12.05. Triangular Intervention: Price Control

0:005. 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, that is, 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.

0:53An 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.

1:38Thus, 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. 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. 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.

2:35There 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. The government, let us assume, imposes a maximum control price above which any sale is illegal. At the control price, the market is no longer cleared, and the quantity demanded exceeds the quantity supplied. In this way, an artificially created shortage of the good has been created.

3:26In any shortage, consumers rush to buy goods which are not available at the price. 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 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.

4:20A bribe is only payment of the market price by a buyer. It must be noted that even if the stock of a good is frozen for the foreseeable future, this artificial shortage will still develop, and all these consequences ensue. The more elastic the supply, that is, 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, that is, 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.

5:22The 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 government 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 The Theory of Money and Credit

6:40The minimum price is to create an artificial shortage, a minimum price creates an artificial unsold surplus. The unsold surplus exists even if the stock of the good is frozen for the foreseeable future. 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.

7:30This 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 overall 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, overall price maxima are equivalent to imposing a minimum on the PPM.

8:33As a result, the money stock exceeds the money demanded. As a result, people possess a quantity of money in unsold surplus. They try to sell their money by buying goods, but they cannot. Where money is anesthetized. To the extent that a government's overall 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. Ironically, the government's destruction of part of the people's money almost always This case takes place after the government has pumped in new money and used it for its own purposes.

9:23The injury that the government imposes on the public is twofold. One, it takes resources away from the public by inflating the currency, and two, after the money has percolated down to the public, it destroys part of the money's usefulness. Favoritism, lining up, bribes, etc., inevitably abound, as well as great pressure for a black market, that is, 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.

10:16The 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, that is, 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.

11:17Labor 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 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 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.

12:11However, as we have stated, 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 through coercion exercised by unions, that is, through union intervention in the market. In the present-day United States, much of the task of coercion has been assumed on the union's behalf by the government. This was the essence of the Wagner Act, the law of the land since 1935.

12:58The Taft-Hartley Act was only a relatively unimportant amendment to the Wagner Act, which which continues on the books. The crucial provisions of this Act are, one, 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, two, to prohibit the employer from 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.

13:52The 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. This was partially seen in Gresham's Law, one of the first economic laws to be discovered.

14:43Few 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.

15:36Whenever 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 monies, 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.

16:27One money became overvalued and the other undervalued by the government. Thus suppose that a country used gold and silver as monies and the government set the ratio between them at 16 ounces of silver to 1 ounce of gold. The market price, perhaps 16 to 1 at the time of the price control, then changes to 15 to 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.

17:17The 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.

18:09If 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 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 monies, and in setting new and worn coins arbitrarily equal to one another when they discernibly differ in weight.

18:56To 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 ensure higher prices to the sellers. Yet the effect will be to prevent many sellers from selling any of their surplus.

19:49Furthermore, 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.