Price Supports; W. M. Curtis

Changes in the prices of individual commodities, con stantly going on even in a stable economy, serve a useful and important function. We saw this function in opera tion in the fall of 1948 in the relation of the price of hogs [ 128 ] to com. With a very short com crop in 1947, com prices advanced relative to hogs. And farmers economized in the feeding of corn. In 1948, with a very large com crop, farmers received the signal-cheaper com-to expand the feeding of corn to hogs and other livestock. These adjust ments run all through our economy. In a free market, farmers will constantly shift their production of cabbage, sweet com and all other crops and livestock products to meet changing demand and supply conditions. When the signals are tampered with, faulty prices may call for too little of this or too much of that so that consumers are unable to satisfy their demands in the market. It is not denied that the legal price of a single com modity can be maintained above or below where it would be in a free market. The price of potatoes, for example, could be set at 25 cents a bushel or at $25 a bushel and if a large enough number of policemen were assigned to the job'of rationing the very small production at 25 cents, or of restricting the very great attempted production at $25, the price might be maintained. But even if this were done for one commodity, or for many commodities, the major problem of preventing general inflation or deflation would not be solved.

The solution of the problem of the giant swings in the general price level lies in the area of the monetary and fiscal policy of the nation and is outside the scope of this discussion. It might be asserted that price supports or price ceilings on individual commodities are not effective in preventing major inHationary and de:B.ationaryswings, and end the [129 ] discussion here. But it is important to point out some of the harmful effects of such programs. Price supports are a one-sided form of price control. Price control is a part of the more important question, namely, whether the nation shall have an economy of free markets, or whether it shall be one of price control leading to production control, allocation of labor, and ultimately, socialism. It matters little whether the outcome of the latter choice is called Democratic Socialism, Socialized Capitalism, State Socialism, Social Democracy, Marxian Socialism, Collectivism or just plain Communism.

The Function Of The Free Price Mechanism A free market system is perhaps the most essential ingre dient of a voluntary economy. Without this freedom to express his wants-and thus to have a hand in guiding production and consumption-man can hardly be called free. The sole purpose of economic production is to cater to the wants of consumers and thus to satisfy the wants of both producers and consumers. The most satisfactory method by which consumers can make their preferences known to producers-and thus to guide production-is through the free price system. Millions of consumers are thereby enabled to vote for or against individual products by their acceptance (purchase) or rejection of items of consumption. Another method of guiding production and consump[130 ] tion is to have the decision of a single individual or of a central bureau substituted for the decisions of millions of individuals interested in that particular or related com modity. There is no third choice. Either the free price system will be permitted to do the job or it will not. The only way in which there is a middle ground is in the sense that not all items of goods and services may be under con trol. Some may be free while others are controlled. But there is abundant evidence to indicate that, once started, price control spreads because of the complex influence which products have on each other. First, the price of a single item may be controlled. Then it is found desirable to control its substitute and then the substitutes for the substitute, and so on.

It must be assumed that those who favor price control of a commodity-whether it be price supports, price ceil ings, subsidies, marketing agreements, forward pricing or other forms-believe that the price should be either higher or lower than it would be if voluntarily arrived at by a willing buyer and a willing seller. Otherwise it would not be price control. A Delicate Instrument The free price mechanism is as delicate as a fine precision instrument with millions of moving parts. Each part con tributes to the operation of the whole. It operates so smoothly that it is sometimes called automatic. But it is anything but automatic in the sense that it runs without direction. [ 131] Consider, for example, some of the factors which, to gether, make the price of a bushel of wheat. They include the prospects for rain in the wheat country, the amount of snow in the mountains, the amount of insect damage, the availability of harvest help and machinery, the burn ing of a few thousand bushels in a local elevator, the availability of boxcars for shipping, the amount of wheat fed to livestock, the production of wheat in Canada, China and Russia, and literally thousands of other things that are wrapped up in what we call supply, or prospective supply.

A Variety Of Influences The price of wheat is influenced by the price of oats, com, potatoes, rye and many other competing crops. The amount of money in the country and the freeness of per sons' spending of it, the amount of wheat purchased for foreign account, the price of automobiles and radios, and an unknown number of other factors all have a bearing. No one person or bureau can possibly know all the con tributing reasons why 1 reject a radio offered at $12.98 and you decide to buy it. Perhaps my wife wants a new hat and yours doesn't. Fortunately it is not necessary that each buyer and seller have all this information. All that is necessary to consummate a sale is for a seller to say, "1 am willing to sell," and the buyer to say, eel am willing to buy" at the same price. The seller may say, eel can't continue to sell for that and stay in business," or the buyer may say, e'l can't continue to pay that much and stay in [132 ] business/' Suffice it to say, the exchange was made. And in view of the alternatives known to each party, the ex change was agreeable to both. A price set arbitrarily at a point different from where a willing buyer and seller would voluntarily set it, is certain to make one of the parties feel he was cheated. In fact, it does cheat one of them.

Who Should Plan? The basic question involved here is not whether there should be economic planning, but rather who should do it. Economic planning there will be. It will be done either by millions of individuals who are directly concerned, each making his own independent decisions, or it will be done by a central planning committee, given power to ignore the judgment of these individuals. A central statistical bureau may assemble volumes of data concerning the demand for and supply of a certain commodity. There is a strong temptation for the bureau then to feel that it knows so much more about conditions than a single producer or consumer can possibly know, that it can therefore decide the price more wisely. Actu ally, they cannot have all the pertinent facts and certainly not the most important ones which individuals use in deciding on whether or not to buy a certain item. The delicate free price mechanism works miracles in guiding workers into each branch of the economy and in guiding the use of raw materials and other resources ac cording to the wishes of consumers. Some have argued [ 133] that our economy has become too complex to let it ron without central planning. Actually, the more .complex it becomes, the more important it is to have the economic planning done by the individuals concerned; the more important it becomes to have their decisions reported in a free market.

A PersonalGuide The free market serves as a guide to persons in deciding whether they should be dentists, doctors, farmers, lawyers, school teachers, grocery clerks or bank clerks. When this function of price is tampered with, it becomes necessary to dictate to the workers what jobs they shall fill and how and where they shall fill them. England has already dis covered this. The free price system is a guide as to how much steel shall be used for tractors, for automobiles, for housing, for toys, for railroads and for other purposes. It suggests whether oil or gas or coal shall be used for heating a house. It serves as a guide in determining how much feed grain shall be fed to dairy cows, or hens, or hogs. This system tells the users of a commodity whether to economize in its use or to expand it. It tells the potato producer, for example, how many acres to plant and whether to harvest all of his crop or leave the smaller potatoes on the ground at harvest time. It suggests how much fertilizer to use and whether or not it will pay him to put in an irrigation sys tem. It tells him whether he will profit more by packing his crop in wholesale lots or in consumer packages. All [134 ] this guidance appears almost accidental and without direc tion, but behind it all is a vast amount of experience, study and thought by all of the persons concerned. The result is that the crop moves to market in an extremely orderly fashion just meeting the demand. All this serves to guide producers of next year's crop.

,CostsOf Central Planning It is not denied that a central planning bureau could make decisions (disregarding the quality of these decisions) in volving the jobs which each person should fill, as well as the amount of production and the distribution of each individual commodity. This, of course, is the design of a planned economy. Space will not permit a complete dis cussion of the cost of a planned economy. This cost in volves the tremendous staff of planners, administrators and policemen who might be otherwise employed in the production and distribution of goods and services. It in volves the question of the right of an individual to the product of his own labor; it involves the question of incen tives to high production which come with this right. It involves the satisfactions which individuals gain from making decisions in questions, involving themselves. In short, the whole question of human liberty and the pur pose of life itself is tied up in this one issue.

If the price of a commodity is arbitrarily set by a central bureau, it might conceivably be where it would have been in a free market at some place and at one time. If so, it serves no purpose at that time and place. It is likelyto be [135 ] wron~ at all other places and at all other times because no central bureau can possibly master all of the differen tials that a free market solves. There is no one price for a commodity like potatoes. There are literally thousands of different prices, depend ing on different conditions, making up what we think of as "the market price." And strangely enough, in a free market, each of the many different prices is the "righe' price for the given situation. PriceIs A Signal Price is somewhat like the signal which the captain on the bridge of a ship sends to the engine room or the in structions he gives to the helmsman. If the signal is right, the ship stays on its course. If it is wrong, the ship cannot go where it is intended it should go. Price is a signal to both producers and consumers of a commodity as well as to all of the agencies involved in distribution. We have had experience with mixing up the signals. We have seen potato prices set too low with a resulting potato famine before a new crop came along. Under the fixed low prices, the signal to economize in the use of potatoes failed to reach consumers. Had this faulty signal continued, it would also have been interpreted by producers to cut future production. A similar situation has existed in the rents of dwellings which were fixed too low. The signal to renters was not to economize on space but to expand. And they did just that. The signal to build new housing was not given. The result was that we had a housing "famine."

[ 186] Tampering With The Signal When the price of a commodity is set lower by controls than the market would set it, the product becomes scarce and its allocation becomes a problem. When a free price is prohibited from rationing a product, some other method must be used. It may be done outside the law in black markets, or with tickets, or special favoritism, or by some other method. In the other direction, we have had experience with arbitrarily setting the prices of a commodity higher than a free market would set them. Price supports contemplate doing this. In such a situation, a wrong signal is sent to both producers and consumers, with the result that a "surplus" arises. The consumer does not buy the whole supply, because the price is higher than he will pay for the amount offered. The producer is encouraged to ex pand the production of a commodity already in unsalable supply. A system of price supports where prices are maintained above the free market level by government is not unlike a system tried by a number of agricultural marketing co operatives some 25 years ago. They found that by keeping prices too high, they were encouraging more and more production and discouraging consumption. They discov ered they were building up a larger and larger carry-over from one crop to the next. One after another, cooperatives based on this principle either failed, or changed their policy. An important difference, of course, between the government and a private cooperative following such a [ 137] policy is that the government can use its taxing power to make up losses and can conceal the error for a longer time by sending the bill for ~~services rendered" to others.

Whereas "scarcities," due to setting prices too low, re quire some kind of a rationing system, "surpluses," due to setting prices too high, require some kind of a disposal plan as well as arbitrary production controls. Otherwise, farmers are paid from taxes to expand acreage or to put in irrigation systems, or to use heavy applications of fer tilizer to produce potatoes to be used for livestock feed or to be destroyed. Subsidize: Control Agricultural leaders, like leaders in other industries, have long been trying to devise some system to raise the price of their products above free market prices, without at the same time exercising some direct control over production. Such a search seems doomed to failure because of the very nature of the price system. If prices of individual commoditie~ are too high, they stimulate too much pro duction and too little consumption at that level of prices; some kinds of production controls thus become necessary unless the government dumps its surplus abroad or gives it away or diverts it into other uses at home. If prices are too low, some other type of stimulus such as subsidies or direct compulsion is required to bring· out the production assumed necessary. It is but a short step from there to the British system where prices are guaranteed and producers told what·to produce. It is a still· shorter step from that [138 ] to cOIQplete nationalization of the industry. Our own Supreme Court has stated that government may properly regulate that which it subsidizes.

A Crutch For Inefficiency Another consequence of a price support which holds a price above where it would be in a free market, is its effect in keeping less efficient producers in business. A competitive economy, based on free market prices, has been an important factor in improving efficiency in all types of business. The market price serves as a signal to the high cost or less efficient producer to use his talents and resources elsewhere. Think what would be the situa tion in the automobile business today if, through support prices, all of the hundreds of auto .manufacturers that have fallen by the wayside had been kept in business at public expense. Suppose we had adopted a system of price supports to keep buggy manufacturers in business. The New York State College of Agriculture supervises detailed cost accounts on a number of New York farms each year_ On those farms in 1946, where potatoes were grown and detailed records of costs were kept, the cost to produce a bushel of potatoes varied from 49 cents for the lowest to $1.92 for the highest cost farm. The average cost was 75 cents a bushel.

Now, suppose in 1946 the predominant judgment of potato growers had been that, for the following year, the potato business didn 7 t appear as attractive as· some other crop and some growers decided to reduce potato acreage. [139 ] Which ones should have reduced? We will probably all agree that it is the high cost producers or those who have a more profitable use of their resources, regardless of their costs, who should drop out. They might better spend their time doing something more profitable. The free market is the guide in this course of action. As a result, the entire economy, as well as individual producers, benefits. Planning Dilemma Instead of a free market for potatoes, suppose the price is arbitrarily set above the market at, say, $2.00 a bushel. What happens? Not only are the less efficient producers encouraged to stay in the potato business, but also new producers who are still less efficient may be drawn in. As a result, more potatoes may be produced than can be sold at the designated price. The problem of the planners now is what to do about the surplus production. They may decide that acreage should be reduced or marketing quotas should be established. How will they do it? Your guess is as good as mine because it is now a political football. They may decide to scale down each grower's acreage by the same percentage. It would be virtually impossible to set up a workable formula that would affect nearby areas and areas far from the market, the way a free price would.

The method chosen is not likely to be one that will elimi nate the less efficient producers. This illustrates some of the problems involved on the production side when free markets are interfered with. Problems on the consumption side are just as involved [ 140] and critical. Consumers are prevented from having a hand in directing production according to their wishes. It is self-evident that people can consume no more than w~at is produced. The free market permits consumers to express a choice for fewer potatoes at a higher price per bushel together ·with the things produced by those who were formerly potato producers. It permits them to make this choice if they wish, in preference to having more and cheaper potatoes, but without the production of the other things. Certainly, few consumers would voluntarily call for so bountiful a supply of potatoes that they be fed to livestock, used for fertilizer or be destroyed.

Over the years, less efficient farmers have found that they could not meet the competition of more efficient ones. In our expanding economy they have found their services useful elsewhere. This has made it possible for the effi ciency of our farms to increase from the point where an average farm produced little more than enough for the farmer and his family to where a farm family now feeds itself and five or six other families. The farmer not only feeds his family better but also gains from the production of automobiles, refrigerators, bathtubs, transportation, en tertainment, education, churches and many, many other goods and services produced by non-farmers. Competition And Progress This kind of progress will continue only with competition and free markets. It is conceivable that farm efficiency can further develop to a point where only one family in [ 141 ] twenty or thirtywill be required to raise the nation's food supply. Such progress cannot continue if inefficient pro duction is encouraged.

Efficient farm producers have nothing to fear from com petition. It is the lack of competition that they should fear. It has been estimated. that one...third of the farmers pro duce 80 per cent of the nation's food. Price supports will tend to keep in competition the least efficient one-third of the farmers who produce only 4 per cent of the food and who might far better be doing something else. Another aspect of price supports for agricultural prod ucts is the matter of special privileges for minority groups. Under a political system such as ours, there is a tendency for certain groups to seek special privileges at the expense of other groups. If they are strong enough politically, they may be able to obtain them. Agriculture has been and still may be strong politically. But it is rapidly becoming a smaller and smaller minority. In the interest of equal rights for all, it would seem that farmers would gain more in the long run by promoting the idea of no special privilege for any group.

To illustrate the pOint of what may happen to minority groups, we have only to observe what has been happening to wheat farmers in Canada. The Canadian government has been marketing the farmers' wheat and has been re ceiving for it a price well over a dollar in excess of what they have paid the wheat producers. By this process, Cana dian farmers have been forced to subsidize the consumers of Canada and Britain. They have paid what amounts to an occupational tax to their own government. This hap[ 142] pened in a country where farming is far less of a minority occupation than it is in the United States. Two Wrongs An argument frequently used by agricultural leaders for various farm programs is that labor and other types of business have "enjoyed" advantages in the form of tariffs and other devices, and that therefore agriculture is en~ titled to a share of "protection." These are exactly the tactics used in a pressure-group economy. Two wrongs do not make a right. And in the end, this process leads to a thoroughly confused situation where vast numbers of per sons become willing to turn the whole sorry mess over to government, as they are rapidly doing in England and have done in other nations of the world.

Summarizing briefly, price supports, like other forms of price control, are not an answer to the important prob lem of bringing reasonable stability to our economy-of eliminating major swings in our general price level caused by monetary inflation and deflation. In addition to their failure to reach this objective, price supports rob us of the most important function of free prices-the guiding of production and Gonsumption of goods and services in ac cordance with the wishes of those directlyconcemed. Finally-and this is most important-price controls must be accompanied by controls of production and consump tion. It cannot be otherwise. Such controls lead to com plete economic domination of citizens by agents of the State. [ 143] THE OTHER SIDE OF THE SUBSIDY From MONTHLY ECONOMIC LETTER, Northeast Farm Foundation, Ithaca, New York, October 1, 1949 WE are this fall beginning to feel more of the iron fist beneath the velvet glove.