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4. Interference with Prices
Price intervention aims at setting goods prices that differ from those the unhampered market would set.
When the unhampered market determines prices, or would determine prices if government had not interfered, the proceeds cover the cost of production. If government sets a lower price, proceeds fall below cost. Merchants and producers will now desist from selling—excepting perishable goods that quickly lose value—in order to save the goods for more favorable times when, hopefully, the control will be lifted. If government now endeavors to prevent a good’s disappearance from the market, a consequence of its own intervention, it cannot limit itself to setting its price, but must simultaneously order that all available supplies be sold at the regulated price.
Even this is inadequate. At the ideal market price supply and demand would coincide. Since government has decreed a lower price the demand has risen while the supply has remained unchanged. The available supply now does not suffice to satisfy the demand at the fixed price. Part of the demand will remain unsatisfied. The market mechanism, which normally brings demand and supply together through changes in price, ceases to function. Customers who were willing to pay the official price turn away in disappointment because the early purchasers or those who personally knew the sellers had bought the whole supply. If government wishes to avoid the consequences of its own intervention, which after all are contrary to its own intention, it must resort to rationing as a supplement to price controls and selling orders. In this way government determines the quantity that may be sold to each buyer at the regulated price.
A much more difficult problem arises when the supplies that were available at the moment of price intervention are used up. Since production is no longer profitable at the regulated price, it is curtailed or even halted. If government would like production to continue, it must force the producers to continue, and it must also control the prices of raw materials, semifinished products, and wages. But such controls must not be limited to a few industries which government meant to control because their products are believed to be especially important. The controls must encompass all branches of production, the prices of all goods and all wages, and the economic actions of all entrepreneurs, capitalists, landowners, and workers. If any industry should remain free, capital and labor will move to it and thus frustrate the purpose of government’s earlier intervention. Surely, government would like an ample supply of those products it deemed so important and therefore sought to regulate. It never intended that they should now be neglected on account of the intervention.5
Our analysis thus reveals that in a private property order isolated intervention fails to achieve what its sponsors hoped to achieve. From their point of view, intervention is not only useless, but wholly unsuitable because it aggravates the “evil” it meant to alleviate. Before the price was regulated, the economic good was too expensive in the opinion of the authority; now it disappears from the market. But this was not the intention of the authority seeking to lower the price for consumers. On the contrary, from its own point of view, the scarcity and inability to find a supply must appear as the far greater evil. In this sense it may be said that limited intervention is illogical and unsuitable, that the economic system that works through such interventions is unworkable and unsuitable, and that it contradicts economic logic.
If government is not inclined to alleviate the situation through removing its limited intervention and lifting its price control, its first step must be followed by others. Its decree that set price ceilings must be followed not only by decrees on the sale of all available supplies and the introduction of rationing, but also price controls on the goods of higher order and wage controls and, finally, mandatory labor for businessmen and workers. And such decrees must not be limited to a single or a few industries, but must cover all branches of production. There is no other choice: government either abstains from limited interference with the market forces, or it assumes total control over production and distribution. Either capitalism or socialism; there is no middle of the road.
Let us take yet another example: the minimum wage, wage control. It is unimportant whether government imposes the control directly, or labor unions through physical coercion or threats prevent employers from hiring workers who are willing to work for lower wages.6 As wages rise, so must the costs of production and also prices. If the wage earners were the only consumers as buyers of the final products, an increase in real wages by this method would be inconceivable. The workers would lose as consumers what they gained as wage earners. But there are also consumers whose income is derived from property and entrepreneurial activity. The wage boost does not raise their incomes; they cannot pay the higher prices and, therefore, must curtail their consumption. The decline in demand leads to dismissal of workers. If the labor union coercion were ineffective, the unemployed would exert a labor market pressure that would reduce the artificially raised wages to the natural market rate. But this escape has been closed. Unemployment, a friction phenomenon that soon disappears in an unhampered market order, becomes a permanent institution in interventionism.
As government did not mean to create such a condition, it must intervene again. It forces employers either to reinstate the unemployed workers and pay the fixed rate, or to pay taxes that compensate the unemployed. Such a burden consumes the owners’ income, or at least reduces it greatly. It is even conceivable that the entrepreneurs’ and owners’ income no longer can carry this burden, but that it must be paid out of capital. But if nonlabor income is consumed by such burdens we realize that it must lead to capital consumption. Capitalists and entrepreneurs, too, want to consume and live even when they are earning no incomes. They will consume capital. Therefore, it is unsuitable and illogical to deprive entrepreneurs, capitalists, and land owners of their incomes and leave control over the means of production in their hands. Obviously, the consumption of capital in the end reduces wage rates. If the market wage structure is unacceptable the whole private property order must be abolished. Wage controls can raise rates only temporarily, and only at the price of future wage reductions.
The problem of wage controls is of such great importance today that we must analyze it in yet another way, taking into consideration the international exchange of goods. Let us suppose that economic goods are exchanged between two countries, Atlantis and Thule. Atlantis supplies industrial products, Thule agricultural products. Under the influence of Friedrich List,* Thule now deems it necessary to build its own industry by way of protective tariffs. The final outcome of Thule’s industrialization program can be no other than that fewer industrial products are imported from Atlantis, and fewer agricultural products exported to Atlantis. Both countries now satisfy their wants to a greater degree from domestic production, which leaves the social product smaller than it used to be because production conditions are now less favorable.
This may be explained as follows: in reaction to the import duties in Thule the Atlantean industry lowers its wages. But it is impossible to offset the whole tariff burden through lower wages. When wages begin to fall it becomes profitable to expand the production of raw materials. On the other hand, the reduction in Thulean sales of agricultural products to Atlantis tends to lower wages in the Thulean raw material production, which will afford the Thulean industry the opportunity to compete with the Atlantean industry through lower labor costs. It is obvious that in addition to the declining capital return of industry in Atlantis, and the declining land rent in Thule, wage rates in both countries must fall. The decline in income corresponds to the declining social product.
But Atlantis is a “social” country. Labor unions prevent a reduction in wage rates. Production costs of Atlantean industry remain at the old pre-import-duty levels. As sales in Thule decline Atlantean industry must discharge some workers. Unemployment compensation prevents the flow of unemployed labor to agriculture. Unemployment thus becomes a permanent institution.7
The exportation of coal from Great Britain has declined. Inasmuch as the unneeded miners cannot emigrate—because other countries do not want them—they must move to those British industries that are expanding in order to compensate for the smaller imports that follow the decline in exports. A reduction in wage rates in coal mining may bring about this movement. But labor unions may hamper this unavoidable adjustment for years, albeit temporarily. In the end, the decline in the international division of labor must bring about a reduction in standards of living. And this reduction must be all the greater, the more capital has been consumed through “social” intervention.
Austrian industry suffers from the fact that other countries are raising their import duties continually on Austrian products and are imposing ever new import restrictions, such as foreign exchange control. Its answer to higher duties, if its own tax burden is not reduced, can only be the reduction in wages. All other production factors are inflexible. Raw materials and semifinished products must be bought in the world market. Entrepreneurial profits and interest rates must correspond to world market conditions as more foreign capital is invested in Austria than Austrian capital is invested abroad. Only wage rates are determined nationally because emigration by Austrian workers is largely prevented by “social” policies abroad. Only wage rates can fall. Policies that support wages at artificially high rates and grant unemployment compensation only create unemployment.
It is absurd to demand that European wages must be raised because wages are higher in the U.S. than in Europe. If the immigration barriers to the U.S., Australia, et cetera, would be removed, European workers could emigrate, which would gradually lead to an international equalization of wage rates.
The permanent unemployment of hundreds of thousands and millions of people on the one hand, and the consumption of capital on the other hand, are each consequences of interventionism’s artificial raising of wage rates by labor unions and unemployment compensation.
- 5. On the effectiveness of price controls versus monopolistic prices see my “Theorie der Preistaxen” [Theory of price controls] in Handwörterbuch der Staatswissenschaften [Handbook of social sciences], 4th ed., vol. VI, p. 1061 et seq.
- 6. It should be noted that we are not dealing here with the question of whether or not wage rates can be raised permanently and universally through collective bargaining, but with the consequences of a general wage boost achieved artificially through physical coercion. To avoid a theoretical difficulty pertaining to money, namely that a general rise in prices is impossible without a change in the ratio between the quantity of money and its demand, we may assume that together with the boost in wages a corresponding reduction in the demand for money takes place through a reduction in cash holdings (e.g., as a result of additional paydays).
- *. Editor’s note: A nineteenth century (1789–1846) German advocate of the use of protective tariffs to stimulate national industrial development.
- 7. On the question of how collective bargaining can temporarily raise wage rates see my essay “Die allgemeine Teuerung im Lichte der theoretischen Nationalökonomie” [The high costs of living in the light of economic theory] in vol. 37 of Archiv, p. 570 et seq. On the causes of unemployment see C. A. Yerrijn Stuart, Die heutige Arbeitslosigkeit im Lichte der Weltwirtschaftslage [Contemporary unemployment in the light of the world economy], Jena, 1922, p. 1 et seq; L. Robbins, Wages, London, 1926, p. 58 et seq.