Mud Pies for Sale; P.L. Poirot

THE AMERICAN PEOPLE finally know the truth about Watergate: it didn't stop inflation. But there persists some honest confusion in Washington, if not elsewhere, as to the cause of high prices and how to combat them. It seemed for a time that the culprit might be General Motors, the rumor being that prices of new models would rise by as much as $500. A bit later, New York subway fares were said to be the key: any increase over the prevail ing 35 cents would be infl.ationary. Meanwhile, others allege that higher wages demanded by labor unions have been chiefly respon sible for rising· prices. And the Office of Communication of the U. S. Department of Agriculture explains that food· prices reaHy haven't gone up, comparatively speaking. But if it seems that they have, it could. be attributed PAUL L. POIROT -.-:= to the fact that 1973 wasn't a nor mal beef year, that hog and poul try producers lowered their pro duction plans when costs rose; that worldwide drought and afflu ence drained American stocks of wheat, corn, soybeans and the like; and that more Americans ar~ dining out instead of home cook ing.

Ask any youngster at his lemon ade stand why he doesn't diversi fy, and he'll promptly give you economics in one lesson : "Well, mister, it's a lot more fun to make mud pies, but there's just no mar ket for them." How come we grow up forget ting what every youngster knows instinctively? Would you believe that some two-fifths of the time and effort and scarce resources· of we the adults of America are go ing into mud pies! Roughly 40 per cent of our factors of production 737 738 THE FREEMAN December are being diverted to purposes for which "there's just no market." So what have mud pies to do with inflation? The answer is: "Almost everything." But let's take it step by step. And our first step is to get off the back of General Motors, or at least off the very silly idea that the most efficient producers of the goods and services we want to buy are the ones who are causing high prices. It ought to be clear that the people who are not producing and selling cars are more likely the caUse of high priced cars than are the largest and most efficient producers. By and large, most of the customers for cars are persons who at least think their time and property is better invested at something other than auto produc tion. Are the customers then to be blamed for high priced car~?

Are Customers at Fault? Well, don't let the customers off scot-free. Noone would be mad at a .. little old mud pie maker if he doubled his price. But if some customer willingly paid that price, who should be held responsible? If General Motors hikes its price $500 and finds no customers, does General Motors cause inflation? There may be chapters in the history and performance of Gen eral Motors worthy of criticism. If so, let the critic document his case. But let us not believe that browbeating producers of the goods and services customers want is a reasonable way to combat in flation. General Motors is not the cul prit. And for the same reason, neither do the unionized laborers of America possess direct powers of inflation or deflation. The per son who demands a wage higher than anyone is willing to pay may find himself unemployed, which is indeed depressing. But if there's no market for his kind of mud pie, how can the result be infla tionary?

Well, there is a way. If organ ized labor can marshall votes enough to badger Congress to ap propriate the funds and create the new money needed to pay for an other batch of mud pies (in this case, pay men who are out on strike) that, in effect, makes a market for an otherwise unwanted item; American citizens lose their right of refusal to buy mud pies. This governmental action with draws scarce resources from the market place, just as if customers had willingly paid men to produce mud pies or to idle themselves on strike. So, to the extent that un ions or any other political pres sure groups are permitted to ex ercise the governmental power to force customers to buy unwanted mud pies (the process is to print 1974 MUD PIES FOR SALE 739 new money to cover the subsidy), that is inflation. Subsidies Upset the Market As for subway fares, it is not the 35 cents paid by riders that is inflationary; it is the balance of the cost which is covered by sub·· sidy, which is in turn translated through a Federal deficit into ad·· ditional fiat money. It's the added supply of fiat money that spells in·· flation, and the money is printed in order to withdraw from the market place goods or service8 customers demand if "someone else" pays for them.

The high prices housewives are willing to pay for beef, sugar,and other foods are not inflationary, nor is drought or blight in the corn b~lt inflationary. These things, of themselves, do not add to the supply of fiat money. But if the Federal government lends (gives) Russia dollars with which to draw foodstuffs from the market, the great likelihood is that those will be extra dollars printed; and that is inflationary. So are the new dol lars printed to cover farm subsidy and school lunch and food stamp and other welfare programs. If taxpayers were happy and willing to pay for mud pies, and if Congress resolutely abstained from all deficit spending and re fused to authorize the printing of fiat money, the problem of infla tion would be ended. Ah, yes, but what would the poor people then do for money? Ask the young fellow at the lemon ade stand, and he'll tell you: all you have to do is earn it; offer a service or supply a good that cus tomers want to buy. And what precisely would all these traders use for money? Why, anything they pJease. Whatever they think might best serve as a medium of exchange. Perhaps they'd choose gold, as free men customarily have chosen down through the ages whenever the choice was theirs.

To be sure, other commodities have also been .used as money cattle, wampum, cigarettes, gourds - some things that seem very strange to us. But the nearest thing to mud pies that men ever have tried as money are the little green scraps of paper redeemable in nothing. If our lemonade salesman could get Congress to declare that mud pies are legal tender, he could do a land-office business. In addition to commandeering 40 per cent of the time and effort of adults, he could have all the youngsters "making money" too! ~ I I I LOWER WHY would it be a mistake for Federal Reserve officials to lower interest rates? Wouldn't it help the building industry? It would seem that a reduction in interest rates would lead to a renewal of building ac tivity. This would put a lot of people to work and provide a lot more homes for those who want them. In fact, wouldn't lower in terest rates be· a spur to other industries and be good for the country as a whole?