The Case for Free Markets

September 8, 1952

The economic problems of the British and ourselves are more alike than is usually supposed. Both of us are suffering from the monetary inflation created by our respective governments’ own policies; and both of us are suffering even more from the government controls imposed ostensibly to protect us from the consequences of this inflation. The difference between our respective problems is chiefly one of degree, not of kind.

This becomes clearer when we read an admirable article like that of Lord Balfour of Burleigh in the July issue of Lloyds Bank Review of London. His arguments are directed against the controls in Britain, but they apply with equal force against the controls here.

Lord Balfour begins by explaining the “immense superiority” of a free price system. “The price mechanism . . . and direct or physical controls . . . are the two fundamentally different methods of adjusting the demand for any good to the available supply. Under the price mechanism, supply and demand are brought into harmony by the movement of prices; the allocation of the available resources is determined by the operation of market forces. . . . [This] is the kind of situation we took for granted before the war, a situation in which every single consumer in the country could walk into any shop anywhere and buy (up to the limit of his money income, naturally) whatever he wanted. . . . In those days there were no such things as ‘shortages,’ not because physical supplies were necessarily any greater but because prices were uncontrolled and so brought demand and supply into balance. Nowadays, of course, the very expression ‘uncontrolled’ prices suggests exorbitant prices. In reality, as we all know, the free, uncontrolled prices of prewar days were both low and stable by comparison with anything that has happened since. The situation, now so familiar, in which any price that is free to move tends to shoot upwards, is a product of inflation.”

When rationing and allocation take the place of free prices, the decisions are taken, not by the consumers themselves, but by bureaucrats who say in effect: “We know best what you want.” Consistently applied, as Balfour points out, the allocation system leads to direction of labor—a gross violation of freedom. “What do we value most in our way of life? Surely our liberty. Of all freedoms, with perhaps the single exception of freedom to choose our job, none contributes more to our real liberty than the freedom to spend our money as we will and to give free rein to our individual choices and desires.”

Balfour goes on to show that “there cannot really be any dispute about the superior efficiency of a properly working price system. . . . Rationing and controls are merely methods of organizing scarcity; the price system automatically works towards overcoming scarcity. If a commodity is in short supply, a rise in its price does not merely reduce demand but will also tend to stimulate an increase in its supply. In this, the price system stands in direct contrast with rationing and controls, which tend to make it less profitable, or less attractive in other ways, to engage in essential production than to produce the inessentials which are left uncontrolled.”

Balfour’s final step is to show how artificially low interest rates create inflation, and how effective and even “selective” a weapon is an increase in the Bank of England rate. It can not only halt inflation, but it can help to balance trade and to direct production into the desired channels.

It is a pity that so much clearsightedness on the part of the chairman of Lloyds Bank should be marred by a blind spot. He cites exchange control, for example (one of the most vicious controls of all), as an exception, arguing that it “cannot be abandoned until the balance of payments is put right.” But if he had followed the logic of the rest of his article he would have recognized that the unbalance in Britain’s payments is caused by exchange control. Only foreign-exchange rates freed from price control will bring “supply and demand into balance.”