CHAPTER 30 INTERFERENCE WITH THE STRUCTURE OF PRICES
1. THE GOVERNMENT AND THE AUTONOMY OF THE MARKET
Interference with the structure of the market means that the authority aims at fixing prices for commodities and services and interest rates at a height different from what the unhampered market would have determined.
It decrees or empowers, either tacitly or expressly, definite groups of people to decree
prices and rates which are to be considered either as maxima or as minima, and it provides
for the enforcement of such decrees by coercion and compulsion.
In resorting to such measures, the government wants to favor either the buyer, as in the
The Maximum Price is designed to make it possible for the buyer to procure what he wants at
a price lower than that of the unhampered market.
The minimum price is designed to make it possible for the seller to dispose of his merchandise
or his services at a price higher than that of the unhampered market.
It depends on the political balance of forces which groups the authority wants to favor.
At times, governments have resorted to maximum prices.
At other times, to minimum prices for various commodities.
At times, they have decreed maximum wage rates.
At other times, minimum wage rates.
It is only with regard to interest that they have never had recourse to minimum rates.
When they have interfered, they have always decreed maximum interest rates.
They have always looked askance upon saving, investing and money lending.
If this interference with commodity prices, wage rates and interest rates includes all
prices, wage rates and interest rates, it is tantamount to the full substitution of
socialism of the German pattern for the market economy.
In the market, interpersonal exchange, private ownership of the means of production, entrepreneurship
and private initiative virtually disappear altogether.
No individual any longer has the opportunity to influence the process of production of
his own accord.
Every individual is bound to obey the orders of the supreme board of production management.
But in the complex of these orders are called prices, wage rates and interest rates, are
no longer prices, wage rates and interest rates in the catallactic sense of these terms.
They are merely quantitative determinations fixed by the director without reference to
a market process.
If the governments resorting to price control and the reformers advocating price control
were always intent upon the establishment of socialism of the German pattern, there
would be no need for economics to deal with price control separately.
All that has to be said with reference to such price control is already contained in
the analysis of socialism.
Many advocates of government interference with prices have been and are very much confused
with regard to this issue.
They have failed to recognize the fundamental difference between a market economy and a
non-market society.
The haziness of their ideas has been reflected in vague and ambiguous language, and in a
bewildered terminology.
They have tried to amalgamate things entirely incompatible with one another.
Their main concepts are examples of the inconsistency which logicians call contradicteo in adjecto
Go.
However, there were and are advocates of price control who have openly declared that they
want to preserve the market economy.
They are outspoken in their assertion that government fixing of prices, wage rates and
interest rates can attain the ends the government wants to attain by their promulgation without
abolishing altogether the market and private ownership of the means of production.
They even declare that price control is the best, or the only means of preserving the
system of private enterprise and of preventing the coming of socialism.
They become very indignant if somebody questions the correctness of their doctrine and shows
that price control, if it is not to make things worse from the point of view of the governments
and the interventionist doctrinaires, must finally result in socialism.
They protest that they are neither socialists nor communists and that they aim at economic
freedom and not at totalitarianism.
It is the tenets of these interventionists that we have to examine.
The problem is whether it is possible for the police power to attain the ends it wants
to attain by fixing prices, wage rates and interest rates at a height different from
from what the unhampered market would have determined.
It is beyond doubt that a strong and resolute government has the power to decree such maximum
or minimum rates and to take revenge upon the disobedient.
But the question is whether or not the authority can attain those ends which it wants to attain
by resorting to such decrees.
Refractory is a long record of price ceilings and anti-usury laws.
Again and again emperors, kings and revolutionary dictators have tried to meddle with the market
phenomena.
Severe punishment was inflicted on refractory dealers and farmers.
Many people fell victim to persecutions, which met with the enthusiastic approval of the
masses.
Nonetheless, all these endeavors failed.
The explanation which the writings of lawyers, theologians and philosophers provided for
the failure was in full agreement with the ideas held by the rulers and the masses.
Man, they said, is intrinsically selfish and sinful, and the authorities were unfortunately
too lax in enforcing the law.
What was needed was more firmness and peremptoriness on the part of those in power.
The cognizance of the issue involved was first reached with regard to a special problem.
Various governments long practiced currency debasement.
They substituted baser and cheaper metals for a part of the gold or silver which the
coins previously contained, or they reduced the weight and the size of the coins.
But they retained for the debased coins the customary names of the old ones, and decreed
In Searching for the Causes Which Made All Such Decrees Abortive, the forerunners of
of Economic Thought had already discovered by the last centuries of the Middle Ages,
the regularity which was later called Gresham's Law.
There was still a long way to go from this isolated insight to the point where the philosophers
of the 18th century became aware of the interconnectedness of all market phenomena.
In describing the results of their reasoning, the classical economists and their successors
Sometimes resorted to idiomatic expressions, which could easily be misinterpreted by those
who wanted to misinterpret them.
They occasionally spoke of the impossibility of price control.
What they really meant was not that such decrees are impossible, but that they cannot attain
those ends which the governments are trying to attain, and that they make things worse,
not better.
They concluded that such decrees are contrary to purpose and inexpedient.
It is necessary to see clearly that the problem of price control is not merely one of the
problems to be dealt with by economics, not a problem with regard to which there can arise
disagreement among various economists.
The issue involved is rather, is there any such thing as economics?
Is there any regularity in the sequence and interconnectedness of the market phenomena?
He who answers these two questions in the negative denies the very possibility, rationality
and existence of economics as a branch of knowledge.
He returns to the beliefs held in the ages which preceded the evolution of economics.
He declares to be untrue the assertion that there is any economic law and that prices
Those wage rates and interest rates are uniquely determined by the data of the market.
He contends that the police have the power to determine these market phenomena ad libitum.
An advocate of socialism need not necessarily negate economics.
His postulates do not necessarily imply the indeterminateness of the market phenomena.
But the interventionist, in advocating price control, cannot help nullifying the very existence
of economics.
Nothing is left of economics if one denies the law of the market.
The German historical school was consistent in its radical condemnation of economics and
in its endeavors to substitute wirtschaftliche Staatswissenschaften, the economic aspects
of Political Science for Economics.
So were many adepts of British Fabianism and American Institutionalism.
But those authors who do not totally reject economics and yet assert that price control
can attain the ends sought lamentably contradict themselves.
It is logically impossible to reconcile the point of view of the economist and that of
the interventionist.
If prices are uniquely determined by the market data, they cannot be freely manipulated by
government compulsion.
The government's decree is just a new datum, and its effects are determined by the operation
of the market.
It need not necessarily produce those results which the government wants to realize in resorting
to it.
It may happen that the final outcome of the interference is, from the point of view of
and the government's intention even more undesirable than the previous state of affairs which the government wanted to alter.
One does not invalidate these propositions by putting the term economic law in quotation marks and by finding fault with the notion of the law.
In speaking of the laws of nature, we have in mind the fact that there prevails an inexorable
interconnectedness of physical and biological phenomena, and that acting man must submit
to this regularity if he wants to succeed.
In speaking of the laws of human action, we refer to the fact that such an inexorable
interconnectedness of phenomena is present also in the field of human action as such,
And that acting man must recognize this regularity too if he wants to succeed.
The reality of the laws of praxeology is revealed to man by the same signs that reveal the reality
of natural law, namely the fact that his power to attain his ends is restricted and conditioned.
In the absence of laws, man would either be omnipotent and would never feel any uneasiness
These laws of the universe must not be confused with the man-made laws of the country and
with man-made moral precepts.
The laws of the universe about which physics, biology and praxeology provide knowledge are
independent of the human will.
They are primary ontological facts, rigidly restricting man's power to act.
The moral precepts and the laws of the country are means by which men seek to attain certain
ends.
Whether or not these ends can really be attained this way depends on the laws of the universe.
The man-made laws are suitable if they are fit to attain these ends, and contrary to
purpose if they are not.
They are open to examination from the point of view of their suitableness or unsuitableness.
With regard to the laws of the universe, any doubt of their suitableness is supererogatory
and vain.
They are what they are and take care of themselves.
Their violation penalizes itself.
But the man-made laws need to be enforced by special sanctions.
It is not really the insane venture to disregard physical and biological laws, but it is quite
common to disdain economic laws.
Rulers do not like to admit that their power is restricted by any laws other than those
of physics and biology.
They never ascribe their failures and frustrations to the violation of economic law.
Foremost in the repudiation of economic knowledge was the German Historical School.
It was an unbearable idea to these professors that their lofty idols, the hoand-sollern
electors of Brandenburg and kings of Prussia, should have lacked omnipotence.
To refute the teachings of the economists, they buried themselves in old documents and
compiled numerous volumes dealing with the history of the administration of these glorious
This, they wrote, is a realistic approach to the problems of state and government. Here
you find unadulterated facts and real life, not the bloodless abstractions and faulty
generalizations of the British doctrinaires. In truth, all that these ponderous tomes report
is a long record of policies and measures which failed precisely because of their neglect
of Economic Law.
No more instructive case history could ever be written than these acta borusica.
However, economics cannot acquiesce in such exemplification.
It must enter into a precise scrutiny of the mode in which the market reacts to government
interference with the price structure.
2. The Market's Reaction to Government Interference
The characteristic feature of the market price is that it equalizes supply and demand. The
size of the demand coincides with the size of supply, not only in the imaginary construction
of the evenly rotating economy. The notion of the plain state of rest, as developed by
by the Elementary Theory of Prices is a faithful description of what comes to pass in the market
at every instant. Any deviation of a market price from the height at which supply and
demand are equal is, in the unhampered market, self-liquidating. But if the government fixes
prices at a height different from what the market would have fixed if left alone, this
Equilibrium of Demand and Supply is Disturbed. Then there are, with maximum prices, potential
buyers who cannot buy, although they are ready to pay the price fixed by the authority, or
even a higher price. Then there are, with minimum prices, potential sellers who cannot
sell, although they are ready to sell at the price fixed by the authority, or even at a
at a lower price.
The price can no longer segregate those potential buyers and sellers who can buy or sell from
those who cannot.
A different principle for the allocation of the goods and services concerned, and for
the selection of those who are to receive portions of the supply available, necessarily
comes into operation.
It may be that only those are in a position to buy who come first, or only those to whom
particular circumstances, such as personal connections, assign a privileged position,
or only those ruthless fellows who chase away their rivals by resorting to intimidation
or violence.
If the authority does not want chance or violence to determine the allocation of the supply
available, and conditions to become chaotic, it must itself regulate the amount which each
individual is permitted to buy.
It must resort to rationing.
For the sake of simplicity, we deal in the further disquisitions of this section only
with maximum prices for commodities, and in the next section only with minimum wage rates.
However, our statements are, mutatus mutandis, equally valid for minimum prices for commodities and maximum wage rates.
But rationing does not affect the core of the issue.
The allocation of portions of the supply already produced and available to the various individuals
eager to obtain a quantity of the goods concerned, is only a secondary function of the market.
Its primary function is the direction of production.
It directs the employment of the factors of production into those channels in which they
satisfy the most urgent needs of the consumers.
If the government's price ceiling refers only to one consumer's good, or to a limited
amount of consumer's goods, while the prices of the complementary factors of production
are left free, production of the consumer's goods concerned will drop.
The marginal producers will discontinue producing them, lest they suffer losses.
The not absolutely specific factors of production will be employed to a greater extent for the
production of other goods not subject to price ceilings.
A greater part of the absolutely specific factors of production will remain unused than
One would have remained in the absence of price ceilings.
There emerges a tendency to shift production activities from the production of the goods
affected by the maximum prices into the production of other goods.
This outcome is, however, manifestly contrary to the intentions of the government.
In resorting to price ceilings, the authority wanted to make the commodities concerned more
is easily accessible to the consumers. It considered precisely those commodities so
vital that it singled them out for a special measure in order to make it possible even
for poor people to be amply supplied with them. But the result of the government's interference
is that production of these commodities drops or stops altogether. It is a complete failure.
It would be vain for the government to try to remove these undesired consequences by
decreeing maximum prices likewise for the factors of production needed for the production
of the consumer's goods, the prices of which it has fixed.
Such a measure would be successful only if all factors of production required were absolutely
specific.
As this can never be the case, the government must add to its first measure, fixing the
price of only one consumer's good below the potential market price.
More and more price ceilings, not only for all other consumer's goods and for all material
factors of production, but, no less, for labor.
It must compel every entrepreneur, capitalist and employee to continue producing at the
prices, wage rates and interest rates which the government has fixed, to produce those
quantities which the government orders them to produce, and to sell the products to those
people, producers or consumers, whom the government determines.
If one branch of production were to be exempt from this regimentation, capital and labor
would flow into it. Production would be restricted precisely in those other regimented branches
which the government considered so important that it interfered with the conduct of their
affairs.
Economics does not say that isolated government interference with the prices of only one commodity
or a few commodities is unfair, bad or unfeasible.
It says that such interference produces results contrary to its purpose, that it makes conditions
worse, not better, from the point of view of the government and those backing its interference.
Before the government interfered, the goods concerned were, in the eyes of the government,
too dear.
As a result of the maximum price, their supply dwindles or disappears altogether.
The government interfered because it considered these commodities especially vital, necessary,
indispensable.
But its action curtailed the supply available.
It is, therefore, from the point of view of the government, absurd and nonsensical.
If the government is unwilling to acquiesce in this undesired and undesirable outcome
and goes further and further, if it fixes the prices of all goods and services of all
orders and obliges all people to continue producing and working at these prices and
wage rates, it eliminates the market altogether.
Then, the planned economy, socialism of the German Zwangswirtschaft pattern, is substituted for the market economy.
The consumers no longer direct production by their buying and abstention from buying.
The government alone directs it.
There are only two exceptions to the rule that maximum prices restrict supply and thus bring about a state of affairs
Prices which is contrary to the aims sought by their imposition.
One refers to absolute rent, the other to monopoly prices.
The maximum price results in a restriction of supply because the marginal producers suffer
losses and must discontinue production.
The nonspecific factors of production are employed for the production of other products
not subject to price ceilings.
The utilization of the absolutely specific factors of production shrinks.
Under unhampered market conditions, they would have been utilized up to the limit determined
by the absence of an opportunity to use the non-specific among the complementary factors
for the satisfaction of more urgent wants.
Now, only a smaller part of the available supply of these absolutely specific factors
can be utilized. Concomitantly, that part of the supply that remains unused increases.
But if the supply of these absolutely specific factors is so scanty that under the prices
of the unhampered market their total supply was utilized, a margin is given within which
the government's interference does not curtail the supply of the product. The maximum price
The price does not restrict production as long as it has not entirely absorbed the absolute rent of the marginal supplier of the absolutely specific factor.
But at any rate, it results in a discrepancy between the demand for and the supply of the product.
Thus the amount by which the urban rent of a piece of land exceeds the agricultural rent
provides a margin in which rent control can operate without restricting the supply of
rental space.
If the maximum rents are graduated in such a way as never to take away from any proprietor
so much that he prefers to use the land for agriculture rather than for the construction
of Buildings, they do not affect the supply of apartments and business premises.
However, they increase the demand for such apartments and premises, and thus create the
very shortage that the governments pretend to fight by their rent ceilings.
Whether or not the authorities resort to rationing the space available is catallactically of
minor importance.
At any rate, their price ceilings do not abolish the catallactic phenomenon of the urban rent.
They merely transfer the rent from the landlord's income into the tenant's income.
In practice, of course, governments resorting to rent restriction never adjust their ceilings
to these considerations.
They either rigidly freeze gross rents as they prevailed on the eve of their interference,
or allow only a limited addition to these gross rents.
As the proportion between the two items included in the gross rent, urban rent proper and price
paid for the utilization of the superstructure varies according to the special circumstances
of each dwelling, the effect of the rent ceilings is also very different.
In some cases, the expropriation of the owner to the benefit of the renter involves only
There is only a fraction of the difference between the urban rent and the agricultural rent.
In other cases, it far exceeds this difference.
But however this may be, the rent restriction creates a housing shortage.
It increases demand without increasing supply.
If maximum rents are decreed not only for already available rental space, but also for
For buildings still to be constructed, the construction of new buildings is no longer
remunerative.
It either stops altogether or slumps to a low level.
The shortage is perpetuated.
But even if rents in new buildings are left free, construction of new buildings drops.
Prospective investors are deterred because they take into account the danger that the
The government will, at a later date, declare a new emergency and expropriate a part of
their revenues in the same way as it did with the old buildings.
The second exception refers to monopoly prices.
The difference between a monopoly price and the competitive price of the commodity in
question provides a margin in which maximum prices could be enforced without defeating
Among the Ends Sought by the Government If the competitive price is P and the lowest
among the possible monopoly prices, M, a ceiling price of C, C being lower than M, would make
it disadvantageous for the seller to raise the price above P. The maximum price would
re-establish the competitive price and increase demand, production and the supply offered
for Sale.
A dim cognizance of this concatenation is at the bottom of some suggestions asking for
government interference in order to preserve competition and to make it operate as beneficially
as possible.
We may, for the sake of argument, pass over the fact that all such proposals are unrealistic
with regard to all those instances of monopoly prices which are the outcome of government
Interference. If the government objects to monopoly prices for new inventions, it should
stop granting patents. It would be absurd to grant patents and then to deprive them
of any value by forcing the patentee to sell at the competitive price. If the government
does not approve of cartels, it should rather abstain from all measures, such as import
Duties which provide business with the opportunity to erect combines.
Things are different in those instances in which monopoly prices come into existence
without assistance from the governments.
Here governmental maximum prices could re-establish competitive conditions, if it were possible
to find out by academic computation at which height a non-existing competitive market would
have determined the price.
That all endeavors to construct non-market prices are vain has been shown.
The unsatisfactory results of all attempts to determine what the fair or correct price
for the services of public utilities should be are well known to all experts.
Reference to these two exceptions explains why, in some rare cases, maximum prices, when
When applied with very great caution within a narrow margin, do not restrict the supply
of the commodity or the service concerned.
It does not affect the correctness of the general rule that maximum prices bring about
a state of affairs which, from the point of view of the government decreeing them, is
is more undesirable than conditions as they would have been in the absence of price control.
Observations on the Causes of the Decline of Ancient Civilization
Knowledge of the effects of government interference with market prices makes us comprehend the
economic causes of a momentous historical event, the decline of ancient civilization.
It may be left undecided whether or not it is correct to call the economic organization
of the Roman Empire capitalism.
At any rate it is certain that the Roman Empire in the second century, the age of the Antonines,
the Good Emperors, had reached a high stage of the social division of labor and of inter-regional
commerce.
Several metropolitan centers, a considerable number of middle-sized towns, and many small
All towns were the seats of a refined civilization. The inhabitants of these urban agglomerations
were supplied with food and raw materials not only from the neighboring rural districts,
but also from distant provinces. A part of these provisions flowed into the cities as
revenue of their wealthy residents who owned landed property, but a considerable part was
was bought in exchange for the rural population's purchases of the products of the city dwellers'
processing activities.
There was an extensive trade between the various regions of the vast empire.
Not only in the processing industries, but also in agriculture, there was a tendency
toward further specialization.
The various parts of the empire were no longer economically self-sufficient.
They Were Mutually Interdependent
What brought about the decline of the empire and the decay of its civilization was the
disintegration of this economic interconnectedness, not the barbarian invasions.
The alien aggressors merely took advantage of an opportunity which the internal weakness
of the empire offered to them.
From a military point of view, the tribes which invaded the empire in the fourth and
and Fifth Centuries were not more formidable than the armies which the legions had easily
defeated in earlier times.
But the empire had changed.
Its economic and social structure was already medieval.
The freedom that Rome granted to commerce and trade had always been restricted.
With regard to the marketing of cereals and other vital necessities, it was even more
are restricted than with regard to other commodities.
It was deemed unfair and immoral to ask for grain, oil and wine, the staples of these
ages, more than the customary prices, and the municipal authorities were quick to check
what they considered profiteering.
Thus the evolution of an efficient wholesale trade in these commodities was prevented.
The policy of the ANONA, which was tantamount to a nationalization or municipalization of
the grain trade aimed at filling the gaps, but its effects were rather unsatisfactory.
Grain was scarce in the urban agglomerations, and the agriculturists complained about the
unremunerativeness of grain growing.
The interference of the authorities upset the adjustment of supply to the rising demand.
The showdown came when, in the political troubles of the third and fourth centuries, the emperors
resorted to currency debasement.
With the system of maximum prices, the practice of debasement completely paralyzed both the
production and the marketing of the vital foodstuffs and disintegrated society's economic
organization.
The more eagerness the authorities displayed in enforcing the maximum prices, the more
For desperate became the conditions of the urban masses dependent on the purchase of
food.
Commerce in grain and other necessities vanished altogether.
To avoid starving, people deserted the cities, settled on the countryside and tried to grow
grain, oil, wine and other necessities for themselves.
On the other hand, the owners of the biggest states restricted their excess production
of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money
He was forced to look for a substitute to meet his needs by employing handicraftsmen on his own account in his villa.
He discontinued big-scale farming and became a landlord receiving rents from tenants or sharecroppers.
These koloni were either freed slaves or urban proletarians who settled in the villages and turned to tilling the soil.
of Soil, a tendency toward the establishment of autarky of each landlord's estate emerged.
The economic function of the cities of commerce, trade and urban handicrafts shrank.
Italy and the provinces of the empire returned to a less advanced state of the social division
of labor.
The highly developed economic structure of ancient civilization retrograded to what is
is now known as the Minorial Organization of the Middle Ages.
The emperors were alarmed with that outcome, which undermined the financial and military
power of their government, but their counteraction was futile, as it did not affect the root
of the evil.
The compulsion and coercion to which they resorted could not reverse the trend toward
and Social Disintegration, which, on the contrary, was caused precisely by too much compulsion
and coercion.
No Roman was aware of the fact that the process was induced by the government's interference
with prices and by currency debasement.
It was vain for the emperors to promulgate laws against the city-dweller who relicta
civitate rus habitare maluaret.
The system of the Laeturgia, the public services to be rendered by the wealthy citizens, only
accelerated the retrogression of the division of labor.
The laws concerning the special obligations of the shipowners, the naviculari, were no
more successful in checking the decline of navigation than the laws concerning grain
dealing in checking the shrinkage in the city's supply of agricultural products.
The marvelous civilization of antiquity perished because it did not adjust its moral code and
its legal system to the requirements of the market economy.
A social order is doomed if the actions which its normal functioning requires are rejected
by the standards of morality, are declared illegal by the laws of the country, and are
prosecuted as criminal by the courts and the police.
The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise.
The policy of interventionism and its political corollary, the Fuhrer Principle, decomposed
As the mighty empire, as they will by necessity, always disintegrate and destroy any social
entity.