What Price Control Really Means; L. W. Reed

Lawrence W. Reed What Price Control Really Means ttIn the great chessboard of human society," observed the eighteenth century Scot philosopher and economist Adam Smith, ttevery piece has a principle of motion of its own, altogether different from that which the legislature might choose to im press upon it." The belief that individuals are pawns to be pushed about by central planners is not new, as this state ment by Smith clearly indicates. In deed, socialism-the controlled society-has its roots in the actions of primitive man. When the first cave man clubbed his neighbor to expropriate the food his neighbor had gathered, he gave blunt, physi cal expression to the essence of socialist society. Mr. Reed is an instructor in economics at Northwood Institute, Midland, Michigan. Two centuries after Adam Smith penned his eloquent defense of the right to be free from coercion, coer cion is again in the ascendancy. It is seen by many as the ttquick fix," the answer to chronic problems, a panacea that will bring order out of chaos. In 1795, James Madison de scribed this phenomenon as ttthe old trick of turning every contingency into a resource for accumulating force in goverment."

The issue of price control provides an excellent illustration. Invariably, as prices rise due to an expanding money supply, talk is heard that government must impose controls. The fact that such talk is becoming more and more prevalent these days may be a warning that price controls loom on the horizon. Therefore, it is absolutely essential to the debate 235 236 THE FREEMAN April that all be made aware of the true implications of government price fixing. Just what is it that control of price by central planners means? What are we abandoning when we embrace the idea? Forcing People to Conform The object of price control is really not the control of trillions of num bers and dollar signs in the econ omy. Price control is merely an ex cuse to coercively dictate the terms of trade between people. The penal ties for violating price control edicts are levied on individuals. Jails and fines are made for people, not for prices. In Revolutionary France, those individuals who dared to trade at prices not in conformity with the ~~Law of the Maximum" paid a visit to the guillotine.

When government fixes price, coercion is substituted for voluntary exchange. Price is no longer deter mined peacefully in the market place of free and willing trade. Economic consequences must follow and they are easily discernible in light of the two functions of price. One function is to allocate scarce resources. When anything is scarce, as all economic goods are, it must be rationed. Supply must somehow be equated with demand. If the market place be imagined as a huge auction, the problem becomes one of who shall get what quantity of the goods to be auctioned. Do we draw straws, or beat each other up until the num ber of survivors equals the number of goods? Would it make sense to line everyone up, fire a gun, and declare that the fastest runners shall re ceive the goods? The economic way to ration scarce resources is through the price sys tem. By way of the ~~market price," supply and demand meet, the mar ket is cleared, and scarce resources are allocated. In so doing, chronic shortages and surpluses are avoided, the productive process is left unharmed, and peaceful exchange becomes the reigning principle. It is a perfectly natural process; all that is required for it to take place is for men to be left alone to pursue their own desires and abilities.

Price also directs production, its second function. Businessmen are professional price-watchers. If con sumer demand for a product in creases, consumers are willing to pay more for that product. This puts pressure on price to rise, which raises profit margins. In order to take advantage of this profitable situation, businessmen increase their production. The process works in the other direction too: declining consumer demand will mean falling price and falling profit margins. In that case, price will ~~signal" produc ers to abandon that line of produc tion and enter another where the demand is more urgent. In the free economy, it is not necessary for the 1978 WHAT PRICE CONTROL REALLY MEANS 237 governmen t to issue an edict to the farmer, ttGrow wheat; the people want bread." It is not necessary for the government to instruct a man ufacturer, HMake televisions; the people want entertainment." The marvelous mechanism of price does the job far better than the noblest and wisest politician.

Economic Disruption The economic consequence of gov ernment price control is economic disruption. A controlled price will still allocate resources, but not in accordance with supply and de mand. Likewise, a controlled price will still direct production, but not in the same directions as consumers, by their voluntary purchases, would have dictated. The signals are fal sified and distorted by fixed prices. The history of price control in America and everywhere else has been the history of shortages, queues, and popular disaffection. The economic effect is but one aspect of price control. A moral question is also involved. By what right does any party coercively dic tate the terms of trade between others? By what twisted principle of justice is one penalized for trading with another at a mutually-agreed upon price? Price control is a form of public theft. In the name of ttthe public good," the authorities are empow ered to force their particular values on others. The victims are all those deprived of the opportunity to trade or to trade on terms which they regard as satisfactory. Price control breeds a spirit of lawless ness, a network of spies and infor mers,. and is unmistakably a hallmark of an immoral society.

To those who are committed to price control, these arguments perhaps will not be sufficient to dis suade them. They may reply that whatever evils price control might produce can be corrected at the bal lot box. The people can supposedly use their political liberty to coun terbalance their loss of economic liberty. To make this assumption is to ignore the manifest threat to political liberty that price control poses. It is no exaggeration that the economic order determines the politi cal order. If people are so controlled economically that their every move is subject to scrutiny by the State, then they can be effectively silenced by the State. ttControl of a man's subsistence is control of his will," wrote Alexander Hamilton. It is in conceivable that economic freedom can be lost while political freedom remains intact. A brief glance at history confirms what theory teaches. In the mercantilist period, roughly 1500 to 1800, the State con trolled the economy. The subjects did not elect their kings and queens.

238 THE FREEMAN In the thousand years of feudalism, the State controlled the economy. The serfs did not vote their masters to power. In modern-day Russia, the State controls the economy and two hundred fifty million Russians are governed by a single political party. In similar fashion, it is no coinci dence that Adam Smith's ideas of economic liberty nurtured ideas of political liberty in the nineteenth century. Because price controls emClosing the Market power the government to establish a vital command post over the econ omy, they would sow the seeds for the loss of political liberty as well. Will Americans endorse a policy of price control? If they have lost fai th in the free society they more than likely will. If the power of price is delivered from the market place to the politicians, surely ignorance of the grave implications will be the proximate cause. @ IDEAS ON LIBERTY To TRADE is to exchange one item for another, as butter for coal. Each party to any trade is both a buyer and a seller, and a person must be satisfied in that dual capacity before he will trade voluntarily.

When the government intervenes to force a change from the free market price, the theory is that one of the parties to the trade will gain at the new price. The idea usually is to help the underdog, whether it be the poor consumer and his family, or the poor farmer, or the poor infant industry, or the poor employee, or the poor Defense Department of the government, or whatever. But the theory is false. It still takes two to make a trade. To arbitrarily change a price for the benefit of one party to the bargain necessarily means a change to the other party's disadvan tage. And it is always that forgotten other party who will not bear the attempted charge. If the government raises the price of butter above its free market level, the owner of coal will not voluntarily trade as much as before. He doesn't want less butter for more coal. So, instead of helping the presumed underdog, the government intervention only drives from the market some of the chances for the underdog to get what he wants through trade.

PAUL L. POIROT, "More than the Traffic Will Bear"