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Theory of Price Controls

1. Introduction

The knowledge that the constellation of the market determines prices precisely, or at least within narrow limits, is relatively new.1 Some earlier writers may have had a dim notion of it, but only the Physiocrats and the classical economists elaborated a system of exchange and market relations. The science of catallactics thus replaced the indeterminism of theory, which explained prices from the demands of sellers, and saw no price limits other than their fairness.

He who believes the formation of prices to be arbitrary eas­ily arrives at the demand that they should be fixed by exter­nal regulation. If the conscience of the seller is lacking, if without fear of the wrath of God he demands more than is “fair,” a worldly authority must intervene in order to help justice prevail. And minimum prices must be imposed for certain commodities and services over which buyers are believed, not quite logically, to have the power to force devia­tions from the just price. Government is called upon to create order because disorder and arbitrariness prevail.

The practical doctrine based on the knowledge of scien­tific economics and sociology—liberalism—rejects all intervention as superfluous, useless, and harmful. It is superfluous because built-in forces are at work that limit the arbitrariness of the exchanging parties. It is useless because the government objective of lower prices cannot be achieved by controls. And it is harmful because it deters production and consumption from those uses that, from the consumer’s viewpoint, are most important. At times liberalism has called government intervention impossible. Of course, gov­ernment can issue orders that regulate prices and punish the violators. Therefore, it would have been more appropriate for liberalism not to call price controls impossible, but rather unsuitable, that is, running counter to the intentions of their advocates. The following discussion will demonstrate this unsuitability.

Liberalism was soon replaced by socialism, which seeks to replace private property in the means of production with public property. Socialism as such need not reject the price knowledge of science; it is conceivable that it could recog­nize its usefulness for an understanding of market phe­nomena in its own economic order. If it were to do that, it would have to conclude that government and other interfer­ence with prices is as superfluous, useless, and harmful as liberalism says it is. In fact, the doctrines of Marxism con­tain, besides quite incompatible principles and demands, the beginnings of this perception; this is clearly visible in the skepticism toward the belief that wage rates can be raised by labor-union tactics, and in the rejection of all methods Marx calls “bourgeois.” But in the world of Marxian reality etatism is dominant. In theory etatism is the doc­trine of state omnipotence, and in practice, it is the govern­ment policy to manage all worldly matters through orders and prohibitions. The social ideal of etatism is a special kind of socialism, such as state socialism or, under certain condi­tions, military or religious socialism. On the surface the so­cial ideal of etatism does not differ from the social order of capitalism. Etatism does not seek to overthrow the tradi­tional legal order and formally convert all private property in production to public property. Only the largest enter­prises in industry, mining, and transportation are to be na­tionalized. In agriculture, and in medium- and small-scale production, private property is to be preserved formally. But in substance all enterprises are to become government operations. Under this practice, the owners will keep their names and trademarks on the property and the right to an “appropriate” income or one “befitting their ranks.” Every business becomes an office and every occupation a civil ser­vice. There is no room for entrepreneurial independence in any of the varieties of state socialism. Prices are set by gov­ernment, and government determines what is to be pro­duced, how it is to be produced, and in what quantities. There is no speculation, no “extraordinary” profits, no losses. There is no innovation, except for that ordered by government. Government guides and supervises everything.

It is one of the peculiarities of etatist doctrine that it can envision man’s social life only in terms of its special socialis­tic ideal. The outer similarity between the “social state” it extols and the social order based on private property in pro­duction causes it to overlook the essential difference that separates them. To the etatist, any dissimilarity of the two social orders is merely a temporary irregularity and a punishable violation of government orders. The state has slackened the reins, which it must pull short again, and everything will be in the best of order. The fact that man’s social life is subject to certain conditions, to regularity like that of nature, is a concept that is alien to an etatist. To him, everything is power, which he views in a grossly materialistic light.

Although etatism did not succeed in supplanting the other socialistic ideals with its own ideal, it has defeated all other branches of socialism in practical policy. In spite of their diverging opinions and objectives all socialistic groups today seek to influence market prices through outside inter­vention and force.

The theory of price controls must investigate the effects of government interference with market prices in the private property order. It is not its task to analyze price controls in a socialistic order that preserves private property by form and outward appearance, and uses price controls to direct production and consumption. In this case the controls have only technical significance, and remain without influence on the nature of the issue. And they alone do not constitute the difference between the socialistic society that uses them and those socialistic societies that are organized along different lines.

The importance of the theory of price controls becomes evident in the contention that there is yet a third social order besides the private property order and one built on public property, an order that retains private property in the means of production, but is “regulated” through government intervention. The Socialists of the Chair and the Solidarists, together with a great many statesmen and powerful political parties, continue to hold to this belief. On the one hand, it plays a role in the interpretation of economic history during the Middle Ages, and on the other hand, it constitutes the theoretic foundation for modern interventionism.

  • 1. Handwörterbuch der Staatswissenschaften [Handbook of social sciences], 4th ed., vol. VI, 1923.
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