Chapter 40: Price Controls
Updated: 1/13/20
Christian Economics: Teacher's Edition
“Bad, bad,” says the buyer, but when he goes away, then he boasts (Proverbs 20:14).
Everyone wants to buy cheaper. Everyone is looking for a better deal. If I can buy it for less, I retain more of my money. More money is better than less money. Furthermore, there is my adaption of Ben Franklin’s aphorism: “A penny saved is up to 1.4 cents earned, depending on your tax bracket.”
In modern economies, most sales are by computerized bar codes. It is not possible to save money by negotiating with the person at the check-out register. Prices and quantities are computerized. The person at the check-out register cannot modify prices. Everything is set up to let buyers go through the line rapidly.
There are still products that are still sold by negotiation. Automobiles are sold this way. So is most real estate. But where items are all the same, unlike real estate, they are usually sold without any negotiating.
This is a modern development. Throughout most of history and in most societies, buyers and sellers negotiated prices and the terms of sale if credit was involved. They negotiated face to face. There was no court to enforce a law that said negotiations could not involve deception. There was no such law. Everyone assumed that there would be verbal deception. It is a mark of capitalism’s mass market sales that deception has become a matter of court cases.
The proverb provides an example of verbal deception: “Bad, bad.” The buyer is trying to negotiate a lower price. He is offering a reason why he is unwilling to pay the seller’s initial asking price. There is an advertising strategy called “reasons why” selling. This verse tells us that there is a comparable strategy for buying. This proverb tells us what we already know: a person may say “bad, bad” when he is thinking: “Good, good . . . and even better if I can get it at a lower price.” Even when he can’t, and he pays the asking price, he brags to others that he got a terrific deal. What he said in one setting is the opposite of what he said in another setting.
Now I am going to give you a practical tip. Here is how a wise person buys a house. He meets the sellers. Real estate agents in the United States do not like sellers and buyers to meet, but a wise buyer will ask for a meeting. Here is what a buyer should say after a tour of the house. “This is a great house. I can’t imagine why anyone would sell a house like this.” The wife wants to hear that her house is great. Her husband likes to hear this, too. It disarms him. He is likely to blurt out the reason why they are selling the house. If he does, the buyer now has useful information about their motivation. He may be able to negotiate a better price or, equally desirable, offer something inexpensive to expedite the sale at a lower price. Warning: do not begin with “bad, bad.”
Prospective buyers were complaining about intolerably high prices in Solomon’s day. This negotiating technique would be as widely used today as it was in Solomon’s day if it were not for bar codes and one-click ordering online. Digital buying is now a matter of “take it or leave it.” There is no negotiating.
In politics, it is all negotiating. In the voting booth, it is take it or leave it, but as soon as the elected candidate is in office, the negotiating begins. If he is an incumbent, the negotiations are merely extensions of where the politician left off on the day of the election. He made whatever promises he thought would persuade a majority of voters during the campaign, but now it is back to business as usual.
Politicians know that there are plenty of buyers in their electoral districts who want to pay lower prices. But if prices were lower, these people would still begin negotiations with “bad, bad.” These people see an opportunity. What if they could secure low prices on a permanent basis? What if they could escape the pricing decisions of sellers? What if they could prevent sellers from starting out with high prices, hoping that buyers will buy? What if negotiations began with this? An officer of the law accompanies every seller to the marketplace. The officer presents the buyer’s offer. “I have a badge, and I have a gun. Your price is too high. Lower it, so that my friend here can afford to buy.” What if the seller says he will not sell at this lower price? The officer then says this. “Bad, bad. You are either going to pay a fine or else pay a lawyer.”
There are two kinds of price controls: price ceilings and price floors. This example is a price ceiling. It sets a legal maximum on prices of specific goods and services.
When the banking system does not expand the monetary base, prices tend to fall slowly. Increased production leads to price competition. You may have heard the phrase: “Inflation happens when too much money is chasing too few goods.” Price deflation happens when too many goods are chasing a fixed quantity of money. The tendency of free market capitalism is to increase wealth: goods and services. When there is a gold coin standard, this stabilizes the money supply. The result is price deflation: sellers vs. sellers. Under these conditions, there is no political demand for price ceilings, but there is rising political demand for price floors. Sellers tell buyers regarding their money: “Bad, bad. You should pay more money.” Buyers then shop for bargains, which they find. This upsets sellers who cannot compete with other sellers. They pressure politicians to enact price floors.
The most widespread price floor legislation is minimum wage legislation. I deal with this in Chapter 40. The other widespread price floor legislation is related to minimum wage laws: any law that compels employers to negotiate with trade unions rather than individual workers. I cover this in Chapter 41.
Here is a summary of price controls. Price ceilings create shortages. Price floors create gluts. All price controls convey inaccurate information regarding the underlying conditions of supply and demand. We might go so far as to call price controls lying conditions of supply and demand.
The phrase “price controls” is misleading. Prices are not arrested. Prices are not fined. Remember this phrase: “Price controls are people controls.” If you remember it, you will be less likely to be deceived by the arguments favoring price controls.
Two people are interested in making an exchange. Each of them is an owner of property. The buyer owns money. The seller owns something that he wants to sell for money. The biblical judicial principle governing this exchange is this: “Am I not allowed to do what I choose with what belongs to me?” (Matthew 20:15a). Each of them is God’s steward, both legally and economically. Each of them is responsible to God for the profitable administration of his property. Ownership establishes legal responsibility. Because each of them owns property, each of them is legally entitled to disown this property. Neither of them can escape the responsibilities of ownership except by transferring ownership.
At this point, an officer of the civil government intervenes. He asserts a higher degree of ownership. He asserts the legal authority to enforce the economic terms of any exchange. The government has granted him this authority. He is not acting as a tax collector. The state will not add to its ownership of monetary assets. This declaration of state ownership is either on behalf of the buyer (price ceiling) or the seller (price floor). In the case of a price ceiling, the buyer will receive a state subsidy if the exchange takes place at the legal price. In the case of a price floor, the seller will receive a state subsidy if the exchange takes place at the legal price. The person receiving the subsidy benefits at the expense of the other participant. In economic terminology, this is called a zero-sum transaction. The gain of the winner is offset by the loss of the loser. But this terminology is conceptually incorrect. The loser has lost more than the winner has gained. Behavioral economics has discovered in thousands of psychological experiments that an equal monetary loss and gain is asymmetric. The loser experiences greater discontent than the contentment the buyer has gained. This assessment assumes that we can make interpersonal comparisons of subjective utility. In terms of the logic of methodological individualism, such a comparison is impossible. There is no common measure of subjective utility. Economists have known this ever since 1932: Chapter VI of Lionel Robbins’ book, An Essay on the Nature and Significance of Economic Science. Nevertheless, based on both introspection and psychological experiments, we can safely say that the asymmetry exists. Conclusion: because of the price control, the degree of mutual benefit is reduced in any exchange. There has to be some expected mutual benefit if they decide to trade. If there weren’t, they would not trade. But one of the traders has received a benefit that he did not pay for. This is a coercive wealth transfer.
This assumes that an exchange takes place. But it is possible that exchange will not take place. The seller refuses to sell. Or, if he had planned to sell at a higher price, and he built inventory on this plan, he will refuse to continue to supply the item in the future. The supply of the item will decline. Hence, there is a shortage. The below-market price imposed by the law sends false information, namely, that there are sellers willing to sell at this price. This is incorrect. Marginal sellers who would have sold at a higher price leave the market. There are more buyers willing to buy at this price than sellers willing to sell.
A buyer wishes to exchange money for a scarce economic resource. In his quest for the best possible deal that he can get, limited of course by search time, he wants accurate information about availability. He does not want to waste his time running down rabbit trails in search of items at prices that are not available.
In modern sales, there is a sales tactic called bait and switch. A seller advertises an item at an abnormally low price. He wants to get shoppers into his place of business. They come in response to the public offer to sell. But the offer is not real. The seller has no intention of selling the item at the advertised price. He then uses high-pressure sales techniques to persuade shoppers to buy a more expensive item. He is a skilled salesman. He succeeds in converting a profitable percentage of these shoppers into buyers of a more expensive item. But he has made these sales only by stealing time from those shoppers who came to his place of business ready to buy at the listed price. This is an act of theft. Bait-and-switch selling is therefore illegal in many jurisdictions, and it should be.
Price ceilings are bait-and-switch policies imposed by the state. Buyers are told that they may purchase items at a price lower than the price that the free market’s auction process would have established. Buyers are told by the politicians that sellers may not charge higher prices for some item. Bureaucrats enforce this law. This is an act of theft.
Some buyers discover that they can add incentives to sellers that are not officially recorded. But sellers fear getting caught and prosecuted.
Other buyers become desperate. They cannot buy what they want. Then they organize politically to get the state to set up a rationing program. This is common during major wars. The ration coupons are distributed on some basis other than high bid wins. They become the real money. The greater the discrepancy between the free market price and the price ceiling, the more that ration coupons become the functional monetary system.
While a seller is not legally permitted to sell an item above the state-imposed price, he is permitted to refuse to sell at this price. No one enforces a law that he must sell. He can decide to give away the items and possibly receive an income tax deduction. He is allowed to burn the item, as long as he does not violate safety standards or air pollution laws. He is allowed to barter the items with other sellers whose inventories have also been priced below market. If he is willing to break the law, he can sell the items at a market price in what are called black markets, meaning markets that exist in the dead of night, where there are no government searchlights. Prices on these markets are higher than they would have been, had there been no price ceilings. There is greater risk of being arrested and convicted of a crime. Buyers must pay a premium price for such high-risk behavior.
A seller can reduce the quality of the items in question. The items appear to be the same, but they are not.
A seller can export items to markets where there are no price ceilings. He need not bring the money back into his jurisdiction. He can keep the money abroad, whether across a state line or a national border. He can spend it in that jurisdiction when he goes on vacation.
A seller of used goods is rarely under the price control law. He can sell the used items on Internet auction sites. Buyers who want the item and cannot locate new ones to buy begin to bid against each other. A businessman who is in the used goods market is subsidized by the state by means of price ceilings. Antique stores, flea markets, and junkyards experience rising demand and rising profits.
Pencils are unlikely to be the targets of politicians. They are considered to be of marginal importance in society. The idea that the public is being gouged by ruthless pencil manufacturers is unlikely to gain a wide constituency among the electorate. Pencil manufacturing is not placed under price controls. A company’s profit margin is not restricted by price ceilings.
On the other hand, some of the raw materials that manufacturers use to produce pencils may come under the price ceiling law. In this case, pencil manufacturers’ pre-controls plans would be disrupted by shortages of key components. In this case, they may be forced to buy more expensive imports and have them shipped into the country. Or they may be forced to set up factories abroad, where there are no price controls, and then import their own brands.
Price controls are controls on individual owners. Politicians and then bureaucrats inform property owners that they are no longer free to exchange goods and services on terms satisfactory to them. Some of the property owners own money. Others own goods. Others possess skills that are in demand in a specialized labor market. This means that ownership has been re-defined. Ownership no longer means the legal right to disown property on terms agreed between two sellers/buyers. This is a loss of liberty.
Price control laws mandate the transmission of inaccurate information. Price controls tell buyers and sellers that assets are available at prices that are different from what the free market would have produced through competition: buyers vs. buyers, sellers vs. sellers. Price ceilings misinform buyers regarding the availability of goods and services at the legal money price. Price floors misinform sellers of goods or services regarding the availability of money at the legal money price. Price ceilings encourage buyers to seek for goods and services that will not be made available by sellers. They will encounter shortages. Price floors encourage sellers of goods and services to seek for money that will not be made available by buyers. They will encounter gluts.
Whenever you hear the word “shortage,” think this: “At what price?” Whenever you hear the word “glut,” think this: “At what price?”
Whenever you hear arguments in favor of price ceilings, think this: “Bad, bad,” says the buyer, but when he goes away, then he boasts.
Every buyer wants a good deal for his money. The best way for him to discover a great deal is to research the market. But, in order to conduct this research profitably, a buyer relies on accurate information, beginning with information on prices. Under all systems of price controls, this information will be inaccurate. It will be misleading. Official prices will not be real-world prices. They will produce rabbit trails and dead ends. They will waste buyers’ time in searching for fruitless deals. The greater the discrepancy between the market price and the legal price, the more that these searches will resemble searches for a pot of gold at the end of a rainbow.
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