It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth (Proverbs 20:14).
This chapter deals with the same issue that Chapter 13 did and Chapter 15 did: government intervention into the economy to keep commodity prices from falling. Such a policy favors existing producers at the expense of consumers.
Politicians dare not admit to voters what they are really doing -- supporting existing producers -- and why: campaign contributions. Remember: the beneficiaries of special-interest legislation are self-interested to a fault. The victims -- customers who are voters -- may never have heard of the policy, nor would they be interested if they did hear about it. The political system is asymmetric. The beneficiaries of political pressure have better information and greater motivation to rig the system in their favor than the voters do. The beneficiaries are highly focused. They persuade politicians to re-direct the taxpayers' money in their direction. The voters do not follow the money. The politicians and the special-interest groups understand this.
This is a recapitulation of my arguments in Chapter 13.
There are several groups of owners, as always.
One group owns money, which is the most marketable commodity. Economists classify these people under the classification of consumers. They are sellers of money and buyers of goods to consume.
Another group is made up of owners of natural resources -- in this case, commodities. Economists classify natural resources under the general category of land.
There are other owners. They own commodities, but only temporarily. They are intermediaries in between landowners and final consumers. They are producers. They purchase raw materials, labor services, and buy or rent capital in order to transform raw materials into final products. Producers are not final consumers. They are buyers, but they are also sellers. They buy in order to make a profit: buy low, sell high. They can be classified under the category of customers.
There may be a fourth group: retailers. They buy goods that contain restructured commodities. They sell these to consumers. They own these commodities temporarily.
There is a fifth group: owners of forecasts regarding the future. They may be able to sell this information. They may choose to give it away. Until this subjective information affects actual bids in the marketplace, it is irrelevant to the pricing system. But whenever these people put their money where their forecasts are, by buying or selling commodity futures contracts, they become speculators. Their bids affect prices at the margin: up or down.
Because owners have the right to own, they also have the right to disown what they own. They can legally sell. They can legally make an exchange. This brings us to the window.
This is a recapitulation of my arguments in Chapter 13.
Consumers compete against consumers. Producers compete against producers. Raw materials owners compete against raw materials owners. Owners of capital compete against owners of capital. Commodity futures speculators compete against each other: "longs" vs. "shorts." Out of this bidding process comes an array of prices. The economic order in a free market system is based on a series of auctions. The same rule of exchange governs all of them: "High bid wins."
The average person knows what an auction is. He understands why the high bid wins: to decide who buys it without creating dissension. He understands that bidders compete against bidders. But a free market economist has a major educational task: to persuade the general public that the orderliness and fairness of an auction is a legitimate model for the entire economy. The principle of open bidding produces an equally orderly and equally fair economy. The ability to make this application of logic -- from a local auction to an international auction -- is a limited resource. This is demonstrated by over two centuries of resistance to the idea of free trade, which is most famously argued in Adam Smith's Wealth of Nations (1776).
The average person can easily understand and readily approve of the allocation principle of "high bid wins" at an auction. One of the tasks I have set for myself in writing this book is to help readers make the conceptual transition from "high bid wins" at a local auction to "high bid wins" for every transaction. This is more easily said than done.
In the auction markets (plural) for commodities, the principle of "high bid wins" benefits those buyers and sellers who come to an agreement on a price. There are multiple sub-markets in this and every other market. The initial market is established between commodity owners and producers. The second phase of the market is established between producers and middlemen: retailers. The final stage is the transaction between retailers and consumers. At every step, the rule is "high bid wins."
This principle of distribution annoys those who do not make the highest bid. Sometimes this annoys them so much that they form a political action group that campaigns for legislation that restricts the use of "high bid wins." People who ran out of money before the auction was over demand that the state impose legal price ceilings. But high bids come on both sides of a transaction. Sometimes those sellers of commodities who were forced to take too low a price, and who dropped out of the auction in order to avoid a loss, see an opportunity. They may be able to persuade the government to make lower bids illegal. This leads us to this chapter's stone.
The government intervenes to create a price floor for a commodity. Politicians declare that prices have become too volatile. The public hears the word "volatile," and thinks: "Prices get too high. Then they get too low. This is not orderly. We need orderly prices. The government is going to stabilize prices." This is what the politicians actually say in defense of their actions. But what they really mean by "volatile prices" is this: "Prices are consistently too low to sustain high profits for one of our major special-interest business groups." Hazlitt summarized the politicians' official defense of price floor intervention.
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.
How can the government do this? Hazlitt offered this example. One way is to lend farmers money so they can hold crops off the market. This is true, but this is simply recapitulating what he wrote in Chapter 13 on parity prices. He then repeated other farm subsidy arguments. This takes the remainder of Section 1 and all of Section 2.
While his chapter is fairly long, Hazlitt offered no other example of a program like parity prices for agriculture. There was a reason for this. There was no other program like it. In early 1946, price ceilings were still in force. Producers could sell everything they offered for sale. Their problem was government rationing, not a lack of demand. There were major shortages of everything that had a price ceiling imposed by the government. This is why this chapter was theoretical rather than a description of existing policies.
There was another major example of common price regulation in the name of combating price volatility: the gold standard. The U.S. government bought all of the gold offered to it. After 1933, it forbade Americans from buying gold for monetary purposes: a rigged market. It paid a specific price for gold, beginning in 1934: $35 per ounce. It had a huge stockpile of gold in early 1946 -- the largest in the world. That gold exchange standard -- no coins, no legal ownership by Americans -- was the weakened remnant of the 1933 gold coin standard. But Hazlitt did not discuss the gold standard in this chapter.
He was trapped by his own economic logic. He was a defender of the 1946 version of the gold standard, although he would have preferred the 1932 version. Yet, in terms of his economic analysis in this chapter, the gold standard had always been a price-rigging system -- one that pre-dated the Agricultural Adjustment Administration by a century. It was anti-free market, according to this chapter. It was just another government-rigged price floor system. The American gold standard, because it involved a government guarantee to buy gold at a fixed price per ounce, had always violated the auction principle of "no rigged bottom bids." This is the inevitable implication of a government-guaranteed gold standard. It is one more government intervention into the free market. It no longer exists anywhere on earth. The old gold coin standard was used to buy the gold of the people. Then all of the governments stole the people's gold. They all violated their promises to redeem paper money for a specific quantity of gold, including gold coins. The governments all did what governments do best: deceive the voters while stealing from them.
There will be higher prices for consumers under this kind of price floor system. This is the reason why politicians voted for the intervention. This is what the special-interest group wanted. Hazlitt then applied the logic of Bastiat once again. The consumers lose. So do the producers and retailers of the goods they would have preferred to buy.
But, as a result of the lower price, they will have money left over, 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.
The losers in business are those who are more efficient than the businesses that could not compete at the previously lower prices.
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 are winners: higher-cost producers. The losers are these: (1) all consumers of these commodities, who pay higher prices; (2) the most efficient producers of these commodities; (3) the producers of the goods that consumers would have bought, but did not because of high prices in one sector of the economy. Thus, there is a net loss of wealth in the community. This was Hazlitt's conclusion. It is also my conclusion. But it is not the conclusion of most voters. It may or may not be the conclusion of politicians. Members of the favored special-interest groups may not understand, but any economist on the organization's payroll does understand. He is paid well to mislead the public about the nature of the arrangement.
Hazlitt was a nice fellow. He avoided following the loot all the way to hired economists' salaries. I am not that nice.
Hazlitt feared the creation of an international body that would act as a political agent of commodity producers.
Of course the international commodity controls that are being proposed now, we are told, are going to avoid all these 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 postwar world of superinternational controls and coercions is also going to be a world of "free" international trade!
Here, he was dead wrong. He did not understand the long-run agenda of what is sometimes called the New World Order. Its goal, beginning in the early 1920's, was to create managed international trade, with low tariffs. This would bankrupt domestic industries.
The goal from the beginning was to create an international political order that would be marked by tariffs against non-member nations, and a low-tariff free trade zone inside the international confederacy. This plan was initially tested in the United States, beginning in 1786. James Madison came up with the plan for the Annapolis Convention in 1786, steered it through the Constitutional Convention in 1787, and got it ratified by state ratification conventions in 1787-88. His political goal was to replace the decentralized Articles of Confederation with a new constitution that centralized political power. He initially promoted this in 1786 as a way to increase trade among colonies.
This two-stage strategy -- economics (open agenda) to politics (concealed agenda) -- was imitated next by German nationalists. They got treaties signed by German principalities in 1833: a customs union. It abolished tariffs internally, but it imposed them on imports. The new system began on January 1, 1834: the Zollverein. Political unification followed in 1871.
Immediately after World War I, the same political agenda began to be formulated by a French bureaucrat, Jean Monnet, and his supporters behind the scene. At the 1919 peace conference at Versailles, Monnet worked closely with John D. Rockefeller's long-term agent, Raymond Fosdick. They and their financial supporters wanted to create a centrally managed international order. That plan failed when the U.S. Senate refused to ratify the League of Nations treaty in 1920. Fosdick returned home from France in 1920 to take over the Rockefeller Foundation, which he ran for the next 28 years.
The New World Order's plans for regional political consolidation were not begun in the inter-war years, but funding laid the conceptual foundations of the economic side of the program. The Rockefeller Foundation was active in this work. It put up money for academic conferences on industrial and agricultural protectionism, beginning in 1936. It co-funded free trade economist Wilhelm Röpke. He discussed this funding in the Preface to his book, International Economic Disintegration (1942). The internationalists' political agenda began after the end of after World War II in 1945. The first step was the 1951 treaty that established the European Economic Coal and Steel Community. The process continued, treaty by treaty. It was completed by the European Union in 1994-2004.
The main exceptions to this system in Europe are farmers, especially French farmers. But with the exception of agriculture, the trend has been toward lower tariffs, more trade, and lower commodity prices. Manufacturing benefits from lower commodity prices.
Here was the bait: international economic integration through low or no tariffs, but with non-elected bureaucratic managers of the rules. Then there was the switch: political unification. Economic benefits -- low tariffs, greater wealth -- served as the lure that baited the political trap. In order to gain the economic benefits of greater trade, we are assured by proponents of bureaucratically managed trade, nations must surrender much of their political sovereignty. Yet from the point of view of economic analysis, this call for political unification is a conceptual error. It confuses economic authority with judicial sovereignty. Any nation can gain the benefits of free trade simply by unilaterally lowering its tariffs. There is no necessity of surrendering national political sovereignty to an international political entity.
Hazlitt did not see this bait-and-switch operation in 1946. He therefore failed to see what was coming next: not commodity price stabilization by price floors, but rather reduced tariffs and high profits for highly efficient multinational firms, which are behind the New World Order.
The desire of national cartels is restricted entry, high tariffs, and high prices. The only large-scale national cartel to achieve this in the United States is the agricultural cartel. The model is the sugar cartel, which extends back to the 1790's.
Raw commodities are part of an international market. Low tariffs on non-agricultural raw commodities have predominated in the United States. This low-tariff system has led to an extensive increase in the foreign trade component of the American economy. Foreign trade accelerated after 1970 because of reduced tariffs on most finished products. American consumers have benefited. But politically, they have been pushed in the direction of international economic treaties. The main one is NAFTA: the North American Free Trade Agreement (1994). Others have been proposed. They will probably be imposed on the voters.
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