STABILIZING" COMMODITIES
ATTEMPTS TO LIFT the prices of particular commodities permanently
above their natural market levels have failed so often,
so disastrously and so notoriously that sophisticated pressure
groups, and the bureaucrats upon whom they apply the pressure,
seldom openly avow that aim. Their stated aims, particularly
when they are first proposing that the government intervene,
are usually more modest, and more plausible.
They have no wish, they declare, to raise the price of commodity
X permanently above its natural level. That, they
concede, would be unfair to consumers. But it is now obviously
selling far below its natural level. The producers cannot make a
living. Unless we act promptly, they will be thrown out of
business. Then there will be a real scarcity, and consumers will
have to pay exorbitant prices for the commodity. The apparent
bargains that the consumers are now getting will cost them dear
in the end. For the present "temporary" low price cannot last.
But we cannot afford to wait for so-called natural market forces,
or for the "blind" law of supply and demand, to correct the
situation. For by that time the producers will be ruined and a
great scarcity will be upon us. The government must act. All
that we really want to do is to correct these violent, senseless
fluctuations in price. We are not trying to boost the price;
we are only trying to stabilize it.
There are several methods by which it is commonly proposed
to do this. One of the most frequent is government loans
to farmers to enable them to hold their crops off the market.
Such loans are urged in Congress for reasons that seem very
plausible to most listeners. They are told that the farmers' crops
are all dumped on the market at once, at harvest time; that this
is precisely the time when prices are lowest, and that
speculators take advantage of this to buy the crops themselves
and hold them for higher prices when food gets scarcer again.
Thus it is urged that the farmers suffer, and that they, rather
than the speculators, should get the advantage of the higher
average price.
This argument is not supported by either theory or experience.
The much-reviled speculators are not the enemy of the
farmer; they are essential to his best welfare. The risks of
fluctuating farm prices must be borne by somebody; they have
in fact been borne in modern times chiefly by the professional
speculators. In general, the more competently the latter act in
their own interest as speculators, the more they help the
farmer. For speculators serve their own interest precisely in
proportion to their ability to foresee future prices. But the more
accurately they foresee future prices the less violent or extreme
are the fluctuations in prices.
Even if farmers had to dump their whole crop of wheat on the
market in a single month of the year, therefore, the price in that
month would not necessarily be below the price at any other
month (apart from an allowance for the costs of storage). For
speculators, in the hope of making a profit, would do most of
their buying at that time. They would keep on buying until the
price rose to a point where they saw no further opportunity of
future profit. They would sell whenever they thought there
was a prospect of future loss. The result would be to stabilize
the price of farm commodities the year round.
It is precisely because a professional class of speculators
exists to take these risks that farmers and millers do not need to
take them. The latter can protect themselves through the markets.
Under normal conditions, therefore, when speculators are
doing their job well, the profits of farmers and millers will
depend chiefly on their skill and industry in farming or milling,
and not on market fluctuations.
Actual experience shows that on the average the price of
wheat and other nonperishable crops remains the same all year
round except for an allowance for storage, interest and insurance
charges. In fact, some careful investigations have shown
that the average monthly rise after harvest time has not been
quite sufficient to pay such storage charges, so that the
speculators have actually subsidized the farmers. This, of
course, was not their intention: it has simply been the result of a
persistent tendency to overoptimism on the part of speculators.
(This tendency seems to affect entrepreneurs in most competitive
pursuits: as a class they are constantly, contrary to intention,
subsidizing consumers. This is particularly true wherever
the prospects of big speculative gains exist. Just as the subscribers
to a lottery, considered as a unit, lose money because each is
unjustifiably hopeful of drawing one of the few spectacular
prizes, so it has been calculated that the total value of the labor
and capital dumped into prospecting for gold or oil has exceeded
the total value of the gold or oil extracted.)
The case is different, however, when the State steps in and
either buys the farmers' crops itself or lends them the money to
hold the crops off the market. This is sometimes done in the
name of maintaining what is plausibly called an "ever-normal
granary." But the history of prices and annual carryovers of
crops shows that this function, as we have seen, is already being
well performed by the privately organized free markets. When
the government steps in, the ever-normal granary becomes in
fact an ever-political granary. The farmer is encouraged, with
the taxpayers' money, to withhold his crops excessively. Because
they wish to make sure of retaining the farmer's vote, the
politicians who initiate the policy, or the bureaucrats who carry
it out, always place the so-called fair price for the farmer's
product above the price that supply and demand conditions at
the time justify. This leads to a falling off in buyers. The
ever-normal granary therefore tends to become an ever-
abnormal granary. Excessive stocks are held off the market.
The effect of this is to secure a higher price temporarily than
would otherwise exist, but to do so only by bringing about later
on a much lower price than would otherwise have existed. For
the artificial shortage built up this year by withholding part of a
crop from the market means an artificial surplus the next year.
It would carry us too far afield to describe in detail what
actually happened when this program was applied, for example,
to American cotton.1 We piled up an entire year's crop in
storage. We destroyed the foreign market for our cotton. We
stimulated enormously the growth of cotton in other countries.
Though these results had been predicted by opponents of the
restriction and loan policy, when they actually happened the
bureaucrats responsible for the result merely replied that they
would have happened anyway.
For the loan policy is usually accompanied by, or inevitably
leads to, a policy of restricting production—i.e., a policy of
scarcity. In nearly every effort to "stabilize" the price of a
commodity, the interests of the producers have been put first.
The real object is an immediate boost of prices. To make this
possible, a proportional restriction of output is usually placed
on each producer subject to the control. This has several immediately
bad effects. Assuming that the control can be imposed
on an international scale, it means that total world production
is cut. The world's consumers are able to enjoy less of
1The cotton program has been, however. an especially instructive one. As
of August 1, 1956, the cotton carryover mounted to the record figure of
14,529,000 bales, more than a full year's normal production or consumption.
To cope with this, the government changed its program. It decided to buy
most of the crop from the growers and immediately offer it for resale at a
discount. In order to sell American cotton again in the world market, it made
a subsidy payment on cotton exports first of 6 cents a pound, and, in 1961, of
8.5 cents a pound. This policy did succeed in reducing the raw-cotton
carryover. But in addition to the losses it imposed on the taxpayers, it put
American textiles at a serious competitive disadvantage with foreign textiles
in both the domestic and foreign markets. The American government was
subsidizing the foreign industry at the expense of the American industry. It is
typical of government price-fixing schemes that they escape one undesired
consequence only by plunging into another and usually worse one.
that product than they would have enjoyed without restriction.
The world is just that much poorer. Because consumers are
forced to pay higher prices than otherwise for that product,
they have just that much less to spend on other products.
The restrictionists usually reply that this drop in output is
what happens anyway under a market economy. But there is a
fundamental difference, as we have seen in the preceding chapter.
In a competitive market economy it is the high-cost producers,
the inefficient producers, that are driven out by a fall in
price. In the case of an agricultural commodity it is the least
competent farmers, or those with the poorest equipment, or
those working the poorest land, that are driven out. The most
capable farmers on the best land do not have to restrict their
production. On the contrary, if the fall in price has been
symptomatic of a lower average cost of production, reflected
through an increased supply, then the driving out of the marginal
farmers on the marginal land enables the good farmers on
the good land to expand their production. So there may be, in
the long run, no reduction whatever in the output of that
commodity. And the product is then produced and sold at a
permanently lower price.
If that is the outcome, then the consumers of that commodity
will be as well supplied with it as they were before. But, as a
result of the lower price, they will have money leftover, which
they did not have before, to spend on other things. The consumers,
therefore, will obviously be better off. But their increased
spending in other directions will give increased employment
in other lines, which will then absorb the former
marginal farmers in occupations in which their efforts will be
more lucrative and more efficient.
A uniform proportional restriction (to return to our government
intervention scheme) means, on the one hand, that the
efficient low-cost producers are not permitted to turn out all the
output they can at a low price. It means, on the other hand, that
the inefficient high-cost producers are artificially kept in business.
This increases the average cost of producing the product.
It is being produced less efficiently than otherwise. The inefficient
marginal producer thus artificially kept in that line of
production continues to tie up land, labor and capital that could
much more profitably and efficiently be devoted to other uses.
There is no point in arguing that as a result of the restriction
scheme at least the price of farm products has been raised and
"the farmers have more purchasing power." They have got it
only by taking just that much purchasing power away from the
city buyer. (We have been over all this ground before in our
analysis of parity prices.) To give farmers money for restricting
production, or to give them the same amount of money for an
artificially restricted production, is no different from forcing
consumers or taxpayers to pay people for doing nothing at all.
In each case the beneficiaries of such policies get "purchasing
power." But in each case someone else loses an exactly equivalent
amount. The net loss to the community is the loss of
production, because people are supported for not producing.
Because there is less for everybody, because there is less to go
around, real wages and real incomes must decline either
through a fall in their monetary amount or through higher
living costs.
But if an attempt is made to keep up the price of an agricultural
commodity and no artificial restriction of output is imposed,
unsold surpluses of the overpriced commodity continue
to pile up until the market for that product finally collapses to a
far greater extent than if the control program had never been
put into effect. Or producers outside the restriction program,
stimulated by the artificial rise in price, expand their own
production enormously. This is what happened to the British
rubber-restriction and the American cotton-restriction programs.
In either case the collapse of prices finally goes to
catastrophic lengths that would never have been reached without
the restriction scheme. The plan that started out so bravely
to "stabilize" prices and conditions brings incomparably grea-
ter instability than the free forces of the market could possibly
have brought.
Yet new international commodity controls are constantly
being proposed. This time, we are told, they are going to avoid
all the old errors. This time prices are going to be fixed that are
"fair" not only for producers but for consumers. Producing and
consuming nations are going to agree on just what these fair
prices are, because no one will be unreasonable. Fixed prices
will necessarily involve "just" allotments and allocations for
production and consumption as among nations, but only cynics
will anticipate any unseemly international disputes regarding
these. Finally, by the greatest miracle of all, this world of
superinternational controls and coercions is also going to be a
world of "free" international trade!
Just what the government planners mean by free trade in this
connection I am not sure, but we can be sure of some of the
things they do not mean. They do not mean the freedom of
ordinary people to buy and sell, lend and borrow, at whatever
prices or rates they like and wherever they find it most profitable
to do so. They do not mean the freedom of the plain citizen
to raise as much of a given crop as he wishes, to come and go at
will, to settle where he pleases, to take his capital and other
belongings with him. They mean, I suspect, the freedom of
bureaucrats to settle these matters for him. And they tell him
that if he docilely obeys the bureaucrats he will be rewarded by
a rise in his living standards. But if the planners succeed in
tying up the idea of international cooperation with the idea of
increased State domination and control over economic life, the
international controls of the future seem only too likely to
follow the pattern of the past, in which case the plain man's
living standards will decline with his liberties.
ATTEMPTS TO LIFT the prices of particular commodities permanently
above their natural market levels have failed so often,
so disastrously and so notoriously that sophisticated pressure
groups, and the bureaucrats upon whom they apply the pressure,
seldom openly avow that aim. Their stated aims, particularly
when they are first proposing that the government intervene,
are usually more modest, and more plausible.
They have no wish, they declare, to raise the price of commodity
X permanently above its natural level. That, they
concede, would be unfair to consumers. But it is now obviously
selling far below its natural level. The producers cannot make a
living. Unless we act promptly, they will be thrown out of
business. Then there will be a real scarcity, and consumers will
have to pay exorbitant prices for the commodity. The apparent
bargains that the consumers are now getting will cost them dear
in the end. For the present "temporary" low price cannot last.
But we cannot afford to wait for so-called natural market forces,
or for the "blind" law of supply and demand, to correct the
situation. For by that time the producers will be ruined and a
great scarcity will be upon us. The government must act. All
that we really want to do is to correct these violent, senseless
fluctuations in price. We are not trying to boost the price;
we are only trying to stabilize it.
There are several methods by which it is commonly proposed
to do this. One of the most frequent is government loans
to farmers to enable them to hold their crops off the market.
Such loans are urged in Congress for reasons that seem very
plausible to most listeners. They are told that the farmers' crops
are all dumped on the market at once, at harvest time; that this
is precisely the time when prices are lowest, and that
speculators take advantage of this to buy the crops themselves
and hold them for higher prices when food gets scarcer again.
Thus it is urged that the farmers suffer, and that they, rather
than the speculators, should get the advantage of the higher
average price.
This argument is not supported by either theory or experience.
The much-reviled speculators are not the enemy of the
farmer; they are essential to his best welfare. The risks of
fluctuating farm prices must be borne by somebody; they have
in fact been borne in modern times chiefly by the professional
speculators. In general, the more competently the latter act in
their own interest as speculators, the more they help the
farmer. For speculators serve their own interest precisely in
proportion to their ability to foresee future prices. But the more
accurately they foresee future prices the less violent or extreme
are the fluctuations in prices.
Even if farmers had to dump their whole crop of wheat on the
market in a single month of the year, therefore, the price in that
month would not necessarily be below the price at any other
month (apart from an allowance for the costs of storage). For
speculators, in the hope of making a profit, would do most of
their buying at that time. They would keep on buying until the
price rose to a point where they saw no further opportunity of
future profit. They would sell whenever they thought there
was a prospect of future loss. The result would be to stabilize
the price of farm commodities the year round.
It is precisely because a professional class of speculators
exists to take these risks that farmers and millers do not need to
take them. The latter can protect themselves through the markets.
Under normal conditions, therefore, when speculators are
doing their job well, the profits of farmers and millers will
depend chiefly on their skill and industry in farming or milling,
and not on market fluctuations.
Actual experience shows that on the average the price of
wheat and other nonperishable crops remains the same all year
round except for an allowance for storage, interest and insurance
charges. In fact, some careful investigations have shown
that the average monthly rise after harvest time has not been
quite sufficient to pay such storage charges, so that the
speculators have actually subsidized the farmers. This, of
course, was not their intention: it has simply been the result of a
persistent tendency to overoptimism on the part of speculators.
(This tendency seems to affect entrepreneurs in most competitive
pursuits: as a class they are constantly, contrary to intention,
subsidizing consumers. This is particularly true wherever
the prospects of big speculative gains exist. Just as the subscribers
to a lottery, considered as a unit, lose money because each is
unjustifiably hopeful of drawing one of the few spectacular
prizes, so it has been calculated that the total value of the labor
and capital dumped into prospecting for gold or oil has exceeded
the total value of the gold or oil extracted.)
The case is different, however, when the State steps in and
either buys the farmers' crops itself or lends them the money to
hold the crops off the market. This is sometimes done in the
name of maintaining what is plausibly called an "ever-normal
granary." But the history of prices and annual carryovers of
crops shows that this function, as we have seen, is already being
well performed by the privately organized free markets. When
the government steps in, the ever-normal granary becomes in
fact an ever-political granary. The farmer is encouraged, with
the taxpayers' money, to withhold his crops excessively. Because
they wish to make sure of retaining the farmer's vote, the
politicians who initiate the policy, or the bureaucrats who carry
it out, always place the so-called fair price for the farmer's
product above the price that supply and demand conditions at
the time justify. This leads to a falling off in buyers. The
ever-normal granary therefore tends to become an ever-
abnormal granary. Excessive stocks are held off the market.
The effect of this is to secure a higher price temporarily than
would otherwise exist, but to do so only by bringing about later
on a much lower price than would otherwise have existed. For
the artificial shortage built up this year by withholding part of a
crop from the market means an artificial surplus the next year.
It would carry us too far afield to describe in detail what
actually happened when this program was applied, for example,
to American cotton.1 We piled up an entire year's crop in
storage. We destroyed the foreign market for our cotton. We
stimulated enormously the growth of cotton in other countries.
Though these results had been predicted by opponents of the
restriction and loan policy, when they actually happened the
bureaucrats responsible for the result merely replied that they
would have happened anyway.
For the loan policy is usually accompanied by, or inevitably
leads to, a policy of restricting production—i.e., a policy of
scarcity. In nearly every effort to "stabilize" the price of a
commodity, the interests of the producers have been put first.
The real object is an immediate boost of prices. To make this
possible, a proportional restriction of output is usually placed
on each producer subject to the control. This has several immediately
bad effects. Assuming that the control can be imposed
on an international scale, it means that total world production
is cut. The world's consumers are able to enjoy less of
1The cotton program has been, however. an especially instructive one. As
of August 1, 1956, the cotton carryover mounted to the record figure of
14,529,000 bales, more than a full year's normal production or consumption.
To cope with this, the government changed its program. It decided to buy
most of the crop from the growers and immediately offer it for resale at a
discount. In order to sell American cotton again in the world market, it made
a subsidy payment on cotton exports first of 6 cents a pound, and, in 1961, of
8.5 cents a pound. This policy did succeed in reducing the raw-cotton
carryover. But in addition to the losses it imposed on the taxpayers, it put
American textiles at a serious competitive disadvantage with foreign textiles
in both the domestic and foreign markets. The American government was
subsidizing the foreign industry at the expense of the American industry. It is
typical of government price-fixing schemes that they escape one undesired
consequence only by plunging into another and usually worse one.
that product than they would have enjoyed without restriction.
The world is just that much poorer. Because consumers are
forced to pay higher prices than otherwise for that product,
they have just that much less to spend on other products.
The restrictionists usually reply that this drop in output is
what happens anyway under a market economy. But there is a
fundamental difference, as we have seen in the preceding chapter.
In a competitive market economy it is the high-cost producers,
the inefficient producers, that are driven out by a fall in
price. In the case of an agricultural commodity it is the least
competent farmers, or those with the poorest equipment, or
those working the poorest land, that are driven out. The most
capable farmers on the best land do not have to restrict their
production. On the contrary, if the fall in price has been
symptomatic of a lower average cost of production, reflected
through an increased supply, then the driving out of the marginal
farmers on the marginal land enables the good farmers on
the good land to expand their production. So there may be, in
the long run, no reduction whatever in the output of that
commodity. And the product is then produced and sold at a
permanently lower price.
If that is the outcome, then the consumers of that commodity
will be as well supplied with it as they were before. But, as a
result of the lower price, they will have money leftover, which
they did not have before, to spend on other things. The consumers,
therefore, will obviously be better off. But their increased
spending in other directions will give increased employment
in other lines, which will then absorb the former
marginal farmers in occupations in which their efforts will be
more lucrative and more efficient.
A uniform proportional restriction (to return to our government
intervention scheme) means, on the one hand, that the
efficient low-cost producers are not permitted to turn out all the
output they can at a low price. It means, on the other hand, that
the inefficient high-cost producers are artificially kept in business.
This increases the average cost of producing the product.
It is being produced less efficiently than otherwise. The inefficient
marginal producer thus artificially kept in that line of
production continues to tie up land, labor and capital that could
much more profitably and efficiently be devoted to other uses.
There is no point in arguing that as a result of the restriction
scheme at least the price of farm products has been raised and
"the farmers have more purchasing power." They have got it
only by taking just that much purchasing power away from the
city buyer. (We have been over all this ground before in our
analysis of parity prices.) To give farmers money for restricting
production, or to give them the same amount of money for an
artificially restricted production, is no different from forcing
consumers or taxpayers to pay people for doing nothing at all.
In each case the beneficiaries of such policies get "purchasing
power." But in each case someone else loses an exactly equivalent
amount. The net loss to the community is the loss of
production, because people are supported for not producing.
Because there is less for everybody, because there is less to go
around, real wages and real incomes must decline either
through a fall in their monetary amount or through higher
living costs.
But if an attempt is made to keep up the price of an agricultural
commodity and no artificial restriction of output is imposed,
unsold surpluses of the overpriced commodity continue
to pile up until the market for that product finally collapses to a
far greater extent than if the control program had never been
put into effect. Or producers outside the restriction program,
stimulated by the artificial rise in price, expand their own
production enormously. This is what happened to the British
rubber-restriction and the American cotton-restriction programs.
In either case the collapse of prices finally goes to
catastrophic lengths that would never have been reached without
the restriction scheme. The plan that started out so bravely
to "stabilize" prices and conditions brings incomparably grea-
ter instability than the free forces of the market could possibly
have brought.
Yet new international commodity controls are constantly
being proposed. This time, we are told, they are going to avoid
all the old errors. This time prices are going to be fixed that are
"fair" not only for producers but for consumers. Producing and
consuming nations are going to agree on just what these fair
prices are, because no one will be unreasonable. Fixed prices
will necessarily involve "just" allotments and allocations for
production and consumption as among nations, but only cynics
will anticipate any unseemly international disputes regarding
these. Finally, by the greatest miracle of all, this world of
superinternational controls and coercions is also going to be a
world of "free" international trade!
Just what the government planners mean by free trade in this
connection I am not sure, but we can be sure of some of the
things they do not mean. They do not mean the freedom of
ordinary people to buy and sell, lend and borrow, at whatever
prices or rates they like and wherever they find it most profitable
to do so. They do not mean the freedom of the plain citizen
to raise as much of a given crop as he wishes, to come and go at
will, to settle where he pleases, to take his capital and other
belongings with him. They mean, I suspect, the freedom of
bureaucrats to settle these matters for him. And they tell him
that if he docilely obeys the bureaucrats he will be rewarded by
a rise in his living standards. But if the planners succeed in
tying up the idea of international cooperation with the idea of
increased State domination and control over economic life, the
international controls of the future seem only too likely to
follow the pattern of the past, in which case the plain man's
living standards will decline with his liberties.
No comments:
Post a Comment