Ideas on Liberty

Fair Pricing:
The Persistent Delusion

BY MELVIN D. BARGER

ONE of the most durable delusions of our time is that there should be a “fair” price for everything. We hear this expressed in a number of ways. If prices are too low, it’s ruinous and the producers are being sacrificed to the gods of chance. But if prices are too high, the situation is exploitative and the sellers are gouging the public. In either case, the solution offered is the same: A public authority should rescue the producers when prices are too low and rein in the sellers when prices are too high. All this is for the public good, it’s argued, and we’re all supposed to receive indirect benefits if “fair” prices bail out the producers or restrain the sellers.

This sounds like a fine solution, since none of us likes being ruined or gouged. In practice, though, it has been destructive in every way it has been tried. It fails, many of us think, because values really are established subjectively. It is misleading to call prices unfair because they are considered “too low” or “too high.” Prices in themselves are only market expressions of subjective value—in much the same way as thermometer readings express the weather temperature.

The strange thing about subjective value is that almost every economics textbook used in the United States tacitly accepts it as true—yet some also try to evade it by defending interventions aimed at establishing price supports and controls. When this results in long-run failures, few economists are willing to admit that the basic error was in ignoring subjective value.

What is subjective value? Here’s a definition supplied by Bettina Bien Greaves, a long-time staff member of The Foundation for Economic Education. “Subjective value is basic to the Austrian School of Economics,” Mrs. Greaves explains. “It wraps up the Austrian point of view, and everything else follows from it. Subjective value means that every individual has a personal scale of values. By acting on those values, the individual directs production, determines prices, decides who is to make profits or suffer losses, determines what commodity is most marketable, and even decides what is money.”1

There are other theories of value. One theory is that certain things have intrinsic value. Another is the labor theory, which tries to establish values by the labor required for production. Neither theory can be supported by the behavior of the market. Intrinsic value? Nothing really has a set value in and of itself. Even commodities like gold, which always seem to fetch some kind of a price, are valued differently at different times and in different places. The labor theory? Almost anybody should be able to disprove the labor theory, since we all have labored at times on things that proved to be worthless in the current market! Even Karl Marx recognized this. “Nothing can have value without being an object of utility,” he said in Capital. “If it be useless, the labor contained in it is useless, cannot be reckoned as labor, and cannot therefore create value.”2

It’s interesting that “utility” pops out in Marx’s statement, since subjective value is also called marginal utility. What it really means is that our values cause us to put our individual resources to different uses. Eugen von Böhm-Bawerk, a founder (with Carl Menger) of Austrian economics, used the example of a pioneer farmer in the jungle of Brazil: The farmer has just harvested five sacks of grain. One he needs simply to stay alive at the subsistence level. The second sack will assure him of a full diet, while the third will feed his poultry and thus provide him with meat. Finally, he uses the fourth sack to make brandy and the fifth to feed his pet parrots.3

There’s a scale of values at work here. The first sack is obviously very dear, since it stands between the farmer and dying. Most farmers might value the first three sacks in the same way, while choosing to use sacks four and five in alternate ways. The point of this illustration is that each of us is the Brazilian farmer and our available resources (usually money) are the sacks of grain. We put our resources out to market in the hope of meeting certain needs on our scale of values. As individuals, we each want to get the most satisfaction with the least expenditure of resources. Prices reflect the ways thousands of people are trying to satisfy their wants and needs in the market. If we use only peaceful methods, each of us can satisfy individual wants and needs only by supplying something valued by others. The economics textbooks use supply and demand curves to illustrate how this process works, and the “equilibrium price” is always the level that balances the determinants of both demand and supply.

In these graphs, “too low” or “too high” does not come into play. The point is made, however, that if prices are kept above the equilibrium level (say, with price supports), then excessive production occurs. On the other hand, if prices are held down (say, with price controls), excessive consumption occurs. It could easily be shown that this causes harm by distorting production and consumption patterns, but it shouldn’t be necessary to make this point.

Are Low Prices Ruinous?

Subjective value, being individual, cannot include any overall judgment that condemns any price level as too low. Certain individuals may feel, of course, that a specific price level is too low and therefore unfair to their own group of producers. Since they may feel it is in their own interests to raise prices above what the market will give them, they seek special legislation to boost or support their prices. This legislation would be turned back if others realized that the price increases would be at their expense. To win passage of such legislation, it is necessary to convey the idea that the change is in the public interest—that we all benefit if these prices are raised.

Rather than be angered by this, we have to remember that subjective value explains why groups will seek special advantage through legislation. They do so in the hope of getting more at less cost to themselves. When they seem to succeed in this effort, it is useless to condemn them as being greedy and selfish. Instead, we should ask why we permitted them to deceive us.

Farmers and some blue-collar workers have been the most successful in winning support for their price interests. Beginning in the 1930s, farmers were able to delude the public into believing that higher farm prices would restore prosperity! In the same period, workers were able to get minimum wage laws passed and protective labor legislation which enabled them to raise their wages (i.e., the prices of their services). The public was led to believe that low farm prices hurt everybody and that workers needed legislation and Federally guaranteed union protection in order to rise above a barely living wage. It was a case of defending the farmer from predatory “middlemen” who took all the profits and shielding the laborer from heartless employers who were only one step removed from Ebenezer Scrooge.

All this was nonsense. Though farm prices were low in the 1930s, they were not ruinously so and some farmers knew how to operate profitably during that bleak period. You could also prove, by studying the food processing and distribution system, that there were no middlemen reaping huge profits at the farmers’ expense. Everybody in the system, from grain broker to miller to baker to grocer, was struggling to stay solvent. Drought and pestilence were really the things to worry about in some parts of the Midwest. A low price, far from being ruinous, is simply a signal the market is sending. It should either help direct production into new commodity lines or force some farmers out of business, with the land being taken over by others who can use it more efficiently.

It’s not even true that all farmers resent low prices at all times. A farmer who buys corn to feed cattle, for example, might like lower corn prices. This can eventually result in lower beef prices for the consumer, something most of us might welcome.

What about the “slave” wages that are supposedly paid to workers if there is no intervention? The low wages of the Depression were actually helping to return some people to work following the terrible dislocations of the Great Crash. Unemployment was severe in the high-wage industries like auto manufacturing and steelmaking, less so in lower wage businesses like food processing. Though low wages were seen as ruinous to some employees, anything that mandated higher wages might have been more ruinous in the sense of putting them out of work. The wage level was not dictated by Scrooge-like employers. Faithful to subjective value, it reported the signals from consumers. The worker who complained about his own ruinously low wages, for example, was also determining by his purchases the price levels and activities in other businesses.

The truth is, low prices are neither good nor bad in a free market. They are merely signals which tell us how to direct production and consumption. What’s really bad is anything that distorts those signals in such a way that we can no longer make the right spending and investment decisions. Efforts to support prices and maintain wages at certain levels have set in motion endless mischief which has not been corrected.

One last thought: Subjective value being what it is, all of us are simply delighted when we find a sensational markdown at a department store or catch the supermarket when it has to sell an overstock of perishable produce at below cost. We do not think we are taking advantage of these retailers, and in truth we are not. By helping ourselves, we also help them avoid total losses for bad purchasing decisions. Are we not also helping the farmer or the laborer by paying market-clearing prices for their commodities and services? Is it somehow better if the farmer is “priced out of the market” or the wage level is raised so that the worker becomes unemployed?

Are High Prices a Form of Gouging?

The same zeal that condemns low prices can often be found when prices seem inordinately high. The villains are often the “speculators”—people who have bought up certain supplies in the hope of making a later profit. In American folklore, the speculator is always a person who is up to no good. Speculators sometimes get the blame for high prices when in fact they have merely been extremely shrewd in estimating price trends.

High prices, no less than low ones, can be explained by subjective value. They are signals which should help direct production for those who can read them. In manufacturing, prices help guide innovation and progress. That’s because competition and other forces tend to drive prices down, thus squeezing earnings on older product lines. This forces business people to branch out into new products which fetch a higher price. Without the opportunity to seek that higher price (with its higher earnings), no business would want to risk the required investment or even take the trouble to innovate.

Consumers need not fret about the high price tags new products carry at introduction. If free market conditions prevail, the high prices will not last—competitors quickly join the race and fight for market share. This cycle has occurred so frequently with new products that the public can even recognize it. It’s not a surprise to anybody, for example, that the prices of video tape recorders tumbled recently. This happened previously to a wide range of products: TV sets, riding mowers, microwave ovens—you name it.

Despite these clear examples, there’s still a suspicion that high prices will hurt us. In wartime, for example, there’s an immediate rush to price controls. When the oil shortage hit, there was a cap on producer prices. We’ve also seen demands for controls on doctors’ fees. Rent control still survives in New York City, even though it is obviously a failure.

Far from trying to punish and control the so-called price gougers, we should stand back and read the message of the high prices. These high prices are more of a blessing than we think. In a wartime situation, high prices immediately spur people to reduce consumption and to hunt for low-cost substitutes. If there is an oil and gas shortage, higher prices encourage conservation, new drilling and exploration and the hunt for substitute energy. If rents are high, more apartment buildings will be constructed, eventually creating a glut that will bring some rents down. As for doctors’ fees, they’ve been unduly distorted by third-party payments and other special demand factors. A genuine free market in health care services would do wonders in bringing prices down.

The point of all this is that there is no such thing as real price gouging in a free market. We need the signals of high prices.

A final note: For a time after World War II, the government kept the prices of new automobiles artificially low, though used cars were allowed to sell at market-determined prices. This created a ridiculous situation: A new car would sell for $1,300 at the dealership and immediately would become worth $2,600 as a used car! Needless to say, some dealers responded to this distorted situation by accepting money under the table or by demanding a used-car trade-in at a low price. Along with used-car dealers, they were denounced as price gougers.

The strange thing, however, is that everybody was a price gouger. Anybody who had a car for sale automatically wanted the higher price, not the low one deemed “fair” by the government. Well, why not? We all want to sell high and buy low—that’s well understood by the students of subjective value.

Understanding Value—A Key to Fairness

Despite all the evidence against it, the arguments for “fair” prices are likely to continue. These arguments will still sell in the political arena when they’re framed in appealing ways. Farm price supports and wage legislation had political support because the farmer and blue-collar worker represented large groups and were cast as underdogs. In the same way, there are times when you can win support for price controls aimed at unpopular groups: doctors, the large auto companies, and so on.

In our personal economic decisions, however, we continue to be guided by our own scales of values. We may pity the farmer and wish him well, but we are stern taskmasters who look for bargains when we buy farm products. We may sympathize with the blue-collar worker, but if his wages force the employer to raise prices, we shift to another supplier without shedding a tear.

In the same way, we denounce high prices but always determine the going market price when we want to make a sale. If real estate prices double in our area, for example, none of us hesitates for a moment in making a windfall profit when the time comes to sell a home. We don’t even think it unfair that the new homeowners have to pay twice the price we once paid!

If there is unfairness, it’s not in “too low” or “too high” prices. It’s in misguided efforts that distort the price signals that will really work for our good in the long run. Nobody can really say what a “fair” price is—but we can say with certainty that the price of self-deception about pricing is always high.

Mr. Barger, a retired corporate public relations representative, is now a writer-consultant in Toledo, Ohio.

4. Obtained by author in telephone discussion with Mrs. Greaves in early 1976. Statement has been slightly modified for this article. The Austrian School, also called free-market economics, got its name because its prominent teachers, Böhm-Bawerk and Menger, were Austrian. Ludwig von Mises and Friedrich A. Hayek are also identified with Austrian economics.

5. Cited in Familiar Quotations, by John Bartlett, Little, Brown and Company, Boston, Thirteenth Edition, 1955, p. 593.

6. Value and Price, Eugen von Böhm-Bawerk, Libertarian Press, South Holland, Ill., published in 1973 from earlier work, pp. 29–30.

• 1. Obtained by author in telephone discussion with Mrs. Greaves in early 1976. Statement has been slightly modified for this article. The Austrian School, also called free-market economics, got its name because its prominent teachers, Böhm-Bawerk and Menger, were Austrian. Ludwig von Mises and Friedrich A. Hayek are also identified with Austrian economics.
• 2. Cited in Familiar Quotations, by John Bartlett, Little, Brown and Company, Boston, Thirteenth Edition, 1955, p. 593.
• 3. Value and Price, Eugen von Böhm-Bawerk, Libertarian Press, South Holland, Ill., published in 1973 from earlier work, pp. 29–30.
• 4What is subjective value? Here’s a definition supplied by Bettina Bien Greaves, a long-time staff member of The Foundation for Economic Education. “Subjective value is basic to the Austrian School of Economics,” Mrs. Greaves explains. “It wraps up the Austrian point of view, and everything else follows from it. Subjective value means that every individual has a personal scale of values. By acting on those values, the individual directs production, determines prices, decides who is to make profits or suffer losses, determines what commodity is most marketable, and even decides what is money.”
• 5There are other theories of value. One theory is that certain things have intrinsic value. Another is the labor theory, which tries to establish values by the labor required for production. Neither theory can be supported by the behavior of the market. Intrinsic value? Nothing really has a set value in and of itself. Even commodities like gold, which always seem to fetch some kind of a price, are valued differently at different times and in different places. The labor theory? Almost anybody should be able to disprove the labor theory, since we all have labored at times on things that proved to be worthless in the current market! Even Karl Marx recognized this. “Nothing can have value without being an object of utility,” he said in Capital. “If it be useless, the labor contained in it is useless, cannot be reckoned as labor, and cannot therefore create value.”
• 6It’s interesting that “utility” pops out in Marx’s statement, since subjective value is also called marginal utility. What it really means is that our values cause us to put our individual resources to different uses. Eugen von Böhm-Bawerk, a founder (with Carl Menger) of Austrian economics, used the example of a pioneer farmer in the jungle of Brazil: The farmer has just harvested five sacks of grain. One he needs simply to stay alive at the subsistence level. The second sack will assure him of a full diet, while the third will feed his poultry and thus provide him with meat. Finally, he uses the fourth sack to make brandy and the fifth to feed his pet parrots.