial products; the city workers were
laid off and could not buy farm products, and the depression
spread in ever-widening vicious circles. There was only one
cure, and it was simple. Bring back the prices of the farmer's
products to a parity with the prices of the things the farmer
buys. This parity existed in the period from 1909 to 1914, when
farmers were prosperous. That price relationship must be restored
and preserved perpetually.
It would take too long, and carry us too far from our main
point, to examine every absurdity concealed in this plausible
statement. There is no sound reason for taking the particular
price relationships that prevailed in a particular year or period
and regarding them as sacrosanct, or even as necessarily more
"normal" than those of any other period. Even if they were
"normal" at the time, what reason is there to suppose that these
same relationships should be preserved more than sixty years
later in spite of the enormous changes in the conditions of
production and demand that have taken place in the meantime?
The period of 1909 to 1914, as the basis of parity, was not
selected at random. In terms of relative prices it was one of the
most favorable periods to agriculture in our entire history.
If there had been any sincerity or logic in the idea, it would
have been universally extended. If the price relationships between
agricultural and industrial products that prevailed from
August 1909 to July 1914 ought to be preserved perpetually,
why not preserve perpetually the price relationship of every
commodity at that time to every other?
When the first edition of this book appeared in 1946, I used
the following illustrations of the absurdities to which this
would have led:
A Chevrolet six-cylinder touring car cost $2,150
in 1912; an incomparably improved six-cylinder
Chevrolet sedan cost $907 in 1942; adjusted for "parity"
on the same basis as farm products, however, it
would have cost $3,270 in 1942. A pound of
aluminum from 1909 to 1913 inclusive averaged 22.5
cents; its price early in 1946 was 14 cents; but at
"parity" it would then have cost, instead, 41 cents.
It would be both difficult and debatable to try to bring these
two particular comparisons down to date by adjusting not only
for the serious inflation (consumer prices have more than tripled)
between 1946 and 1978, but also for the qualitative differences
in automobiles in the two periods. But this difficulty
merely emphasizes the impracticability of the proposal.
After making, in the 1946 edition, the comparison quoted
above, I went on to point out that the same type of increase in
productivity had in part led also to the lower prices of farm
products. "In the five year period 1955 through 1959 an average
of 428 pounds of cotton was raised per acre in the United States
as compared with an average of 260 pounds in the five-year
period 1939 to 1943 and an average of only 188 pounds in the
five year 'base' period 1909 to 1913." When these comparisons
are brought down to date, they show that the increase in farm
productivity has continued, though at a reduced rate. In the
five-year period 1968 to 1972, an average of 467 pounds of
cotton was raised per acre. Similarly, in the five years 1968 to
1972 an average of 84 bushels of corn per acre was raised
compared with an average of only 26.1 bushels in 1935 to 1939,
and an average of 31.3 bushels of wheat was raised per acre
compared with an average of only 13.2 in the earlier period.
Costs of production have been substantially lowered for farm
products by better application of chemical fertilizer, improved
strains of seed and increasing mechanization. In the 1946 edition
I made the following quotation: "On some large farms
which have been completely mechanized and are operated
along mass production lines, it requires only one-third to onefifth
the amount of labor to produce the same yields as it did a
few years back."1 Yet all this is ignored by the apostles of
"parity" prices.
The refusal to universalize the principle is not the only
evidence that it is not a public-spirited economic plan but
merely a device for subsidizing a special interest. Another
evidence is that when agricultural prices go above parity, or are
forced there by government policies, there is no demand on the
part of the farm bloc in Congress that such prices be brought
down to parity, or that the subsidy be to that extent repaid. It is
a rule that works only one way.
Dismissing all these considerations, let us return to the central
fallacy that specifically concerns us here. This is the argument
that if the farmer gets higher prices for his products he can buy
more goods from industry and so make industry prosperous
and bring full employment. It does not matter to this argument,
of course, whether or not the farmer gets specifically so-called
parity prices.
Everything, however, depends on how these higher prices
are brought about. If they are the result of a general revival, if
they follow from increased prosperity of business, increased
1New York Times, January 2, 1946. Of course the acreage restriction plans
themselves helped to bring about the increased crop yields per acre—first,
because the acres that farmers took out of cultivation were naturally their least
productive; and secondly, because the high support price made it profitable to
increase the dosage of fertilizer per acre. Thus the government acreage
restriction plans were largely self-defeating.
industrial production and increased purchasing power of city
workers (not brought about by inflation), then they can indeed
mean increased prosperity and production not only for the
farmers, but for everyone. But what we are discussing is a rise
in farm prices brought about by government intervention. This
can be done in several ways. The higher price can be forced by
mere edict, which is the least workable method. It can be
brought about by the government's standing ready to buy all
the farm products offered to it at the parity price. It can be
brought about by the government's lending to farmers enough
money on their crops to enable them to hold the crops off the
market until parity or a higher price is realized. It can be
brought about by the government's enforcing restrictions in the
size of crops. It can be brought about, as it often is in practice,
by a combination of these methods. For the moment we shall
simply assume that, by whatever method, it is in any case
brought about.
What is the result? The farmers get higher prices for their
crops. In spite of reduced production, say, their "purchasing
power" is thereby increased. They are for the time being more
prosperous themselves, and they buy more of the products of
industry. All this is what is seen by those who look merely at
the immediate consequences of policies to the groups directly
involved.
But there is another consequence, no less inevitable. Suppose
the wheat which would otherwise sell at $2.50 a bushel is
pushed up by this policy to $3.50. The farmer gets $1 a bushel
more for wheat. But the city worker, by precisely the same
change, pays $1 a bushel more for wheat in an increased price of
bread. The same thing is true of any other farm product. If the
farmer then has $1 more purchasing power to buy industrial
products, the city worker has precisely that much less purchasing
power to buy industrial products. On net balance industry
in general has gained nothing. It loses in city sales precisely as
much as it gains in rural sales.
There is of course a change in the incidence of these sales; No
doubt the agricultural-implement makers and the mail-order
houses do a better business. But the city department stores do a
smaller business.
The matter, however, does not end there. The policy results
not merely in no net gain, but in a net loss. For it does not mean
merely a transfer of purchasing power to the farmer from city
consumers, or from the general taxpayer, or from both. It also
frequently means a forced cut in the production of farm commodities
to bring up the price. This means a destruction of
wealth. It means that there is less food to be consumed. How
this destruction of wealth is brought about will depend upon
the particular method pursued to bring prices up. It may mean
the actual physical destruction of what has already been produced,
as in the burning of coffee in Brazil. It may mean a
forced restriction of acreage, as in the American AAA plan, or
its revival. We shall examine the effect of some of these methods
when we come to the broader discussion of government commodity
controls.
But here it may be pointed out that when the farmer reduces
the production of wheat to get parity, he may indeed get a
higher price for each bushel, but he produces and sells fewer
bushels. The result is that his income does not go up in proportion
to his prices. Even some of the advocates of parity prices
recognize this, and use it as an argument to go on to insist upon
parity income for farmers. But this can only be achieved by a
subsidy at the direct expense of taxpayers. To help the farmers,
in other words, it merely reduces the purchasing power of city
workers and other groups still more.
There is one argument for parity prices that should be dealt
with before we leave the subject. It is put forward by some of
the more sophisticated defenders. "Yes," they will freely
admit, "the economic arguments for parity prices are unsound.
Such prices are a special privilege. They are an imposition on
the consumer. But isn't the tariff an imposition on the farmer?
Doesn't he have to pay higher prices on industrial products
because of it? It would do no good to place a compensating tariff
on farm products, because America is a net exporter of farm
products. Now the parity-price system is the farmer's equivalent
of the tariff. It is the only fair way to even things up."
The farmers that asked for parity prices did have a legitimate
complaint. The protective tariff injured them more than they
knew. By reducing industrial imports it also reduced American
farm exports, because it prevented foreign nations from getting
the dollar exchange needed for taking our agricultural products.
And it provoked retaliatory tariffs in other countries.
Nonetheless, the argument we have just quoted will not stand
examination. It is wrong even in its implied statement of the
facts. There is no general tariff on all "industrial" products or on
all nonfarm products. There are scores of domestic industries
or of exporting industries that have no tariff protection. If the
city worker has to pay a higher price for woolen blankets or
overcoats because of a tariff, is he "compensated" by having to
pay a higher price also for cotton clothing and for foodstuffs?
Or is he merely being robbed twice?
Let us even it all out, say some, by giving equal "protection"
to everybody. But that is insoluble and impossible. Even if we
assume that the problem could be solved technically — a tariff
for A, an industrialist subject to foreign competition; a subsidy
for B, an industrialist who exports his product—it would be
impossible to protect or to subsidize everybody "fairly" or
equally. We should have to give everyone the same percentage
(or would it be the same dollar amount?) of tariff protection or
subsidy, and we could never be sure when we were duplicating
payments to some groups or leaving gaps with others.
But suppose we could solve this fantastic problem? What
would be the point? Who gains when everyone equally subsidizes
everyone else? What is the profit when everyone loses in
added taxes precisely what he gains by his subsidy or his
protection? We should merely have added an army of needless
bureaucrats to carry out the program, with all of them lost to
production.
We could solve the matter simply, on the other hand, by
ending both the parity-price system and the protective-tariff
system. Meanwhile they do not, in combination, even out
anything. The joint system means merely that Farmer A and
Industrialist B both profit at the expense of Forgotten Man C.
So the alleged benefits of still another scheme evaporate as
soon as we trace not only its immediate effects on a special
group but its long-run effects on everyone.
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