Priorities vs. Price Control

April 23, 1951

On April 6, 7, and 8 I attended a conference on “the economics of mobilization” at White Sulphur Springs under the sponsorship of the University of Chicago Law School. There were some 70-odd participants, consisting of university professors of economics and law, representatives of labor, banking, and business, editors, members of Congress, government officials, former price control directors and the present Director of Price Stabilization, Michael V. DiSalle.

In view of the diversity of views expressed, DiSalle could hardly be blamed for remarking that “the experts are much more effective talking to nonexperts than they are talking to each other.” But the chief reason why this was so was that many of the professional economists present abandoned their function as economists in order to become amateur politicians. They did not talk of the economic consequences of price control but of its political popularity. They made no real answer to the argument of those who held that the only way to prevent further inflation is through proper monetary and fiscal policy, and that price-wage control not only fails strike at the root causes of inflation but impairs the general efficiency of the economy and even of the armament effort.

This contention, shared by most of those who came to the conference from the University of Chicago itself, will not be unfamiliar to the readers of this column. As pointed out at the conference, the country’s bank loans rose from May 31 to the end of 1950 by nearly 20 percent, while demand deposits increased more than 9 percent. It is this increase in money and bank credit that financed the rise of 11 percent in wholesale prices and of 6 percent in living costs.

What was most remarkable about the conference was not the political defense of existing price and wage controls but the number of those who condemned the whole policy not merely in details but in principle.

There was instructive discussion of some technical questions. Herbert Stein, for example, of the Committee for Economic Development, pointed out that even where such direct controls as priorities and allocations might be necessary, price controls would still be both unnecessary and undesirable.

As examples, Stein cited such industries as machine tools and steel. These are already working at capacity; they cannot make some deliveries for many months; and they customarily fill first the orders longest on the books. In place of such a “private rationing system,” Stein advocated government priorities and allocations to permit the quickest military deliveries.

Few persons, I believe, would venture to deny the need for this particular kind of priority in wartime or in a defense emergency. But there are several implications of this kind of control which are usually overlooked by those who are most insistent on it. It is not needed where prices have risen too much, but, as Stein points out, where prices haven’t risen “fast enough and far enough to . . . eliminate an excess of demand.” Price ceilings, so far from reducing the need for such priorities, simply make their need “more widespread and more persistent.” Such priorities are “a means of supplementing the allocating function of price where prices do not rise enough to do the whole job.”

This is the opposite of the doctrine usually voiced. It is recognized by most economists (though not yet, apparently, by our present price fixers) that price ceilings do not make sense without priorities, allocations, and rationing. But the converse is not true. Though price ceilings make allocations necessary, allocations do not make price ceilings necessary. On the contrary, they tend by themselves to hold down prices, by reducing demand. They work much easier without price ceilings than with them. For administrators are not then confronted with the impossible task of trying to solve all three determinants in the supply-demand-price equation simultaneously. In brief, though price ceilings cannot work long without rationing, rationing works better without price ceilings. Rationing helps price ceilings, but price ceilings thwart rationing.