Freeman

ARTICLE

What Price Control Really Means

APRIL 01, 1978 by LAWRENCE W. REED

“In the great chessboard of human society,” observed the eighteenth century Scot philosopher and economist Adam Smith, “every piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”

The belief that individuals are pawns to be pushed about by central planners is not new, as this statement by Smith clearly indicates. Indeed, socialism—the controlled society—has its roots in the actions of primitive man. When the first cave man clubbed his neighbor to expropriate the food his neighbor had gathered, he gave blunt, physical expression to the essence of socialist society.

Two centuries after Adam Smith penned his eloquent defense of the right to be free from coercion, coercion is again in the ascendancy. It is seen by many as the “quick fix,” the answer to chronic problems, a panacea that will bring order out of chaos. In 1795, James Madison described this phenomenon as “the old trick of turning every contingency into a resource for accumulating force in goverment.”

The issue of price control provides an excellent illustration. Invariably, as prices rise due to an expanding money supply, talk is heard that government must impose controls. The fact that such talk is becoming more and more prevalent these days may be a warning that price controls loom on the horizon. Therefore, it is absolutely essential to the debate that all be made aware of the true implications of government price-fixing. Just what is it that control of price by central planners means? What are we abandoning when we embrace the idea?

Forcing People to Conform

The object of price control is really not the control of trillions of numbers and dollar signs in the economy. Price control is merely an excuse to coercively dictate the terms of trade between people. The penalties for violating price control edicts are levied on individuals. Jails and fines are made for people, not for prices. In Revolutionary France, those individuals who dared to trade at prices not in conformity with the “Law of the Maximum” paid a visit to the guillotine.

When government fixes price, coercion is substituted for voluntary exchange. Price is no longer determined peacefully in the market place of free and willing trade. Economic consequences must follow and they are easily discernible in light of the two functions of price.

One function is to allocate scarce resources. When anything is scarce, as all economic goods are, it must be rationed. Supply must somehow be equated with demand. If the market place be imagined as a huge auction, the problem becomes one of who shall get what quantity of the goods to be auctioned. Do we draw straws, or beat each other up until the number of survivors equals the number of goods? Would it make sense to line everyone up, fire a gun, and declare that the fastest runners shall receive the goods?

The economic way to ration scarce resources is through the price system. By way of the “market price,” supply and demand meet, the market is cleared, and scarce resources are allocated. In so doing, chronic shortages and surpluses are avoided, the productive process is left unharmed, and peaceful exchange becomes the reigning principle. It is a perfectly natural process; all that is required for it to take place is for men to be left alone to pursue their own desires and abilities.

Price also directs production, its second function. Businessmen are professional price-watchers. If consumer demand for a product increases, consumers are willing to pay more for that product. This puts pressure on price to rise, which raises profit margins. In order to take advantage of this profitable situation, businessmen increase their production. The process works in the other direction too: declining consumer demand will mean falling price and falling profit margins. In that case, price will “signal” producers to abandon that line of production and enter another where the demand is more urgent. In the free economy, it is not necessary for the government to issue an edict to the farmer, “Grow wheat; the people want bread.” It is not necessary for the government to instruct a manufacturer, “Make televisions; the people want entertainment.” The marvelous mechanism of price does the job far better than the noblest and wisest politician.

Economic Disruption

The economic consequence of government price control is economic disruption. A controlled price will still allocate resources, but not in accordance with supply and demand. Likewise, a controlled price will still direct production, but not in the same directions as consumers, by their voluntary purchases, would have dictated. The signals are falsified and distorted by fixed prices. The history of price control in America and everywhere else has been the history of shortages, queues, and popular disaffection.

The economic effect is but one aspect of price control. A moral question is also involved. By what right does any party coercively dictate the terms of trade between others? By what twisted principle of justice is one penalized for trading with another at a mutually-agreed upon price?

Price control is a form of public theft. In the name of “the public good,” the authorities are empowered to force their particular values on others. The victims are all those deprived of the opportunity to trade or to trade on terms which they regard as satisfactory. Price control breeds a spirit of lawlessness, a network of spies and informers, and is unmistakably a hallmark of an immoral society.

To those who are committed to price control, these arguments perhaps will not be sufficient to dissuade them. They may reply that whatever evils price control might produce can be corrected at the ballot box. The people can supposedly use their political liberty to counterbalance their loss of economic liberty. To make this assumption is to ignore the manifest threat to political liberty that price control poses.

It is no exaggeration that the economic order determines the political order. If people are so controlled economically that their every move is subject to scrutiny by the State, then they can be effectively silenced by the State. “Control of a man’s subsistence is control of his will,” wrote Alexander Hamilton. It is inconceivable that economic freedom can be lost while political freedom remains intact. A brief glance at history confirms what theory teaches.

In the mercantilist period, roughly 1500 to 1800, the State controlled the economy. The subjects did not elect their kings and queens.

In the thousand years of feudalism, the State controlled the economy. The serfs did not vote their masters to power.

In modern-day Russia, the State controls the economy and two hundred fifty million Russians are governed by a single political party.

In similar fashion, it is no coincidence that Adam Smith’s ideas of economic liberty nurtured ideas of political liberty in the nineteenth century. Because price controls empower the government to establish a vital command post over the economy, they would sow the seeds for the loss of political liberty as well.

Will Americans endorse a policy of price control? If they have lost faith in the free society they more than likely will. If the power of price is delivered from the market place to the politicians, surely ignorance of the grave implications will be the proximate cause.

***

Closing the Market

To trade is to exchange one item for another, as butter for coal. Each party to any trade is both a buyer and a seller, and a person must be satisfied in that dual capacity before he will trade voluntarily.

When the government intervenes to force a change from the free market price, the theory is that one of the parties to the trade will gain at the new price. The idea usually is to help the underdog, whether it be the poor consumer and his family, or the poor farmer, or the poor infant industry, or the poor employee, or the poor Defense Department of the government, or whatever. But the theory is false. It still takes two to make a trade. To arbitrarily change a price for the benefit of one party to the bargain necessarily means a change to the other party’s disadvantage. And it is always that forgotten other party who will not bear the attempted charge. If the government raises the price of butter above its free market level, the owner of coal will not voluntarily trade as much as before. He doesn’t want less butter for more coal. So, instead of helping the presumed underdog, the government intervention only drives from the market some of the chances for the underdog to get what he wants through trade.

Paul L. Poirot, “More than the Traffic Will Bear”

ASSOCIATED ISSUE

April 1978

ABOUT

LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

comments powered by Disqus

EMAIL UPDATES

* indicates required
Sign me up for...

CURRENT ISSUE

October 2014

Heavily-armed police and their supporters will tell you they need all those armored trucks and heavy guns. It's a dangerous job, not least because Americans have so many guns. But the numbers just support these claims: Policing is safer than ever--and it's safer than a lot of common jobs by comparison. Daniel Bier has the analysis. Plus, Iain Murray and Wendy McElroy look at how the Feds are recruiting more and more Americans to do their policework for them.
Download Free PDF

PAST ISSUES

SUBSCRIBE

RENEW YOUR SUBSCRIPTION