It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth (Proverbs 20:14).
Once again, Hazlitt returned to the issue of government price fixing. In Chapters 13, 15, and 16, this price fixing was in the form of price floors. In this chapter, he dealt with price ceilings. But the theoretical issue is the same in all of these chapters: the state's interference with the price system, a system that rests on two legal principles: (1) private ownership, which includes the right to disown property, and (2) the right to make a bid for ownership. By "right," I mean an individual's ability to make a transaction, or to refuse to make a transaction, in a legal system that preserves the right to exclude. So did Hazlitt.
Hazlitt wrote that governments resort to price ceilings during wartime. In early 1946, the United States was just coming out of four years of price and wage ceilings. The transition was not yet complete when he wrote his book.
Members of one group of owners have legal title to property. This includes their labor, which they can rent. Because these owners have legal title, they have the right to transfer this legal title: to disown something. We call this act of disownership selling.
Members of another group of owners have legal title to money: the most marketable commodity. They also have the right to disown money. We call this act of disownership buying.
We have covered this repeatedly in earlier chapters. Buyers of money (sellers of services) seek out sellers of money (buyers of services). The market is a complex institutional arrangement that is the product of years of exchanges. These exchanges have been based on private ownership. Legal and customary arrangements have established an individual's legal right to buy and sell without the threat of coercion, including coercion by authorized agents of the state.
Prices have developed over periods of time. These are not fixed by law, but they are familiar to participants. Prices convey valuable information to participants. Prices makes their decision-making more accurate. People can more easily count the costs of their decisions, past, present, and future. Prices fluctuate, but normally they do not fluctuate much. This stability reduces the costs of transactions. Past prices do not guarantee future prices, but they do point to a pattern. They bid down money prices. When prices get comparatively high, sellers enter the market to sell. When prices get comparatively low, buyers enter the market to buy. They bid up money prices.
Final buyers are the sources of market pricing. They possess the most marketable commodity: money. They compete against other buyers. The free market is an auction, both in theory and practice.
Entrepreneurs who buy production goods and services try to guess what final buyers will pay and in what quantities, but no one knows. Good guesses produce profits. Bad guesses produce losses. Final buyers retain control over production and distribution by means of their bids. High bids win.
The state enters the scene. Politicians are told by voters that certain prices are too high. Sellers are gouging buyers, buyers say. Buyers do not tell politicians: "We buyers are driving up prices. Stop us before we spend again!" No, they blame sellers, who are simply responding to the highest bids, sale by sale.
Politicians pass laws against raising prices. These laws impose what are called price ceilings. This is what most people have in mind when they think, "price controls."
Voters do not understand this economic law: There are no price controls. There are only people controls. People bid to buy. A price control law makes it illegal for a seller to complete the transaction. Buyers make bids above the price ceiling, but sellers who do not want to be arrested resist the temptation to sell, at least in the legal markets.
Hazlitt described the argument of voters who want these people controls. They want to control the rich.
The argument for holding down the price of these goods will run something like this. If we leave beef (let us say) to the mercies of the free market, the price will be pushed up by competitive bidding so that only the rich will get it. People will get beef not in proportion to their need, but only in proportion to their purchasing power. If we keep the price down, everyone will get his fair share.
There is an implied ethical argument: fairness. "The government must force bidders to be fair. The high bidders should be compelled by law to cease bidding against people with less money."
What price is fair? What criteria of fairness will bureaucrats who enforce these laws use as guidelines? If the politicians do not fix all prices, then the list of retail price ceilings will be in the billions. Not millions -- billions. There are that many products in the United States. This does not count services.
The reason why a price ceiling is demanded by voters is that too many bidders are bidding at the auction. The voters want this stopped. But the problem still remains: Who should be allowed by the bureaucrats to buy? There is greater demand than supply at the artificially low price. Instead of the top bidder who goes home with the item, there are half a dozen bidders who can still afford to bid, and who still want to bid. Five of them must be turned away. On what legal basis? More to the point, on what moral basis? What is fair? Will the five non-buyers agree on this standard? Will they agree with the bureaucrat's decision in applying it?
There is now growing resentment among excluded bidders. There may be conflict if this allocation procedure continues.
When the war ends, disappointed buyers can no longer be dismissed with this phrase, universal in World War II: "Don't you know there's a war on?"
Under price ceilings, consumers lose their control over the production process, which is the flip side of the distribution process. Power increasingly flows toward the government and its enforcement agents. It flows away from consumers.
The effect of a price ceiling is a shortage: more demand than supply at the fixed price. The government must then ration by some methodology other than price.
The price control program spreads. Mises said why in his 1951 lecture: "The Middle of the Road Policy Leads to Socialism." New rules are passed in order to fix the disruptions of the previous interventions. Hazlitt described this process.
But as the government extends this price-fixing backwards, it extends at the same time the consequences that originally drove it to this course. Assuming that it has the courage to fix these costs, and is able to enforce its decisions, then it merely, in turn, creates shortages of the various factors--labor, feedstuffs, wheat, or whatever--that enter into the production of the final commodities. Thus the government is driven to controls in ever-widening circles, and the final consequence will be the same as that of universal price-fixing.
The trend is clear: what Hayek in 1944 called the road to serfdom.
The natural consequence of a thoroughgoing overall price control which seeks to perpetuate a given historic price level, in brief, must ultimately be a completely regimented economy. Wages would have to be held down as rigidly as prices. Labor would have to be rationed as ruthlessly as raw materials. The end result would be that the government would not only tell each consumer precisely how much of each commodity he could have; it would tell each manufacturer precisely what quantity of each raw material he could have and what quantity of labor. Competitive bidding for workers could no more be tolerated than competitive bidding for materials. The result would be a petrified totalitarian economy, with every business firm and every worker at the mercy of the government, and with a final abandonment of all the traditional liberties we have known.
Under price ceiling, bidding is illegal. Prices no longer convey accurate information about supply and demand. Output falls. Economic growth falls or disappears. Rationing spreads. Shortages increase.
Of course, none of this happens if the central bank deflates. But they rarely do.
The West did not march down the road to serfdom after World War II. Before 1946 was over, a strike by beef producers forced President Truman to remove all price controls on beef. That was the end of most of the national controls.
The American public got tired of the shortages. They got tired of the rationing coupons. They wanted to return to the world of 1941.
In Great Britain, the Labour Party won the 1945 election. They kept the price controls in place until 1951. Shortages were universal. So was rationing. There were controls in the Western zone of Germany until the economics minister Ludwig Erhard abolished them on June 20, 1948. The German economic recovery began the next day.
The public did not know that price controls led to rationing. But the voters wanted an end to rationing. This forced the hand of the governments. They had to abolish the controls. This is why periods of price and wage controls in peacetime do not last long. Voters will not tolerate rationing, except in limited markets.
Nixon imposed price and wage controls by fiat on August 15, 1971, the day he abolished the gold-exchange standard. The controls created bottlenecks, visible in long lines at gasoline stations. They were abolished in April 1974.
Price and wage controls have come and gone in history. They do not last long. Black markets undermine them: goods and services flow into these illegal markets. Government rationing creates resistance politically. The public does not understand the logic of price ceilings, but they recognize the government's response: rationing. Voters will not tolerate this in peacetime. Their answer is this: "Don't you know there's not a war on?"
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