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5. Triangular Intervention: Price Control
A triangular intervention occurs when an intervener either compels a pair of people to make an exchange or prohibits them from making an exchange. The coercion may be imposed on the terms of the exchange or on the nature of one or both of the products being exchanged or on the people doing the exchanging. The former type of triangular intervention is called a price control, because it deals specifically with the terms, i.e., the price, at which the exchange is made; the latter may be called product control, as dealing specifically with the nature of the product or of the producer. An example of price control is a decree by the government that no one may buy or sell a certain product at more (or, alternatively, less) than X gold ounces per pound; an example of product control is the prohibition of the sale of this product or prohibition of the sale by any but certain persons selected by the government. Clearly both forms of control have various repercussions on both the price and the nature of the product.
A price control may be effective or ineffective. It will be ineffective if the regulation has no influence on the market price. Thus, if automobiles are selling at 100 gold ounces on the market, and the government decrees that no autos be sold for more than 300 ounces, on pain of punishment inflicted on violators, the decree is at present completely academic and ineffective.19 However, should a customer wish to order an unusual custom-built automobile for which the seller would charge over 300 ounces, then the regulation now becomes effective and changes transactions from what they would have been on the free market.
There are two types of effective price control: a maximum price control that prohibits all exchanges of a good above a certain price, with the controlled price being below the market equilibrium price; and a minimum price control prohibiting exchanges below a certain price, this fixed price being above market equilibrium.
Let Figure 83 depict the supply and demand curves for a good subjected to maximum price control: DD and SS are the demand and supply curves for the good. FP is the equilibrium price set by the market. The government, let us assume, imposes a maximum control price 0C, above which any sale is illegal. At the control price, the market is no longer cleared, and the quantity demanded exceeds the quantity supplied by amount AB. In this way, an artificially created shortage of the good has been created. In any shortage, consumers rush to buy goods which are not available at the price. Some must do without, others must patronize the market, revived as illegal or “black,” paying a premium for the risk of punishment that sellers now undergo. The chief characteristic of a price maximum is the queue, the endless “lining up” for goods that are not sufficient to supply the people at the rear of the line. All sorts of subterfuges are invented by people desperately seeking to arrive at the clearance of supply and demand once provided by the market. “Under-the-table” deals, bribes, favoritism for older customers, etc., are inevitable features of a market shackled by the price maximum.20
It must be noted that, even if the stock of a good is frozen for the foreseeable future and the supply line is vertical, this artificial shortage will still develop and all these consequences ensue. The more “elastic” the supply, i.e., the more resources shift out of production, the more aggravated, ceteris paribus, the shortage will be. The firms that leave production are the ones nearest the margin. If the price control is “selective,” i.e., is imposed on one or a few products, the economy will not be as universally dislocated as under general maxima, but the artificial shortage created in the particular line will be even more pronounced, since entrepreneurs and factors can shift to the production and sale of other products (preferably substitutes). The prices of the substitutes will go up as the “excess” demand is channeled off in their direction. In the light of this fact, the typical governmental reason for selective price control—”We must impose controls on this necessary product so long as it continues in short supply”—is revealed to be an almost ludicrous error. For the truth is the reverse: price control creates an artificial shortage of the product, which continues as long as the control is in existence—in fact, becomes ever worse as resources have time to shift to other products. If the government were really worried about the short supply of certain products, it would go out of its way not to impose maximum price controls upon them.
Before investigating further the effects of general price maxima, let us analyze the consequences of a minimum price control, i.e., the imposition of a price above the free-market price. This may be depicted in Figure 84. DD and SS are the demand and supply curves respectively. 0C is the control price and FP the market equilibrium price. At 0C, the quantity demanded is less than the quantity supplied, by the amount AB. Thus, while the effect of a maximum price is to create an artificial shortage, a minimum price creates an artificial unsold surplus, AB. The unsold surplus exists even if the SS line is vertical, but a more elastic supply will, ceteris paribus, aggravate the surplus. Once again, the market is not cleared. The artificially high price at first attracts resources into the field, while, at the same time, discouraging buyer demand. Under selective price control, resources will leave other fields where they benefit themselves and consumers better, and transfer to this field, where they overproduce and suffer losses as a result.
This offers an interesting example of intervention tampering with the market and causing entrepreneurial losses. Entrepreneurs operate on the basis of certain criteria: prices, interest rate, etc., established by the free market. Interventionary tampering with these signals destroys the continual market tendency to adjustment and brings about losses and misallocation of resources in satisfying consumer wants.
General, over-all price maxima dislocate the entire economy and deny consumers the enjoyment of substitutes. General price maxima are usually imposed for the announced purpose of “preventing inflation”—invariably while the government is inflating the money supply by a large amount. Over-all price maxima are equivalent to imposing a minimum on the PPM (see Figure 85): 0F (or SmSm) is the money stock in the society; DmDm the social demand for money; FP is the equilibrium PPM (purchasing power of the monetary unit) set by the market. An imposed minimum PPM above the market (0C) injures the clearing “mechanism” of the market. At 0C the money stock exceeds the money demanded.
As a result, people possess a quantity of money GH in “unsold surplus.” They try to sell their money by buying goods, but they cannot. Their money is anesthetized. To the extent that a government's over-all price maximum is effective, a part of people's money becomes useless, for it cannot be exchanged. But a mad scramble inevitably ensues, with each person hoping that his money can be used.21 Favoritism, lining up, bribes, etc., inevitably abound, as well as great pressure for a “black” market (i.e., the market) to provide a channel for the surplus money.
A general price minimum is equivalent to a maximum control on the PPM. This sets up an unsatisfied, excess, demand for money over the stock of money available—specifically, in the form of unsold stocks of goods in every field.
The principles of maximum and minimum price control apply to any prices, whatever they may be: of consumers’ goods, capital goods, land or labor services, or, as we have seen, the “price” of money in terms of other goods. They apply, for example, to minimum wage laws. When a minimum wage law is effective, i.e., where it imposes a wage above the market value of a grade of labor (above the laborer's discounted marginal value product), the supply of labor services exceeds the demand, and the “unsold surplus” of labor services means involuntary mass unemployment. Selective, as opposed to general, minimum wage rates, create unemployment in particular industries and tend to perpetuate these pockets by attracting labor to the higher rates. Labor is eventually forced to enter less remunerative, less value-productive lines. This analysis applies whether the minimum wage is imposed by the State or by a labor union.
The reader is referred to chapter 10 above for an analysis of the rare case of a minimum wage imposed by a voluntary union. We saw that this creates unemployment and shifts labor to less remunerative and value-productive branches of employment, but that these results must be treated as voluntary. To prohibit people from joining unions and agreeing voluntarily on union wage scales and on the mystique of unionism would subject workers by force to the dictates of consumers and would impose a welfare loss upon the former. However, as we stated above, a spread among the workers of praxeological knowledge, of a realization that union solidarity causes unemployment and lower wage rates for many workers, would probably weaken this solidarity considerably. Empirically, on the other hand, almost all cases of effective unionism are imposed through coercion exercised by unions, i.e., through union intervention in the market.22 The effects of union intervention are then the same as the same degree of government intervention would have been. As we have pointed out, the analysis of intervention applies to whatever agency wields the violence, whether private or governmental. Unemployment and misallocations of many workers to less efficient and lower-paying jobs again occur in this case and again involuntarily.
Our analysis of the effects of price control applies also, as Mises has brilliantly shown, to control over the price (“exchange rate”) of one money in terms of another.23 This was partially seen in Gresham's Law, one of the first economic laws to be discovered. Few have realized that this law is merely a specific instance of the general consequences of price controls. Perhaps this failure is due to the misleading formulation of Gresham's Law, which is usually phrased: “Bad money drives good money out of circulation.” Taken at its face value, this is a paradox that violates the general rule of the market that the best methods of satisfying consumers tend to win out over the poorer. The phrasing has been fallaciously used even by those who generally favor the free market, to justify a State monopoly over the coinage of gold and silver. Actually, Gresham's Law should read: “Money overvalued by the State will drive money undervalued by the State out of circulation.” Whenever the State sets an arbitrary value or price on one money in terms of another, it thereby establishes an effective minimum price control on one money and a maximum price control on the other, the “prices” being in terms of each other. This, for example, was the essence of bimetallism. Under bimetallism, a nation recognized gold and silver as moneys, but set an arbitrary price, or exchange ratio, between them. When this arbitrary price differed, as it was bound to do, from the free-market price (and this became ever more likely as time passed and the free-market price changed, while the government's arbitrary price remained the same), one money became overvalued and the other undervalued by the government. Thus, suppose that a country used gold and silver as moneys, and the government set the ratio between them at 16 ounces of silver:1 ounce of gold. The market price, perhaps 16:1 at the time of the price control, then changes to 15:1. What is the result? Silver is now being arbitrarily undervalued by the government and gold arbitrarily overvalued. In other words, silver is fixed cheaper than it really is in terms of gold on the market, and gold is forced to be more expensive than it really is in terms of silver. The government has imposed a price maximum on silver and a price minimum on gold, in terms of each other.
The same consequences now follow as from any effective price control. With a price maximum on silver, the gold demand for silver in exchange now exceeds the silver demand for gold (conversely, with a price minimum on gold, the silver demand for gold is less than the gold demand for silver). Gold goes begging for silver in unsold surplus, while silver becomes scarce and disappears from circulation. Silver disappears to another country or area where it can be exchanged at the free-market price, and gold, in turn, flows into the country. If the bimetallism is worldwide, then silver disappears into the “black market,” and official or open exchanges are made only with gold. No country, therefore, can maintain a bimetallic system in practice, since one money will always be undervalued or overvalued in terms of the other. The overvalued always displaces the other from circulation, the latter being scarce.
Similar consequences follow from such price control as setting arbitrary exchange rates on fiat moneys (see further below) and in setting new and worn coins arbitrarily equal to one another when they discernibly differ in weight.
To sum up our analysis of price control: Directly, the utility of at least one set of exchangers will be injured by the control. Indirectly, as we find by further analysis, hidden, but just as certain, effects injure a substantial number of people who thought they would gain in utility from the imposed controls. The announced aim of a maximum price control is to benefit the consumer by giving him his supply at a lower price; yet the objective effect is to prevent many consumers from having the good at all. The announced aim of a minimum price control is to insure higher prices to the sellers; yet the effect will be to prevent many sellers from selling any of their surplus. Furthermore, the price controls inevitably distort the production and allocation of resources and factors in the economy, thereby injuring again the bulk of consumers. And we must not overlook the army of bureaucrats who must be financed by the binary intervention of taxation and who must administer and enforce the myriad of regulations. This army, in itself, withdraws a mass of workers from productive labor and saddles them onto the remaining producers—thereby benefiting the bureaucrats, but injuring the rest of the people.
- 19. Of course, even a completely ineffective triangular control is likely to increase the government bureaucracy dealing with the matter and therefore increase the total amount of binary intervention over the taxpayer. But more on this below.
- 20. A “bribe” is only payment of the market price by a buyer.
- 21. Ironically, the government's destruction of part of the people's money almost always takes place after the government has pumped in new money and used it for its own purposes. The injury that the government imposes on the public is twofold: (1) it takes resources away from the public by inflating the currency (see below); and (2) after the money has percolated down to the public, it destroys part of the money's usefulness.
- 22. In the present-day United States, much of the task of coercion has been assumed on the unions’ behalf by the government. This was the essence of the Wagner Act, the law of the land since 1935. (The Taft-Hartley Act was only a relatively unimportant amendment to the Wagner Act, which continues on the books.) The crucial provisions of this act are: (1) to coerce all workers in a certain production unit (arbitrarily defined ad hoc by the government) into being represented by a union in bargaining with an employer, if a majority of workers agree; (2) to prohibit the employer from refusing to hire union members or union organizers; and (3) to compel the employer to bargain with this union. Thus, unions have been invested with governmental authority, and the strong arm of the government uses coercion to force workers and employers alike to deal with the unions. On special coercive privilege granted to unions, see also Roscoe Pound, “Legal Immunities of Labor Unions” in Labor Unions and Public Policy (Washington, D.C.: American Enterprise Association, 1958), pp. 145–73; and Frank H. Knight, “Wages and Labor Union Action in the Light of Economic Analysis” in Bradley, Public Stake in Union Power, p. 43. Also see Petro, Power Unlimited, and chapter 10, pp. 714–15 above.
- 23. Mises, Human Action, pp. 432 n., 447, 469, 776.