Free Prices, Free Wages

May 21, 1962

The market economy is a marvelous but infinitely complicated mechanism. It was once moderately estimated that there are some 9 million different prices of all goods in the United States. This would imply more than 40 trillion interrelationships of these prices.

Under the play of supply and demand these prices change from day to day and from hour to hour. So do their interrelationships. These changes in relative prices, wages, costs, profits, and losses are daily changing the pattern of consumption and production, driving firms and workers out of some lines and drawing them into others. It is through this wondrous mechanism that the relative output of thousands of different commodities and services, in accordance with the relative demand of consumers, is determined.

If, now, a government official, substituting his personal judgment for that of the market place, steps in to hold down one set of prices (say of steel), what will happen? Because of the smaller relative profit margin, the output of that product will decline. Suppose the government keeps inflating, by undermining confidence in the dollar and increasing the money supply, thus putting upward pressure on all prices and wages, but then insists that everybody must “hold the line” and freeze prices? Then it will impair or nullify the function of the whole price-cost mechanism, disrupt and disorganize production, and bring shortages and unemployment.

THE 3 PERCENT FALLACY

Yet there are people who are not only presumptuous enough to suppose that they can fix prices better than the market can fix them, but that they can do this by some simple pat formula. The Council of Economic Advisers, in its last annual report, put forward its own “guidelines” for prices and wages. It modestly disavowed omniscience. It conceded that “productivity is a guide rather than a rule”; that “this is a large and complex subject and there is still much to be learned”; that it had no “mechanical formula for determining whether a particular price or wage decision is inflationary.”

But suddenly the “guidelines” became clear rules and the government knew all. Any price rise whatever (especially in steel) was “inflationary,” but a wage-rate rise or labor-cost rise of 3 percent or less was “non-inflationary.” The President denounced the steel-price rise as a “wholly unjustifiable and irresponsible defiance of the public interest”; but he congratulated the steel union leaders for their “statesmanship” in forcing another 2½ percent labor-cost rise. And when a Presidential emergency board recommends an increase of 10.2 cents an hour, or more than 4 percent, for non-operating railroad employees, the President declares himself “gratified” that the recommendation falls within the council’s guidelines.

THREAT TO EMPLOYMENT

These “guidelines” are economic quackery. The council’s own figures show an average annual growth of output per man-hour from 1947 to 1960 of 2.8 percent. But this varied every year. Average man-hour output in 1956, outside of agriculture, was lower than in 1955. The rate of change was different in every industry in every year, and in every firm within every industry. To impose a Procrustean annual hourly labor-cost increase of 3 percent on every industry and firm would disrupt profits, employment, and production. The formula ignores, moreover, all differences in past increases in wage rates. The average wage increase in the apparel and textile industry in the period 1947–1960 was 38 percent; in steel 113 percent.

Suppose, however, there really was everywhere an increase in man-hour productivity of 3 percent a year? Such increases as occur are brought about, not because everybody works harder every year, but because there has been an increase in investment in new plant and equipment. If the whole of the increased productivity goes to labor, where will the funds come from and where will the incentive come from for future investment?

Any formula whatever of government price and wage control overlooks and destroys the whole function of free prices and free wages, which is to guide and stimulate production, investment, and employment.