- Socialism-in-Practice Was a Nightmare, Not Utopia - February 23, 2021
- The Case for Freedom in Ludwig von Mises, F.A. Hayek, and Ayn Rand - February 19, 2021
- The Bankruptcy of Conservative Political Paternalism - February 17, 2021
We increasingly live in a new “dark age” of economic ignorance, and even stupidity. Few things exemplify this trend as much as the call for price controls over the interactions of multitudes of people in the marketplace of supply and demand. There are few government interventionist policies as likely to disrupt, distort, and imbalance the actions of tens of millions, indeed, hundreds of millions, of people dependent upon each other for the everyday things of life as much as price controls.
In California, the state legislature has approved a system of statewide rent control in the name of maintaining reasonable rental housing expenses in the face of high housing costs. States and municipalities around the country have been implementing higher minimum wages laws up to $15 per hour in the name of ensuring a “living wage” for lower-skilled employees. (See my article “Freedom and the Minimum Wage.”)
At the federal level, the president of the United States continues his attempted pressure on the Federal Reserve to set key interest rates to zero, a level even lower than the U.S. central bank already manipulates the cost of borrowing in financial markets. President Trump also tries to set minimum prices for a wide variety of imported goods, especially from China, through imposing increased tariff costs on a growing number of items coming from abroad. (See my articles “Interest Rates Need to Tell the Truth” and “America’s Economic Commissar of Trade.”)
A Republican president and “progressive” Democrats all share a common belief and premise in their thinking about the market and the power of government: those in political authority have the right and the ability to determine the prices at which a variety of goods and services may be bought and sold, without any notable consequences other than the ones they promise to produce from imposing such price controls.
Freedom of Speech and Free Market Prices
I have often thought that market prices should be protected from government interference and infringement under the First Amendment to the U.S. Constitution. Just as freedom of speech and freedom of the press are essential for the communication of ideas between people that enables them to express their ideas and share them with others for the mutual gains from discourse and dialogue on every imaginable subject, including politics, the same applies to people’s expressions and evaluations communicated to others through the medium of market prices.
We certainly consider it reasonable if two or more people in each other’s company are free from government intervention to verbally state and debate their views on politics, the conditions of society, the uncertainties of the weather, the controversies concerning religious doctrines and dogmas, or even where a good meal might be obtained at what one of the discussants suggests might be a reasonable price.
We, equally, consider it reasonable if these two or more individuals choose to convey their thoughts on these or any other topics over the telephone or in articles and other forms of print and social media, within and across neighborhoods, communities, regions, countries, and continents. In fact, our increasing sense of a shared global society connecting people virtually anywhere in the world is precisely due to these and related modes and methods of interpersonal communication.
For the government to interfere with or abridge any of these instances of freedom of speech has been long established in the United States as “unconstitutional.” Often what some might consider highly objectionable forms of public expression of an idea or belief as conveyed on the canvas of a painting or the words in a song have been declared to be “protected speech.”
Prices as Essential Means of Market Communication
The same should apply to market-based prices, in my view. They are a necessary and essential means for multitudes of widely dispersed people to inform each other in a simple and encapsulated communicative form what they desire as consumers and the relative value they place on the various goods and services they might be willing and interested in possibly buying; and for those on the supply side of the marketplace, prices enable them to share information with others about what they consider the alternative uses and values of the resources and labor services in different lines of production that they might purchase, rent, or hire.
Just as people learn and evaluate new things based on continuing discussion and debate with others on any sundry of subjects, and in the process modify and revise their own articulated positions and perspectives in spoken or written exchanges, the same is no less true in the case of constant and continuous revisions of market prices reflecting new evaluations and appraisements about what people would like to demand and what the costs of producing goods may be in bringing them to market over a period of time.
Ludwig von Mises and the Abolition of Prices Under Socialism
It is almost 100 years since the Austrian economist Ludwig von Mises (1881–1973) published his famous article “Economic Calculation in the Socialist Commonwealth” (1920), which he then expanded into a far more comprehensive critique of possible collectivist societies in his treatise Socialism: An Economic and Sociological Analysis (1922; revised eds., 1932; 1951).
Mises’s central point against socialist central planning was that with the abolition of private property in the means of production, this brought an end to market competition and the disappearance of free prices on the supply side of the economy. The socialist planners would be left blind concerning what and how to produce the goods and services the members of the society might actually want, and in the least costly manner to get the most out of the scarce resources available in the promised socialist utopia.
In competitive markets, not only does private property permit a wide discretion of use to the owner of what he possesses, but each has the option to trade away what they own for that which is possessed by another, if mutual terms of exchange may be reached between them. The resulting market prices “objectify” all the personal, or “subjective,” valuations and judgments for all that might be bought and sold among the members of society.
At the same time, the diversity of all the heterogeneous and tradable things, with all their different qualities, features, and characteristics, are reduced to a simplifying common denominator for valuation and appraisement in the form of the money prices for all the goods, services, and productive resources in the society that can be bought and sold. Competitively formed prices, therefore, provide the shared market language, if you will, through which all the members of the society may communicate with each other for effective, efficient, and incentivized interpersonal cooperative coordination of everything done in the social system of division of labor.
The Language of Prices Is Needed and Used by Everyone, Every Day
In addition, unlike “natural” languages that differ among various groups of people around the world and which often require the complex “art” of translation, the market language of competitively formed prices is universal. In the global market arena, “translation” is easy for anyone through the simple conversion of one currency’s value into another as found and expressed on the foreign exchange markets every day.
While arguments over Aristotelian philosophy or the nature of black holes in other corners of the universe have their value and importance, on an everyday basis only a relatively small number of people concern themselves with and debate issues relating these subjects and others like them. Certainly, freedom of speech and the press are essential for these and multitudes of other subjects that matter to any number of people.
But the price language of the market is not only essential, but crucial to virtually everyone, everywhere, everyday, without which the ongoing needs and wants of all of humanity participating in the division of labor for the material and cultural maintenance and betterment of all could be impossible. The existence and free formation of prices is coterminous with the preservation of the prevailing human condition and its improvement over time.
Government Regulation of Business Distorts Market Outcomes
Ninety years ago, in 1929, Ludwig von Mises published a collection of essays under the title Critique of Interventionism. If socialist central planning was inherently unworkable with its abolition of private property, market competition, and a price system, could there not be found a “middle way” between unregulated capitalism and a comprehensive socialist command economy? Could not be introduced a system of government interventions in the form of selected and limited price and production controls and regulations that would restrain and redirect market activities into more “socially desirable” directions and patterns without doing away with the essential institutions of a market economy and its profit-guided incentives for business efficiency and improvements over time?
Mises’s critique of such proposals was to point out that government regulations over what and how goods could be produced inescapably limited the liberty of private enterprisers from having the discretion to produce those goods they considered most valued and demanded by the consuming public, and with the qualities and features and characteristics they judged likely to be the most profitable. And the earning of profits in a free market is dependent upon how successfully entrepreneurs market the products or services consumers are discovered to have actually wanted and, therefore, were willing to buy at prices that more than covered the costs of production.
The judgment about what should be produced, as well as how and where, and with what resources and labor services, is at least partly shifted out of the hands of those investing their own capital and who are by market necessity consumer-oriented, and into the hands of politicians and bureaucrats whose ideological and special interest goals and purposes have little to do with satisfying the actual demands of the buying public or using the scarce means of production in the most cost-efficient ways.
The Imbalances and Secondary Effects From Price Controls
But of all the various forms of government intervention, Mises’s harshest criticisms are directed against price controls. By fixing prices at a level either above or below where the free market process would have established them, government inescapably distorts and imbalances supply and demand, with numerous secondary effects that only exacerbate the effects of the imposed price controls.
One of Mises’s most famous examples is with the government imposing a maximum price on some commodity, with the mandated price being set below where the market would have established a coordination between supply and demand. By setting the price below the market-clearing level, it not only generates a greater quantity demanded for the good than at the hypothetical market-based price, but it also tends to bring about a reduced quantity supplied of the good.
If the good has a degree of durability, some sellers may decide to hold a certain amount of it off the market with the hope of an end to the controlled price at some point in the future; or it may be held off the market to be sold at a higher illegal, black market price; or the seller may withhold a part of his supply and use it for some personal or other use of greater value than what he could earn selling at the controlled price.
But if the good is a non-durable good, the seller may find that his only choice (separate from any black market sales) is to sell his inventory at the controlled price for whatever it can earn. But now, Mises argued, a new dilemma arises. Any new purchase of inventory by the retail seller requires him to buy it from his wholesale dealer. But as the government has fixed his retail price the question arises whether he can afford to purchase the same quantity of inventory from the wholesaler as before.
If the government has fixed the price of his good below what he had been selling it for, then his total revenues (the controlled price times the number of units of the good he had to sell) will be less than the sum of money he needs to buy the same amount from the wholesaler, because the retailer must pay the same wholesaler’s uncontrolled prices as before the government’s price intervention at his retail level.
One Price Control Leads to Another up the Supply Chain
The result, Mises explained, is an emerging shortage, that is, a quantity demanded at the controlled price greater than the available quantity supplied on the market by the retail sellers. Either the government reverses its intervention and allows a market-determined price to reestablish itself on the market, with quantity demanded and supplied being rebalanced, or, Mises reasoned, the government must extend the price controls to the wholesale level, to make it possible for the retailer to purchase as least as much from the wholesaler as he had prior to the price intervention.
But the same problem re-emerges one step further back from the consumer level of the market. Now with his prices also fixed below market clearing by the government, the wholesaler finds it financially impossible to purchase as much of the good from his suppliers as he had before. If the government is determined not to admit the error of its ways and insists on carrying on with its attempt to artificially fix the retail price of the good in question below its free market level, then the price controls must, once more, be extended backwards up the supply chain of production and sales to encompass those producers and sellers who supply the good in question to the wholesaler.
The “dynamic” of the price-interventionist path taken, Mises reasoned, given the interdependency of prices and production throughout the supply chains of the division of labor, is that step-by-step the price controls would have to be extended further and further back and up the stages of production to include more and more of the complementary and product-substitution sectors of the economy, until, finally, the price controls would envelop virtually all of the market.
The end result of introducing such maximum price controls below market-established levels, Mises concluded, would be the entire economy finally coming under the command of the government through these piecemeal additions to the network of price controls, one sector of the economy after another. This brings about a socialist-type command economy by the backdoor. If production is not to be guided by and coordinated with consumer demands through free market prices, then government must, at some point, start dictating what gets produced, where, how, and for whom.
F. A. Hayek on the Negative Consequences From Rent Controls
Interestingly, shortly after Mises offered his analysis of interventionist policies, including price controls, in his book Critique of Interventionism, his younger “Austrian” colleague, Friedrich A. Hayek (1899–1992), published an article on “The Repercussions of Rent Restrictions” (1930), using the city of Vienna as an example of the consequences from government-imposed rent controls.
After all the historical instances of rent controls during the 20th century, Hayek’s conclusions should not be surprising to the modern, market-informed reader. Whether the rent controls are initially set below the previous market-coordinating levels or are prevented from rising over time in the face of increased demand, the inevitable result is a residential housing shortage. The quantity demanded for rental accommodations necessarily begins to increase due to the government-fixed lower cost of residential housing from prospective renters’ points of view, Hayek explained.
Furthermore, those currently residing in residential housing units at the time the rent controls are imposed now are reluctant to part with them, since any substitute housing to live in either may cost more if outside the jurisdiction of the rent-controlling authority or places the occupant parting with his current rent-controlled apartment in the same dilemma as many others — finding available housing in the face of the rent-controlled shortage.
As a consequence, residential apartment turnover is much reduced from what it otherwise would be in a free rental housing market. In addition, Hayek argued, it also could tend to reduce labor mobility in the face of changing market conditions. Whether currently employed or unemployed, a worker may decide not to relocate to where more attractive gainful employment might be available if one of the elements in the decision is whether the cost of housing might be significantly higher in the alternative work location relative to the cost of the rent-controlled housing from which one is presently benefiting. Thus, the rent control’s distortion of the housing market price structure may result in part in the labor force not being allocated among employments in the most market-directing pattern, given employer demands for members of the workforce.
In the case of the unemployed, Hayek said that a rent-controlled apartment is equivalent to an increase in any unemployment benefits received from the government: “What is certain is that to an unemployed worker a controlled tenancy is the equivalent of a substantially higher unemployment benefit. In other words, rent controls have the same effect as a rise in unemployment benefit in reducing pressure on the labor market from the unemployed.”
Rent Controls Reduce the Incentives to Maintain and Increase the Housing Supply
At the same time, Hayek emphasized, the rent controls undermine the incentives and the profitability of maintaining or improving those portions of the housing market impacted by the imposed below-market prices for rental units. Thus, over time, segments of the existing housing stock deteriorate in quality and may become unusable, making any housing problems for which the political authority rationalized its rent-control intervention in the first place potentially even worse.
Also, part of the stock of rental housing may be taken off the market for other uses by the property owner; if not all types of housing are under rent control, one of these alternative uses may be to rebuild or remodel the existing rent-controlled property to be re-categorized as outside of the rent-control authority. All of this, clearly, reduces the availability of residential housing for many of the very people the government controllers publicly declared they wished to assist — the poor and low income.
The upshot of this discussion, with using rent controls as one specific example as offered by Friedrich A. Hayek, and in the wider context of Ludwig von Mises’s general critique of price-control intervention, is awareness of the deleterious effect from any and all interferences with market-based and market-determined prices.
As a number of economists have pointed out, prices have work to do. Their central role in society is to serve as a crucial means of interpersonal communication to inform and coordinate the actions of, now, billions of participants in the global system of division of labor. Without competitively formed prices in the marketplace, rational and reasonable economic calculation becomes impossible, in terms of effectively conveying needed information about supplies and demands in a next-door neighborhood and halfway around the world.
Prices are the shared and common language of the marketplace, without which people are unable to converse with each other around the globe concerning their wants and desires, on the one hand, and the willingness and abilities of others to supply what is wanted, including the terms and trade-offs at which all in society may prosper. It is for that reason that all forms of price controls are a dangerous abridgment of our essential right to freedom of speech.
[Originally Published at AIER]