For citizens and law professors who believe that the government is Santa Claus, capable of blessing the nation with prosperity by way of market manipulations, a review of certain basic economic principles, easy to understand if equally easy to forget, is in order.
Few economists have illustrated as plainly and logically as Ludwig von Mises why price controls (and by extension, all types of interventions in free markets) don't work, never achieve their stated goals. For this reason we present here an excerpt from the chapter 'Interventionism' from his book 'Economic Policy', published by Regnery (www.regnery.com) and the Mises Institute (www.mises.org):
The government hears people complain that the price of milk has gone up. And milk is certainly very important, especially for the rising generation, for children. Consequently the government declares a maximum price for milk, a maximum price that is lower than the potential market price would be. Now the government says: "certainly we have done everything needed in order to make it possible for poor parents to buy as much milk as they need to feed their children."
But what happens? On the one hand, the lower price of milk increases the demand for milk; people who could not afford to buy milk at a higher price are now able to buy it at the lower price which the government has decreed. And on the other hand some of the producers, those producers of milk who are producing at the highest cost – that is, the marginal producers – are now suffering losses, because the price which the government has decreed is lower than their costs. This is the important point in the market economy. The private entrepreneur, the private producer, cannot take losses in the long run. And as he cannot take losses in milk, he restricts the production of milk for the market. He may sell some of his cows for the slaughterhouse, or instead of milk he may sell some products made out of milk, for instance sour cream, butter or cheese.
Thus the government's interference with the price of milk will result in less milk that there was before, and at the same time there will be a greater demand. Some people who are prepared to pay the government-decreed price cannot buy it. Another result will be that anxious people will hurry to be the first at the shops. They have to wait outside. The long lines of people waiting at shops always appear as a familiar phenomenon in a city in which the government has decreed maximum prices for commodities that the government considers as important. This is happened everywhere when the price of milk was controlled. This was always prognosticated by economists. Of course, only by sound economists, and their number is not very great.
But what is the result of the government's price control? The government is disappointed. It wanted to increase the satisfaction of the milk drinkers. But actually it has dissatisfied to them. Before the government interfered, milk was expensive, but people could buy it. Now there is only an insufficient quantity of milk available. Therefore the total consumption of milk drops. The children are getting less milk, not more. The next measure to which the government now resorts, is rationing. But rationing only means that certain people are privileged and are getting milk while other people are not getting any at all. Who gets milk and who does not, of course, is always very arbitrarily determined. One order may determine, for example, that children under four years old should get milk, and the children over four years, or between the age of four and six, should get only half the ration which children under four years receive.
Whatever the government does, the fact remains, there is only a smaller amount of milk available. Thus people are still more dissatisfied than they were before. Now the government asks the milk producers (because the government does not have enough imagination to find out for itself): "why do you not produce the same amount of milk you produced before?" The government gets the answer: "we cannot do it, since the cost of production are higher than the maximum price which the government has established." Now the government studies the costs of the various items of production, and it discovers one of the items is fodder. "Oh," says the government, "the same control we applied to milk we will now apply to fodder. We will determine a maximum price for fodder, and then you will be able to feed your cows at a lower price, at a lower expenditure. Then everything will be all right; you will be able to produce more milk and you will sell more milk. "
But what happens now? The same story repeats itself with fodder, and as you can understand, for the same reasons. The production of fodder drops and the government is again faced with a dilemma. So the government arranges new hearings, to find out what is wrong with fodder production. And it gets an explanation from the producers of fodder precisely like the one that it got from the milk producers. So the government must go a step farther, since it does not want to abandon the principle of price control. It determines maximum prices for producers goods which are necessary for the production of fodder. And the same story happens again.
The government at the same time starts controlling not only milk, but also eggs, meat, and other necessities. And every time the government gets the same result, everywhere the consequence is the same. Once the government fixes a maximum price for consumer goods, it has to go farther back to producer's goods, and limit the prices of the producer's goods required for the production of the price-controlled consumer goods. And so the government, having started with only a few price controls, goes farther and farther back in the process of production, fixing maximum prices for all kinds of producer's goods, including of course the price of labor, because without wage control, the government's "cost control" would be meaningless.
Moreover, the government cannot limit its interference into the market to only those things which it views as vital necessities, like milk, butter, eggs, and meat. It must necessarily include luxury goods, because if it did not limit their prices, capital and labor would abandon the production of vital necessities and would turn to producing those things which the government considers unnecessary luxury goods. Thus, the isolated interference with one or a few prices of consumer goods always brings about effects – and this is important to realize – which are even less satisfactory than the conditions that prevailed before.
Before the government interfered, milk and eggs were expensive; after the government interfered they began to disappear from the market. The government considered those items to be so important that it interfered; it wanted to increase the quantity and improve the supply. The result was the opposite: isolated interference brought about a condition which – from the point of view of the government – is even more undesirable than the previous state of affairs which the government wanted to alter. And as the government goes farther and farther, it will finally arrive at a point where all prices, all wage rates, all interest rates, in short everything in the whole economic system, is determined by the government. And this, clearly, is socialism.
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