The Fear of High Prices

0:00The Fear of High Prices One of the reasons people continue to insist that government ought to intervene in the economy is their fear that if the government did not intervene, prices would simply rise out of sight, and we wouldn't be able to pay them, and consequently, we would all suffer privation and want, as a result of the ability of men in business, to simply demand and collect any price that they want to ask. Now, to understand what really happens assuming a free market, we would have to begin by finding out how prices are established in the first place. Most people assume that the price is established by the businessman, that he puts the price on the merchandise, and may I confirm that every businessman But in point of fact, that isn't what establishes the price. The price of any good or service is established as a result of the competing and conflicting forces of supply and demand, and although the businessman may very well physically put a price on a piece of merchandise, that is what is called the asking price, and it has no necessary relevance.

1:23The real price is the exchange price. That may be what the businessman asks, but it may be a long way away from what he asks, because the businessman does not set prices. He sets asking prices, and that's all he can do. If he asks a price that is too high, he doesn't get it, and therefore he hasn't really set a price at all. The only kind of price that has meaning is a price that will contribute to an exchange. Now before we go any further in this area, it is important to realize what it is that causes prices to rise. Prices can rise from three general causes and usually more than More than one cause is acting at a given moment. We tend to oversimplify here, and we try to fix the blame for a high price at one point or another, sometimes not recognizing the other factors that are also influencing the fluctuation of price.

2:43The things that cause prices to rise would be these, one, an increasing demand for a given good or service. That is, suddenly a particular commodity becomes increasingly popular. When this happens, more and more buyers appear in the market and they bid against

3:36are more popular than it was before. There is a sudden increased demand and that will cause prices to rise. Additionally, a decline in the supply of a given commodity will cause prices to rise. The effect is exactly the same. If there is an item that is in popular demand and suddenly Only for any reason that item is no longer supplied as plentifully as it had been. Maybe the components become scarce or something else happens so that it cannot be produced in the same numbers that it was produced before. For example, a strike or a war or any kind of a stoppage that prevents production for continuing at the same level that had been established before will undoubtedly reduce the numbers of units of that item being available. And this will always tend to cause prices to rise. So prices will rise when there is an increased demand and also when there is a decline in supply. You see, supply and demand both influence price.

4:50Now there is a third area that will cause prices to rise. And this is the area that that we refer to popularly as inflation. Technically speaking, inflation is nothing more than the increase in the amount of money or credit in circulation. And when the amount of money or credit increases, then prices will tend to rise. Now many persons, because of the have confused inflation with any price rise, and every time they see a price going up, they say, well there you are, that's inflation. No, it may not be inflation at all. You could have a price rise as a result of a scarcity of supply, or as a result of an increase in demand, or as a result of an increase in the supply of money. All of those factors could would cause prices to rise. Now the interesting thing is that inflation by itself might not cause a price to rise. And of course you can get price rises without inflation. An example of the former condition occurred during World War II. In World War II the government rapidly

6:05expanded the amount of money and credit in circulation. And it did so at the same time claimed that it passed laws regulating the prices so that prices were frozen and could not be raised. But the result was inflation. It was a kind of inflation that was not automatized in terms of a higher price. It's still inflation. Because it was simply the increase in the amount of Money and Credit Available, people tended to devalue their money and yet they couldn't exchange it for very much in the market because everything in the market was being regulated and the result was simply a devaluing of money even though prices remained the same.

6:55So there is a case where you have an inflation occurring without a price rise and of course You can, and often do, have price rises occurring when the money supply and the credit supply is relatively stable. A case in point is one that has occurred during the last months of 1969 and the first months of 1970 where our president, Mr. Nixon, accepted the idea that The reason for the rise in prices in this country was entirely related to the inflationary policies of the government. The government had been for many years going on with the idea of increasing the amount of credit and currency in circulation somewhere between 3% and maybe 4% per year.

7:49And so we had had a constantly administered inflationary policy and we have had constantly Rising Prices. So economists advised Mr. Nixon that if he stopped increasing the money supply, the result would be that prices would stop rising. And so Mr. Nixon did this. He acted upon the advice of his economists and for about seven or eight months the federal government did not create more currency and circulation and it actually reversed itself on credit and Titan Credit so that the tendency was somewhat deflationary rather than inflationary. And what was the result? Prices kept going up anyway.

8:34Well, you see, the prices were rising in part because of inflation, but in part because of other factors as well. It's always dangerous in making market forecasts to try to indicate that a particular result is coming from one specified cause. Once you begin peeling back the various layers, like an onion, these things occur in the market, you peel back the various layers that cause something to occur. You may find that although inflation will definitely help to boost prices, other factors remaining the same, other factors don't necessarily remain the same. And you You may have other things in there that are also affecting price rises.

9:25One of the things that we have had, and we do have, although it's hard for people in this country to believe it, we have shortages. We have scarcities. And that is one of the reasons our prices continue to go up, because there just aren't There are enough goods and services being mass-produced rapidly enough to lower the prices to where they could be. We are producing limited supplies, often under government recommendation. In very few cases does the government actually limit the amount of production, but by virtue of manipulating money and credit, which they're in a position to do, and in making recommendations The government influences this very profoundly and actually the government has been cooperating with businessmen through its antitrust operations in helping to maintain high prices and in helping to create an economy of scarcity although the men in government would probably deny that and aren't really aware that they've been doing it.

10:31They really don't intend to do that but their actions end up creating this effect in the in the market. And if they understood it well enough, perhaps they'd see that. So keep in mind that prices can rise from three sources, increasing demand, declining supply, or an increase in the supply of money. All of these things can affect a price rise. Given a free market, any of those factors could occur in a free market. Now, you have to realize that we do not have a free market at this time. We haven't had a free market in this country for a very long time. And so the pure actions of a free market, you are not going to see.

11:19So when something happens in our existing economy, don't think that what has happened would happen in a free market. You have to use your brain, you have to use logic here to figure out what would happen given a free market because we are operating today in something other than a free market. So you have to visualize this and see what would have to happen if things were free. Don't take what we're talking about and what we have today as being evidence of a free market. Now, to see how prices are arrived at in a free market, we have to create a situation that illustrates this. As I've already indicated, prices are not set by the businessman, although he'd probably like to. All he does is establish the asking price. Possibly the best illustration The first question we could find of how prices are established would be to describe the actions of an auction.

12:24Actually, the general marketplace is always an auction anyway, but at an auction house where auctions occur, you see everything. In the general market of this country, for instance, it's so big that you don't see everything, but exactly the same things are occurring. People are bidding for goods and services, and the forces that are in play in the whole country can be condensed and observed in a given auction situation. So let's imagine an auction situation and find out just exactly how prices are established given a free market. Now, in the illustration I'll describe, let's imagine a given product, and I'll make this the widget.

13:14This is the famous household item that everybody would like to have. It's a handy-dandy thing that everybody would like, and whatever it is, you guess, because it doesn't make any difference. So we're now manufacturing a widget, and in terms of my illustration, I will assume that there will be five widget makers, and that each of these widget makers, see, what we're going to examine now is just one factor. We're going to examine the pricing factor. That's all. So we freeze all the other factors and leave this one alone so we can examine what would happen in that area alone. So we'll assume that all of these widget makers make the same quality of widget, and they all make the same amount of widgets, and they all come So, the prices are going to fluctuate here, but nothing else will fluctuate. And we'll assume that what we have are five suppliers. We'll call them Mr. 1, 2, 3, 4 and 5. That's easy to keep in mind. And their prices will range, let us suppose, the price to them will

14:28in the range $0.70, $0.60, $0.50, $0.40, and $0.30. Now that's relatively easy to keep in mind. We've got five sellers who have produced widgets and everything is identical about them excepting the factor of price which fluctuates from $0.70 to $0.30 with $0.10 intervals. Now that's the condition of the sellers. And now to make my illustration, let's suppose that we have just five widget buyers and they come in to the market and they want to buy the exact number of widgets that the sellers want to sell. And their situation is identical to the sellers in all respects, that is everything is frozen except one thing and that is what they'll pay. And we'll assume here that we We have A, B, C, D, and E. We've got five buyers that are alphabetically designated.

15:28And Mr. A will pay 60 cents. And he will pay more than anybody else. And they will buy 60, 50, 40, 30, and 20. And you'll notice that I've deliberately created a 10-cent gap App here, both at the top and at the bottom of the market. In other words, Mr. One will sell for 70 cents, but Mr. A, who is in the top position as a buyer, will only pay 60. And at the bottom of the buyers I've got Mr. E, who will only pay 20, but at the bottom of the sellers I've got Mr. Five, who will not take 20. He's got to get at least 30. Now, that's going to be your condition in the market. Now we come to a very important factor relating to all market transactions, and that is this. No market transaction occurs because of the wish of a buyer exclusively. No market transaction occurs until something has been created that can be sold. The fact that people want to buy something doesn't

16:39can do a thing. Lots of people want everything, but they can't get it. Demand is not the motivational factor in the market that many people think it is. If it were, then the most prosperous place in the world would be the place where the biggest demand is. And that would have to be in China and India, where you have people simply clamoring for the bare Necessities, which they can't get. It's obviously not one of the most prosperous places there is. It's one of the least prosperous places, and yet the demand is there. What is it that creates prosperity? It comes on the other side. It's the people that produce and offer something for sale. So the impetus, the initiation of a market action, always begins from the point of investment, the point of production. These are the things that cause things to happen.

17:36So the result of that is that you have a fellow named a salesman. And he is the key factor in all market exchanges. He is a key factor because he has knowledge. And what the auctioneer has, and that's a particular type of salesman in my illustration, the auctioneer has knowledge of what the sellers will do and he is absolutely ignorant of what the buyers will do when the market opens. That's why you have the market. The market is arranged to find out what buyers will do. The salesman knows what the sellers will do. They've told him. In fact, he can't operate until he knows because he's going to get a commission and he can't get paid unless he gets the price that Now, of course, he knows that all of these sellers who are offering widgets would be happy to take more than they're asking.

18:35The lowest one he's got is 30 cents, the highest one is 70. But if by some fluke he could get a dollar apiece for his widgets, he could sell all the widgets and everybody would be delighted. And he doesn't know maybe the buyers will pay a dollar. Maybe they'll pay two dollars. He doesn't know what they'll pay. He doesn't know what they'll pay. He's completely ignorant as to what's in their minds, but he has knowledge as to what's in the minds of the sellers. So he has to work on that basis. Now keep in mind that here are the conflicting forces of supply and demand, and they operate everywhere, in every market. When the seller goes into the market, he has a floor in mind. He will take all he can get, but he'll come down only so far. Below that he can't go, because if he goes below that he's out of business. So every seller enters the market with the idea, I will get all I can get, but I can come down to such and such

19:42a position. And in my illustration we now know what that floor position is for each of Our Sellers, Mr. 1, 2, 3, 4, and 5 respectively hold to floor prices of 70, 60, 50, 40, and 30 cents respectively. Fine. Now we still don't know what the buyers are going to do. We haven't any idea. So keep in mind, when a buyer comes into the market, his point of view is the reverse of the seller's. When the buyer comes in, he doesn't have a floor in mind, he has a ceiling in mind. Every buyer enters the market saying to himself, I could go up to Y position, but I can't go above it. In other words, I could pay so many dollars, but I can't go higher than that.

20:32So the view of the buyers is exactly the opposite of the view of the sellers. And in this case, as we know, we've got some discrepancies here. The buyers don't think as highly of the widgets as a group, as the widget sellers think of their own widgets. And I might add that that's more or less a natural situation. Now the bidding opens. Remember, the auctioneer or the salesman, whatever kind of a salesman he is, has knowledge on the selling side and he has no knowledge on the other. What he's trying to get is that knowledge. So he says, I've got these wonderful widgets and he gives a big spiel about how great they are and hopefully they've got some quality to them and then he says, how much am I going to get for them? And he tries to get a bid. Now in an auction he'll get what we call an opening bid. That means that the sale can start. And it doesn't make any difference where that bid occurs. The very next thing he will try to do is to

21:33put the price up. It doesn't make any difference. Now we do know where the bid is going to come We know that in terms of what the buyers know, so you and I have inside information here, we know that the buyers are going to bid somewhere between zero and sixty cents. The chances are rather good that the buyers will start in the lower brackets, possibly around twenty or thirty cents. They might start at ten cents. They'd all be willing to pay ten cents for widgets. One fellow will drop out if he has to pay more than 20 cents. Another fellow will drop out if he has to pay more than 30 cents, and so on up the line. So they'll probably start low. It doesn't make any difference where they start. The auctioneer will try to maximize the price. He will definitely try to put it up. And so he will do so. He will say, okay, now let's get some bidding here. And he gets the buyers bidding against each other and

22:32And they force the price up. And this is exactly what happens in a general market. It's the same way. We don't see it happening in an auction house. You see it happening and the price goes up. How high will it go? It can't go higher than 60 cents because we've only got one fellow that'll pay that high. It will get to that position. And then when the auctioneer finds out that nobody will go above that, then he's going to sell a lot of widgets at that price. Now which lot of widgets will he sell? He will sell Mr. Two's widgets. He can't sell one. One is priced his at 70 cents and won't take less. So one is priced off the market. Two wants 60 cents and that's the load that he's going to now deliver. Of course all of the other sellers would be happy to take 60 cents too. But why will he sell Mr. Two's. He will sell Mr. Two's because he is not certain that he will ever again have a price as high as that. So he matches buyers with sellers. He finds a seller that will pay sixty cents to a buyer who will take no less than sixty cents, and that's the transaction he makes. And so, during the auction, what will happen is Mr. A will buy Mr. Two's widgets

23:59C will buy threes, C will buy fours, and D will buy fives, but E won't buy anything because he won't bid into the market. So you've got Mr. E coming out of the auction disappointed he didn't buy anything. The prices were too high for him to meet. And you have Mr. One coming out of the market disappointed because he priced himself out of the market to begin with. Now there is a lesson that has been learned. And it has been learned by both buyers and sellers once the market has been opened. And this happens in an auction and it happens anywhere around the country. And the lesson is this, that there is a fellow Making widgets who can sell them and will sell them for 30 cents.

24:55From that time on, every seller of widgets will attempt to meet that price because he knows that he's got a competitor at that level. And if he can't meet that level, he's going to have to get out of the widget business. In other words, the seller who can sell at 30 cents, which is the rock bottom price, now realize that he is, quote, in on the ground floor. This is what this is called. He's on the base. And he will expand production because he knows he can maximize sales. People who charge more than he will have to get down and compete with him at that level, somewhere

26:07And so, given a free market, in spite of the fact that businessmen would like to charge high prices, they can't. Given a free market, the factors of competition enter, and prices These are driven down to the lowest possible level and this is recognized on both sides of the market. And if you've taken any time to examine what actually happens, in fact, you'll see that that is true. I remember when the ice cream cone was invented.

26:52You probably can't imagine that there ever was a time in this country when we didn't We didn't have ice cream cones, but I can assure you there was a time when we didn't. We used to buy ice cream in an ice cream parlor and you got it in a dish. And one day when I was a little tyke, my dad saw an ad in the paper and he read it to us at home in which it described the actions of this entrepreneur who had come up with a wild idea that you could buy ice cream in a dish and when you were through eating the The ice cream, you ate the dish. Fantastic. Well, I at once wanted one, but my dad wouldn't buy me one because he said the price was too high. And I remember very much what the price was. It was 25 cents. And at that time, 25 cent pieces were pretty hard to come by. And my dad said, you're just not going to get an ice cream cone that costs that much. Well,

27:48When time passed and what do you think happened? The price of ice cream cones came down because there were too many people like my dad that wouldn't buy it. And there were a lot of people who began to see that they could get into this area profitably for something less than 25 cents. And the price came down to 20, 15, 10. Incidentally, at 10 cents I got my first ice cream cone. And then they dropped to five. Then you got two scoops on a cone

28:46in the free market, in ice cream cones, and when we did, the prices went down and more and more people got the benefit. But when the government got in to protect everybody, the prices went up and that's where we are now. And this is not only true with ice cream and ice cream cones, it's true in virtually every product you can think of. Thanks very much.