It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth (Proverbs 20:14).
An alert reader will think: "Wait a minute. I've seen this before." Indeed you have! And you will see it again: Chapters 16, 17, and 18. There is a valid reason for this. Hazlitt was dealing with the same government policy in each chapter: the policy of keeping prices higher than what the free market would produce.
I began Chapter 13 with this verse. Chapter 13 is on parity prices: agricultural price floors that are set by the government rather than by competitive bidding in an open market. In challenging the legitimacy of all price floors, I invoked the free market's pricing system. I wrote the following:
Every voluntary exchange involves buying and selling. The person who is called a buyer is a seller of money. He buys goods and services. The person who is called a seller is a buyer of money. He sells something of value to purchase money.The practice described here by Solomon is familiar. In negotiating, both the buyer of goods and the buyer of money complain that the asking price is too high. It is not a good enough deal. "It is naught, it is naught." Each hopes that the seller will drop his price. In the case of the buyer of money (seller of goods), he hopes that the buyer of goods (seller of money) will decide to take less for his money. Solomon knew that his listeners and readers would recognize this negotiating technique.
The technique rests on this institutional arrangement: the right to bid. We can see this in markets in which private property is secure (the window). We also see it in markets governed by politics (the stone).
In a society with a small retail market, where there are few rival options nearby, negotiation is basic to sales. In a highly developed economy, there is not much negotiation. We do not negotiate with a check-out clerk when we get to the front of the line at a supermarket. The clerk scans the bar code on the item's package, and the computer adds it to the list of items we are buying. The negotiation rule here is clear: "Take it or leave it." It is easy to leave it. Anyone can shop at a different store, or go online to check prices.
Sellers (buyers of money) bid against sellers. Buyers (sellers of money) bid against buyers. Out of this competitive bidding process -- a gigantic auction system -- come objective prices. There is little ignorance. Face-to-face negotiating is limited to zones of ignorance regarding prices and quality. The better the information about market prices, the narrower the range for price negotiating.
The best way to understand how the price system works is to understand an auction. The free market is a gigantic auction. All over the world, 24 hours a day, this auction is going on. Owners of money bid against each other to buy whatever they want to own or rent. Everyone with some asset to sell is an auctioneer. "Do I hear a higher bid?"
An auction is governed by this rule of asset allocation: high bid wins. So is the free market.
There are owners of scarce economic resources. What is a scarce resource? It is any resource for which, at zero price, there is greater demand than supply. This includes labor, which in turn includes mental labor: gathering information and exercising judgment.
There are also owners of money: the most marketable commodity. We call these people consumers, but they can also be investors.
Buyers of money (sellers of goods and services) want to obtain the highest money price possible, i.e., the obligation to deliver the least quantity of a crop. In contrast, buyers of goods and services (sellers of money) want to obtain more goods or services for whatever they are willing to pay.
There is a third aspect of ownership in a free market: the legal right to bid. This is another way of saying that owners possess the legal right to disown their property, whichever form of property they own: money or whatever money can buy.
The window is all of the legal and institutional arrangements that produce what we call the free market. The free market is a system in which the ownership of goods and services is exchanged voluntarily. Ownership is the right to disown legal titles to property.
This right to disown does not include legal sovereignty, such as the right to vote or the right to sit on a jury. These are sometimes called inalienable rights, which means that they cannot be legally transferred. There is no legal market for them. There is a difference between legal sovereignty and economic authority. Economic authority is the right to sell what you own. For example, you do not have the right to sell your child because you do not own your child.
Buyers bid against buyers. Sellers bid against sellers. Out of this competitive bidding process comes an array of prices.
The money price of the latest asset exchange applies to all of the assets in this category. If you buy one share of stock, this price applies to all other shares of that stock until there is another exchange at a different price. The marginal price -- the latest price -- sets the price for all of the other exchanges. These prices change constantly in highly developed markets.
This is why prices convey information to all active participants in a particular market. No one wants to pay more than he has to. The latest exchange price alerts all participants to whatever the terms of exchange have just been. This was a market-clearing price. No one was willing to pay more money to buy this asset, and no one was willing to sell for less.
Because this is a legally free market, the market for bidding is open to anyone who possesses money or assets that are for sale for money. Anyone who thinks that he has better information about the future price of an asset may put his money where his prediction is. He can legally make a bid to pay a higher price. This way, people are legally entitled to implement their plans in terms of their best estimates of what is coming next. They hope to profit. But in order to profit, they must make a bid that is then accepted. This exchange converts their subjective estimates of economic value into objective prices. This new selling price brings new information into the market. The participants are alerted to the fact that someone with either money (a buyer) or assets (a seller) thought that the previous array of prices was based on false information. Other bidders must now adjust their plans accordingly.
The free market allows an exchange of ownership. Those people who believe they possess better information than other owners and bidders can legally register their disagreement in an open market. "You're all wrong. I know better. I'll prove it to you. I'm bidding more."
Each exchange of ownership allocates scarce resources in a new way. Other participants who expect to profit in this market must now make decisions as to how best to allocate their resources: buy, sell, or hold. But holding means buying. The owner must defend his bid constantly. He remains the highest bidder for whatever it is he owns. He pays a price: forfeiting the ownership of whatever the highest rival bid is. "I won't sell it," he says. Then the would-be buyer responds: "Then you won't get what I just offered."
People bring to the marketplace their best estimates of what the future holds, asset by asset. They decide to buy, sell, or hold. Their individual decisions, either to bid or to refrain from bidding, establish objective prices in the market.
In short, the window is a gigantic auction.
People vote to elect politicians who then use the state to steal in the name of justice. Politicians use coercion to overturn the decisions of property owners who want to disown things in order to buy others.
Hazlitt never mentioned ethics in this book. Most free market economists also refuse to mention it. Yet legitimacy is always based in part on ethics. Any state that is perceived by the voters as being illegitimate will generate resistance. It will be forced to pay more to gain compliance. Its costs of operating will rise. It will attain fewer of its goals at yesterday's political prices.
Property owners whose plans are disrupted by the state's intervention into the free market are tempted to lose faith in the state, which refuses to defend the unified system of private ownership, disownership, and open bidding.
Agents of the civil government decide to control the price outcomes of the free market's auction process. They may decide to take steps to make some exchanges illegal. This reduces demand in a legal market. Or they may decide to enter this market as bidders on behalf of the government. This increases demand in a legal market. They alter the existing array of prices by means of their bids. They may even decide to set up a new system of rationing. All systems of economics are forms of rationing: asset allocation. There is rationing by government decree. There is also rationing by competitive bidding: prices.
Intervention sends a signal to other participants: "The economic conditions have changed. Demand is different." This information alters other participants' behavior. It changes their objective bids. Like a rock tossed into a pond, the government's participation in this market creates ripples. The array of prices that had existed in terms of the older conditions of supply and demand changes. People's behavior also changes in response to this new information.
Why do politicians interfere with auction prices? Because they think they can get more votes than they lose. They respond to what they perceive as new conditions of supply and demand for the currency of politics: votes.
Hazlitt blamed a single argument for this intervention: "Production for use is better than production for profit."
It is on the fallacy of isolation, at bottom, that the "production-for-use-and-not-for-profit" school is based, with its attack on the allegedly vicious "price system." The problem of production, say the adherents of this school, is solved. (This resounding error, as we shall see, is also the starting point of most currency cranks and share-the-wealth charlatans.) The problem of production is solved. The scientists, the efficiency experts, the engineers, the technicians, have solved it. They could turn out almost anything you cared to mention in huge and practically unlimited amounts. But, alas, the world is not ruled by the engineers, thinking only of production, but by the businessmen, thinking only of profit. The businessmen give their orders to the engineers, instead of vice versa.
Critics of the free market adopted this argument during the Great Depression. We do not often hear it these days.
Another motivation for government economic planning is far stronger than people's belief in the "production for use" idea. This motivation is never stated this way in public, but it is a major root cause of all windows broken by the government. "The existing owners own more than I do. I want more. I can get more if the government takes over the system of distribution." This view is widely shared. It is an argument based on jealousy: benefiting at the expense of someone else, especially sellers.
Then there is this motivation. "The existing owners own more than I do. I can never own as much. Therefore, the government should be in charge of distributing property, even if I do not benefit. I may even lose. I don't care if I lose. The existing owners won't win." This is the argument from envy.
Hazlitt wrote:
There are so many fallacies in this view that they cannot all be disentangled at once. But the central error, as we have hinted, comes from looking at only one industry, or even at several industries in turn, as if each of them existed in isolation. Each of them in fact exists in relation to all the others, and every important decision made in it is affected by and affects the decisions made in all the others.
This argument is Bastiat's. It is the broken window fallacy. The solution: follow the money. All of the money.
Hazlitt then turned to the division of labor to explain what prices do. Each worker produces something in terms of his specialized skills. Each wage earner achieves greater output this way, and therefore greater income. We exchange the output of our labor for the output of someone else's labor. We make bids. The result of our bidding is the extension of the auction process, which in turn is regulated through competitive prices. Hazlitt wrote: "Prices are fixed through the relationship of supply and demand, and in turn affect supply and demand." The more efficient producers make profits. The less efficient producers go out of business.
He also wrote: "Prices are determined by supply and demand, and demand is determined by how intensely people want a commodity and what they have to offer in exchange for it." This is true, but this has been understood ever since Adam Smith wrote The Wealth of Nations (1776). But the existence of government intervention and allocation indicates that lots of voters either do not believe Smith or else they do not care (envy).
The highest costs of government intervention into the market process are ethical costs. Most people who believe in private property recognize that the state has become immoral when it uses coercion to intervene into market exchanges. They see that the politicians have adopted this commandment: "Thou shalt not steal, except by majority vote." Economists rarely talk about this ethical cost as the number-one cost of state intervention. They prefer to pretend that they are value-free analysts. They are not. They are merely analysts who do not believe in permanent ethical standards, especially ethical standards to which are attached predictable institutional sanctions: positive and negative.
Economists also do not discuss the judicial principle that undergirds the concept of private property: the link between ownership and personal responsibility. Men are responsible before God judicially. They are also responsible before other bidders economically. A man who says "I will not sell" necessarily also says: "I will retain full responsibility for my ownership." Other bidders say this by their bids: "I can do a better job as an owner." The man who refuses to sell necessarily pays a price to retain ownership: whatever the highest bidder would have handed over to him. The free market's pricing system forces each owner to pay the price of refusing to sell. Therefore, judicial responsibility is reinforced economically.
There are other costs of state intervention. The main ones have to do with undermining the authority of consumers (customers) to shape the behavior of producers. Consumers reward some producers by buying. They also penalize other producers by not buying. State interference with market pricing disrupts the auction process. This intervention reduces the ability of consumers to persuade producers to do things the consumers' way. Producers pay attention to the government's most recent rules or the government's most recent bids, and also its promises of future bids. Sellers honor this auction principle: "High bid wins." When the state offers the highest bid, it wins. But then someone inescapably must lose: the taxpayer.
Hazlitt repeated an argument he had used in Chapter 14: "Saving the X Industry."
It follows that it is just as essential for the health of a dynamic economy that dying industries should be allowed to die as that growing industries should be allowed to grow. For the dying industries absorb labor and capital that should be released for the growing industries.
The government saves one industry at the expense of other industries. It does so by stealing from one group of consumers in order to transfer the loot to another group of consumers -- minus handling fees, of course. "There's no such thing as a free thief." If you use an armed thug as your middleman, he will demand payment.
The main consequences of the state's interference with the price system have been constant calls politically for the government to intervene again. Part of this is the desire of members of other special-interest groups to get in on the deal. Free money or free goods are always politically popular.
More insidious is what Ludwig von Mises described in his 1951 speech, "The Middle of the Road Policy Leads to Socialism." The state's intervention disrupts production. It disrupts the market's auction process that directs production. These disruptions cause losses for some groups. They complain about these ill effects. So, the policy makers in the government intervene again in order to repair the visible damage that its previous intervention produced. This creates another series of negative side effects. Every time the state intervenes to clean up the mess it has produced, the mess spreads.
This brings us back to the issue of the famous law of unintended consequences. It can be summarized as follows: "There are no side effects. There are only effects. We use the phrase 'side effects' to describe effects that we do not like."
When Western Europe went off the government-guaranteed gold coin standard in the fall of 1914 at the beginning of World War I, it became possible for national governments to interfere with pricing on a scale that had not been seen since the days of the Pharaohs of Egypt. This intervention led to a series of boom-bust cycles that Mises had predicted in his 1912 book, The Theory of Money and Credit. The expansion of central banking, which he had warned about, made the booms bigger and the busts deeper.
Government intervention into the price system grew worse during World War II: rationing. That war ended for Americans in August 1945. Public opinion regarding government intervention and rationing had begun to decline in the year that Hazlitt's book was published. The Truman administration was forced politically to abandon most price controls by the end of 1946.
Only in Nixon's two years of price controls, 1971-73, did the United States again deal with full-scale price and wage controls. Nixon unilaterally abandoned the last legal traces of the old gold standard on the same day that he announced price and wage controls: August 15, 1971. He "closed the gold window" by prohibiting foreign governments and central banks from buying gold from the U.S. Treasury at $35 an ounce. The great peacetime price inflation began immediately. It lasted for over a decade.
Federal spending as a percentage of GDP has increased, due to increased debt, but federal revenues as a percentage of GDP have never reached the level of 1945. Even then, the ratio was only slightly above 20%. It is now slightly below. The American public resists increased taxes. Lobbyists who lobby Congress make sure that the super-rich pay a lower percentage than the middle class does. But in the area of federal debt, the process of political over-promising has escalated throughout the West. These promises cannot be fulfilled. Either there will be massive tax hikes or a Great Default. I think the latter is more likely.
The call for government intervention into market pricing is ancient. This call was resisted politically in the West until the decade before World War I began. After that war ended in 1918, the West saw the triumph of the isms: Communism, Fascism, National Socialism, Fabianism, and the smaller isms that arose in the wake of the larger isms.
Calls for government intervention into the price system have multiplied. Hazlitt's book dealt with lots of these calls. But these calls have played second fiddle in the West to three government-bankrupting ideas: government pensions, government health care for the aged, and military empire. Europe is further along the path to bankruptcy because of the first two programs, along with government health care for the whole population. The United States has specialized in war since 1946.
Because of the price-disrupting effects of central banking and fractional reserve banking -- both of which are government-licensed monopolies -- the state's interventions in these closely related sectors of the economy have subsidized the allocation of capital away from what consumers would have chosen, had politically favored special-interest groups not been furnished with fiat money. The economy of the world is now addicted to monetary inflation. Among modern economists, Austrian School economic analysis alone focuses on these disrupting effects. This outlook is not known by the public, and it is rejected by academic economists. Thus, the West is headed for the Great Default.
The window is cracked. The shattering is still ahead of us.
For documentation, go here: http://bit.ly/CEIOL-Doc-15All of the chapters are here: http://bit.ly/CEIOL
© 2022 GaryNorth.com, Inc., 2005-2021 All Rights Reserved. Reproduction without permission prohibited.