WEBVTT NOTE XXX. Interference with the Structure of Prices 1 00:00:00.000 --> 00:00:05.000 CHAPTER 30 INTERFERENCE WITH THE STRUCTURE OF PRICES 2 00:00:05.000 --> 00:00:11.000 1. THE GOVERNMENT AND THE AUTONOMY OF THE MARKET 3 00:00:11.000 --> 00:00:25.000 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. 4 00:00:25.000 --> 00:00:33.680 It decrees or empowers, either tacitly or expressly, definite groups of people to decree 5 00:00:33.680 --> 00:00:40.440 prices and rates which are to be considered either as maxima or as minima, and it provides 6 00:00:40.440 --> 00:00:46.120 for the enforcement of such decrees by coercion and compulsion. 7 00:00:46.120 --> 00:00:51.080 In resorting to such measures, the government wants to favor either the buyer, as in the 8 00:00:51.080 --> 00:01:02.960 The Maximum Price is designed to make it possible for the buyer to procure what he wants at 9 00:01:02.960 --> 00:01:07.000 a price lower than that of the unhampered market. 10 00:01:07.000 --> 00:01:12.640 The minimum price is designed to make it possible for the seller to dispose of his merchandise 11 00:01:12.640 --> 00:01:18.520 or his services at a price higher than that of the unhampered market. 12 00:01:18.520 --> 00:01:24.620 It depends on the political balance of forces which groups the authority wants to favor. 13 00:01:24.620 --> 00:01:28.520 At times, governments have resorted to maximum prices. 14 00:01:28.520 --> 00:01:32.980 At other times, to minimum prices for various commodities. 15 00:01:32.980 --> 00:01:36.500 At times, they have decreed maximum wage rates. 16 00:01:36.500 --> 00:01:39.640 At other times, minimum wage rates. 17 00:01:39.640 --> 00:01:45.740 It is only with regard to interest that they have never had recourse to minimum rates. 18 00:01:45.740 --> 00:01:51.060 When they have interfered, they have always decreed maximum interest rates. 19 00:01:51.060 --> 00:01:57.540 They have always looked askance upon saving, investing and money lending. 20 00:01:57.540 --> 00:02:03.660 If this interference with commodity prices, wage rates and interest rates includes all 21 00:02:03.660 --> 00:02:09.180 prices, wage rates and interest rates, it is tantamount to the full substitution of 22 00:02:09.180 --> 00:02:14.140 socialism of the German pattern for the market economy. 23 00:02:14.140 --> 00:02:21.100 In the market, interpersonal exchange, private ownership of the means of production, entrepreneurship 24 00:02:21.100 --> 00:02:26.220 and private initiative virtually disappear altogether. 25 00:02:26.220 --> 00:02:31.980 No individual any longer has the opportunity to influence the process of production of 26 00:02:31.980 --> 00:02:34.100 his own accord. 27 00:02:34.100 --> 00:02:40.820 Every individual is bound to obey the orders of the supreme board of production management. 28 00:02:40.820 --> 00:02:47.460 But in the complex of these orders are called prices, wage rates and interest rates, are 29 00:02:47.460 --> 00:02:54.580 no longer prices, wage rates and interest rates in the catallactic sense of these terms. 30 00:02:54.580 --> 00:03:00.200 They are merely quantitative determinations fixed by the director without reference to 31 00:03:00.200 --> 00:03:02.620 a market process. 32 00:03:02.620 --> 00:03:08.560 If the governments resorting to price control and the reformers advocating price control 33 00:03:08.560 --> 00:03:14.000 were always intent upon the establishment of socialism of the German pattern, there 34 00:03:14.000 --> 00:03:19.560 would be no need for economics to deal with price control separately. 35 00:03:19.560 --> 00:03:24.800 All that has to be said with reference to such price control is already contained in 36 00:03:24.800 --> 00:03:27.960 the analysis of socialism. 37 00:03:27.960 --> 00:03:33.740 Many advocates of government interference with prices have been and are very much confused 38 00:03:33.740 --> 00:03:36.240 with regard to this issue. 39 00:03:36.240 --> 00:03:41.280 They have failed to recognize the fundamental difference between a market economy and a 40 00:03:41.280 --> 00:03:44.020 non-market society. 41 00:03:44.020 --> 00:03:50.040 The haziness of their ideas has been reflected in vague and ambiguous language, and in a 42 00:03:50.040 --> 00:03:52.560 bewildered terminology. 43 00:03:52.560 --> 00:03:58.240 They have tried to amalgamate things entirely incompatible with one another. 44 00:03:58.240 --> 00:04:05.440 Their main concepts are examples of the inconsistency which logicians call contradicteo in adjecto 45 00:04:05.440 --> 00:04:06.440 Go. 46 00:04:06.440 --> 00:04:12.800 However, there were and are advocates of price control who have openly declared that they 47 00:04:12.800 --> 00:04:16.140 want to preserve the market economy. 48 00:04:16.140 --> 00:04:21.560 They are outspoken in their assertion that government fixing of prices, wage rates and 49 00:04:21.560 --> 00:04:28.640 interest rates can attain the ends the government wants to attain by their promulgation without 50 00:04:28.640 --> 00:04:35.040 abolishing altogether the market and private ownership of the means of production. 51 00:04:35.040 --> 00:04:41.040 They even declare that price control is the best, or the only means of preserving the 52 00:04:41.040 --> 00:04:46.800 system of private enterprise and of preventing the coming of socialism. 53 00:04:46.800 --> 00:04:52.480 They become very indignant if somebody questions the correctness of their doctrine and shows 54 00:04:52.480 --> 00:04:58.200 that price control, if it is not to make things worse from the point of view of the governments 55 00:04:58.200 --> 00:05:04.140 and the interventionist doctrinaires, must finally result in socialism. 56 00:05:04.140 --> 00:05:10.180 They protest that they are neither socialists nor communists and that they aim at economic 57 00:05:10.180 --> 00:05:14.340 freedom and not at totalitarianism. 58 00:05:14.340 --> 00:05:18.980 It is the tenets of these interventionists that we have to examine. 59 00:05:18.980 --> 00:05:24.460 The problem is whether it is possible for the police power to attain the ends it wants 60 00:05:24.460 --> 00:05:30.940 to attain by fixing prices, wage rates and interest rates at a height different from 61 00:05:30.940 --> 00:05:34.660 from what the unhampered market would have determined. 62 00:05:34.660 --> 00:05:41.340 It is beyond doubt that a strong and resolute government has the power to decree such maximum 63 00:05:41.340 --> 00:05:46.300 or minimum rates and to take revenge upon the disobedient. 64 00:05:46.300 --> 00:05:52.780 But the question is whether or not the authority can attain those ends which it wants to attain 65 00:05:52.780 --> 00:05:56.660 by resorting to such decrees. 66 00:05:56.660 --> 00:06:01.900 Refractory is a long record of price ceilings and anti-usury laws. 67 00:06:01.900 --> 00:06:08.060 Again and again emperors, kings and revolutionary dictators have tried to meddle with the market 68 00:06:08.060 --> 00:06:09.660 phenomena. 69 00:06:09.660 --> 00:06:14.900 Severe punishment was inflicted on refractory dealers and farmers. 70 00:06:14.900 --> 00:06:20.020 Many people fell victim to persecutions, which met with the enthusiastic approval of the 71 00:06:20.020 --> 00:06:21.020 masses. 72 00:06:21.020 --> 00:06:25.160 Nonetheless, all these endeavors failed. 73 00:06:25.160 --> 00:06:30.640 The explanation which the writings of lawyers, theologians and philosophers provided for 74 00:06:30.640 --> 00:06:36.520 the failure was in full agreement with the ideas held by the rulers and the masses. 75 00:06:36.520 --> 00:06:43.400 Man, they said, is intrinsically selfish and sinful, and the authorities were unfortunately 76 00:06:43.400 --> 00:06:46.420 too lax in enforcing the law. 77 00:06:46.420 --> 00:06:52.880 What was needed was more firmness and peremptoriness on the part of those in power. 78 00:06:52.880 --> 00:06:59.120 The cognizance of the issue involved was first reached with regard to a special problem. 79 00:06:59.120 --> 00:07:02.920 Various governments long practiced currency debasement. 80 00:07:02.920 --> 00:07:08.160 They substituted baser and cheaper metals for a part of the gold or silver which the 81 00:07:08.160 --> 00:07:15.000 coins previously contained, or they reduced the weight and the size of the coins. 82 00:07:15.000 --> 00:07:21.200 But they retained for the debased coins the customary names of the old ones, and decreed 83 00:07:21.200 --> 00:07:47.640 In Searching for the Causes Which Made All Such Decrees Abortive, the forerunners of 84 00:07:47.640 --> 00:07:52.920 of Economic Thought had already discovered by the last centuries of the Middle Ages, 85 00:07:52.920 --> 00:07:56.900 the regularity which was later called Gresham's Law. 86 00:07:56.900 --> 00:08:02.620 There was still a long way to go from this isolated insight to the point where the philosophers 87 00:08:02.620 --> 00:08:09.420 of the 18th century became aware of the interconnectedness of all market phenomena. 88 00:08:09.420 --> 00:08:14.740 In describing the results of their reasoning, the classical economists and their successors 89 00:08:14.740 --> 00:08:20.740 Sometimes resorted to idiomatic expressions, which could easily be misinterpreted by those 90 00:08:20.740 --> 00:08:23.540 who wanted to misinterpret them. 91 00:08:23.540 --> 00:08:28.820 They occasionally spoke of the impossibility of price control. 92 00:08:28.820 --> 00:08:34.900 What they really meant was not that such decrees are impossible, but that they cannot attain 93 00:08:34.900 --> 00:08:40.980 those ends which the governments are trying to attain, and that they make things worse, 94 00:08:40.980 --> 00:08:42.420 not better. 95 00:08:42.420 --> 00:08:48.860 They concluded that such decrees are contrary to purpose and inexpedient. 96 00:08:48.860 --> 00:08:54.980 It is necessary to see clearly that the problem of price control is not merely one of the 97 00:08:54.980 --> 00:09:01.480 problems to be dealt with by economics, not a problem with regard to which there can arise 98 00:09:01.480 --> 00:09:05.220 disagreement among various economists. 99 00:09:05.220 --> 00:09:11.380 The issue involved is rather, is there any such thing as economics? 100 00:09:11.380 --> 00:09:17.780 Is there any regularity in the sequence and interconnectedness of the market phenomena? 101 00:09:17.780 --> 00:09:24.200 He who answers these two questions in the negative denies the very possibility, rationality 102 00:09:24.200 --> 00:09:28.220 and existence of economics as a branch of knowledge. 103 00:09:28.220 --> 00:09:34.600 He returns to the beliefs held in the ages which preceded the evolution of economics. 104 00:09:34.600 --> 00:09:41.340 He declares to be untrue the assertion that there is any economic law and that prices 105 00:09:41.340 --> 00:09:47.560 Those wage rates and interest rates are uniquely determined by the data of the market. 106 00:09:47.560 --> 00:09:54.620 He contends that the police have the power to determine these market phenomena ad libitum. 107 00:09:54.620 --> 00:09:59.920 An advocate of socialism need not necessarily negate economics. 108 00:09:59.920 --> 00:10:06.680 His postulates do not necessarily imply the indeterminateness of the market phenomena. 109 00:10:06.680 --> 00:10:13.680 But the interventionist, in advocating price control, cannot help nullifying the very existence 110 00:10:13.680 --> 00:10:15.680 of economics. 111 00:10:15.680 --> 00:10:21.420 Nothing is left of economics if one denies the law of the market. 112 00:10:21.420 --> 00:10:27.560 The German historical school was consistent in its radical condemnation of economics and 113 00:10:27.560 --> 00:10:34.320 in its endeavors to substitute wirtschaftliche Staatswissenschaften, the economic aspects 114 00:10:34.320 --> 00:10:37.920 of Political Science for Economics. 115 00:10:37.920 --> 00:10:43.540 So were many adepts of British Fabianism and American Institutionalism. 116 00:10:43.540 --> 00:10:49.760 But those authors who do not totally reject economics and yet assert that price control 117 00:10:49.760 --> 00:10:55.140 can attain the ends sought lamentably contradict themselves. 118 00:10:55.140 --> 00:11:00.840 It is logically impossible to reconcile the point of view of the economist and that of 119 00:11:00.840 --> 00:11:03.000 the interventionist. 120 00:11:03.000 --> 00:11:09.360 If prices are uniquely determined by the market data, they cannot be freely manipulated by 121 00:11:09.360 --> 00:11:11.620 government compulsion. 122 00:11:11.620 --> 00:11:18.120 The government's decree is just a new datum, and its effects are determined by the operation 123 00:11:18.120 --> 00:11:19.820 of the market. 124 00:11:19.820 --> 00:11:25.720 It need not necessarily produce those results which the government wants to realize in resorting 125 00:11:25.720 --> 00:11:27.060 to it. 126 00:11:27.060 --> 00:11:32.180 It may happen that the final outcome of the interference is, from the point of view of 127 00:11:32.180 --> 00:11:41.180 and the government's intention even more undesirable than the previous state of affairs which the government wanted to alter. 128 00:11:41.180 --> 00:11:52.180 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. 129 00:11:52.180 --> 00:11:57.920 In speaking of the laws of nature, we have in mind the fact that there prevails an inexorable 130 00:11:57.920 --> 00:12:05.000 interconnectedness of physical and biological phenomena, and that acting man must submit 131 00:12:05.000 --> 00:12:09.280 to this regularity if he wants to succeed. 132 00:12:09.280 --> 00:12:14.640 In speaking of the laws of human action, we refer to the fact that such an inexorable 133 00:12:14.640 --> 00:12:21.840 interconnectedness of phenomena is present also in the field of human action as such, 134 00:12:21.840 --> 00:12:28.980 And that acting man must recognize this regularity too if he wants to succeed. 135 00:12:28.980 --> 00:12:35.980 The reality of the laws of praxeology is revealed to man by the same signs that reveal the reality 136 00:12:35.980 --> 00:12:44.900 of natural law, namely the fact that his power to attain his ends is restricted and conditioned. 137 00:12:44.900 --> 00:12:51.140 In the absence of laws, man would either be omnipotent and would never feel any uneasiness 138 00:12:51.140 --> 00:13:04.560 These laws of the universe must not be confused with the man-made laws of the country and 139 00:13:04.560 --> 00:13:07.580 with man-made moral precepts. 140 00:13:07.580 --> 00:13:13.900 The laws of the universe about which physics, biology and praxeology provide knowledge are 141 00:13:13.900 --> 00:13:16.760 independent of the human will. 142 00:13:16.760 --> 00:13:23.520 They are primary ontological facts, rigidly restricting man's power to act. 143 00:13:23.520 --> 00:13:29.720 The moral precepts and the laws of the country are means by which men seek to attain certain 144 00:13:29.720 --> 00:13:31.280 ends. 145 00:13:31.280 --> 00:13:38.160 Whether or not these ends can really be attained this way depends on the laws of the universe. 146 00:13:38.160 --> 00:13:43.920 The man-made laws are suitable if they are fit to attain these ends, and contrary to 147 00:13:43.920 --> 00:13:46.480 purpose if they are not. 148 00:13:46.480 --> 00:13:52.840 They are open to examination from the point of view of their suitableness or unsuitableness. 149 00:13:52.840 --> 00:13:58.620 With regard to the laws of the universe, any doubt of their suitableness is supererogatory 150 00:13:58.620 --> 00:14:00.040 and vain. 151 00:14:00.040 --> 00:14:04.080 They are what they are and take care of themselves. 152 00:14:04.080 --> 00:14:07.520 Their violation penalizes itself. 153 00:14:07.520 --> 00:14:13.600 But the man-made laws need to be enforced by special sanctions. 154 00:14:13.600 --> 00:14:19.840 It is not really the insane venture to disregard physical and biological laws, but it is quite 155 00:14:19.840 --> 00:14:23.600 common to disdain economic laws. 156 00:14:23.600 --> 00:14:28.780 Rulers do not like to admit that their power is restricted by any laws other than those 157 00:14:28.780 --> 00:14:31.240 of physics and biology. 158 00:14:31.240 --> 00:14:38.040 They never ascribe their failures and frustrations to the violation of economic law. 159 00:14:38.040 --> 00:14:43.900 Foremost in the repudiation of economic knowledge was the German Historical School. 160 00:14:43.900 --> 00:14:49.960 It was an unbearable idea to these professors that their lofty idols, the hoand-sollern 161 00:14:49.960 --> 00:14:56.340 electors of Brandenburg and kings of Prussia, should have lacked omnipotence. 162 00:14:56.340 --> 00:15:01.980 To refute the teachings of the economists, they buried themselves in old documents and 163 00:15:01.980 --> 00:15:07.280 compiled numerous volumes dealing with the history of the administration of these glorious 164 00:15:07.280 --> 00:15:15.080 This, they wrote, is a realistic approach to the problems of state and government. Here 165 00:15:15.080 --> 00:15:21.780 you find unadulterated facts and real life, not the bloodless abstractions and faulty 166 00:15:21.780 --> 00:15:29.060 generalizations of the British doctrinaires. In truth, all that these ponderous tomes report 167 00:15:29.060 --> 00:15:36.220 is a long record of policies and measures which failed precisely because of their neglect 168 00:15:36.220 --> 00:15:38.580 of Economic Law. 169 00:15:38.580 --> 00:15:44.900 No more instructive case history could ever be written than these acta borusica. 170 00:15:44.900 --> 00:15:50.460 However, economics cannot acquiesce in such exemplification. 171 00:15:50.460 --> 00:15:56.620 It must enter into a precise scrutiny of the mode in which the market reacts to government 172 00:15:56.620 --> 00:16:00.740 interference with the price structure. 173 00:16:00.740 --> 00:16:07.940 2. The Market's Reaction to Government Interference 174 00:16:07.940 --> 00:16:14.340 The characteristic feature of the market price is that it equalizes supply and demand. The 175 00:16:14.340 --> 00:16:21.060 size of the demand coincides with the size of supply, not only in the imaginary construction 176 00:16:21.060 --> 00:16:27.940 of the evenly rotating economy. The notion of the plain state of rest, as developed by 177 00:16:27.940 --> 00:16:34.540 by the Elementary Theory of Prices is a faithful description of what comes to pass in the market 178 00:16:34.540 --> 00:16:41.140 at every instant. Any deviation of a market price from the height at which supply and 179 00:16:41.140 --> 00:16:49.100 demand are equal is, in the unhampered market, self-liquidating. But if the government fixes 180 00:16:49.100 --> 00:16:54.880 prices at a height different from what the market would have fixed if left alone, this 181 00:16:54.880 --> 00:17:02.520 Equilibrium of Demand and Supply is Disturbed. Then there are, with maximum prices, potential 182 00:17:02.520 --> 00:17:08.900 buyers who cannot buy, although they are ready to pay the price fixed by the authority, or 183 00:17:08.900 --> 00:17:15.780 even a higher price. Then there are, with minimum prices, potential sellers who cannot 184 00:17:15.780 --> 00:17:21.660 sell, although they are ready to sell at the price fixed by the authority, or even at a 185 00:17:21.660 --> 00:17:23.660 at a lower price. 186 00:17:23.660 --> 00:17:30.740 The price can no longer segregate those potential buyers and sellers who can buy or sell from 187 00:17:30.740 --> 00:17:33.060 those who cannot. 188 00:17:33.060 --> 00:17:38.580 A different principle for the allocation of the goods and services concerned, and for 189 00:17:38.580 --> 00:17:43.900 the selection of those who are to receive portions of the supply available, necessarily 190 00:17:43.900 --> 00:17:46.460 comes into operation. 191 00:17:46.460 --> 00:17:53.060 It may be that only those are in a position to buy who come first, or only those to whom 192 00:17:53.060 --> 00:18:00.020 particular circumstances, such as personal connections, assign a privileged position, 193 00:18:00.020 --> 00:18:05.740 or only those ruthless fellows who chase away their rivals by resorting to intimidation 194 00:18:05.740 --> 00:18:07.780 or violence. 195 00:18:07.780 --> 00:18:13.700 If the authority does not want chance or violence to determine the allocation of the supply 196 00:18:13.700 --> 00:18:20.600 available, and conditions to become chaotic, it must itself regulate the amount which each 197 00:18:20.600 --> 00:18:23.520 individual is permitted to buy. 198 00:18:23.520 --> 00:18:27.020 It must resort to rationing. 199 00:18:27.020 --> 00:18:32.220 For the sake of simplicity, we deal in the further disquisitions of this section only 200 00:18:32.220 --> 00:18:39.620 with maximum prices for commodities, and in the next section only with minimum wage rates. 201 00:18:39.620 --> 00:18:49.620 However, our statements are, mutatus mutandis, equally valid for minimum prices for commodities and maximum wage rates. 202 00:18:50.620 --> 00:18:54.620 But rationing does not affect the core of the issue. 203 00:18:54.620 --> 00:19:01.620 The allocation of portions of the supply already produced and available to the various individuals 204 00:19:01.620 --> 00:19:08.620 eager to obtain a quantity of the goods concerned, is only a secondary function of the market. 205 00:19:08.620 --> 00:19:13.120 Its primary function is the direction of production. 206 00:19:13.120 --> 00:19:18.400 It directs the employment of the factors of production into those channels in which they 207 00:19:18.400 --> 00:19:22.680 satisfy the most urgent needs of the consumers. 208 00:19:22.680 --> 00:19:28.760 If the government's price ceiling refers only to one consumer's good, or to a limited 209 00:19:28.760 --> 00:19:34.280 amount of consumer's goods, while the prices of the complementary factors of production 210 00:19:34.280 --> 00:19:40.600 are left free, production of the consumer's goods concerned will drop. 211 00:19:40.600 --> 00:19:46.680 The marginal producers will discontinue producing them, lest they suffer losses. 212 00:19:46.680 --> 00:19:52.760 The not absolutely specific factors of production will be employed to a greater extent for the 213 00:19:52.760 --> 00:19:57.680 production of other goods not subject to price ceilings. 214 00:19:57.680 --> 00:20:03.880 A greater part of the absolutely specific factors of production will remain unused than 215 00:20:03.880 --> 00:20:08.000 One would have remained in the absence of price ceilings. 216 00:20:08.000 --> 00:20:13.320 There emerges a tendency to shift production activities from the production of the goods 217 00:20:13.320 --> 00:20:19.080 affected by the maximum prices into the production of other goods. 218 00:20:19.080 --> 00:20:25.240 This outcome is, however, manifestly contrary to the intentions of the government. 219 00:20:25.240 --> 00:20:31.120 In resorting to price ceilings, the authority wanted to make the commodities concerned more 220 00:20:31.120 --> 00:20:37.240 is easily accessible to the consumers. It considered precisely those commodities so 221 00:20:37.240 --> 00:20:43.000 vital that it singled them out for a special measure in order to make it possible even 222 00:20:43.000 --> 00:20:49.800 for poor people to be amply supplied with them. But the result of the government's interference 223 00:20:49.800 --> 00:20:58.200 is that production of these commodities drops or stops altogether. It is a complete failure. 224 00:20:58.200 --> 00:21:03.680 It would be vain for the government to try to remove these undesired consequences by 225 00:21:03.680 --> 00:21:09.960 decreeing maximum prices likewise for the factors of production needed for the production 226 00:21:09.960 --> 00:21:14.440 of the consumer's goods, the prices of which it has fixed. 227 00:21:14.440 --> 00:21:21.440 Such a measure would be successful only if all factors of production required were absolutely 228 00:21:21.440 --> 00:21:23.160 specific. 229 00:21:23.160 --> 00:21:28.960 As this can never be the case, the government must add to its first measure, fixing the 230 00:21:28.960 --> 00:21:34.860 price of only one consumer's good below the potential market price. 231 00:21:34.860 --> 00:21:41.940 More and more price ceilings, not only for all other consumer's goods and for all material 232 00:21:41.940 --> 00:21:46.680 factors of production, but, no less, for labor. 233 00:21:46.680 --> 00:21:53.840 It must compel every entrepreneur, capitalist and employee to continue producing at the 234 00:21:53.840 --> 00:21:59.940 prices, wage rates and interest rates which the government has fixed, to produce those 235 00:21:59.940 --> 00:22:05.920 quantities which the government orders them to produce, and to sell the products to those 236 00:22:05.920 --> 00:22:11.800 people, producers or consumers, whom the government determines. 237 00:22:11.800 --> 00:22:18.100 If one branch of production were to be exempt from this regimentation, capital and labor 238 00:22:18.100 --> 00:22:25.640 would flow into it. Production would be restricted precisely in those other regimented branches 239 00:22:25.640 --> 00:22:30.680 which the government considered so important that it interfered with the conduct of their 240 00:22:30.680 --> 00:22:33.460 affairs. 241 00:22:33.460 --> 00:22:39.740 Economics does not say that isolated government interference with the prices of only one commodity 242 00:22:39.740 --> 00:22:45.460 or a few commodities is unfair, bad or unfeasible. 243 00:22:45.460 --> 00:22:52.900 It says that such interference produces results contrary to its purpose, that it makes conditions 244 00:22:52.900 --> 00:23:01.940 worse, not better, from the point of view of the government and those backing its interference. 245 00:23:01.940 --> 00:23:07.060 Before the government interfered, the goods concerned were, in the eyes of the government, 246 00:23:07.060 --> 00:23:08.460 too dear. 247 00:23:08.460 --> 00:23:15.060 As a result of the maximum price, their supply dwindles or disappears altogether. 248 00:23:15.060 --> 00:23:21.820 The government interfered because it considered these commodities especially vital, necessary, 249 00:23:21.820 --> 00:23:23.200 indispensable. 250 00:23:23.200 --> 00:23:27.220 But its action curtailed the supply available. 251 00:23:27.220 --> 00:23:34.800 It is, therefore, from the point of view of the government, absurd and nonsensical. 252 00:23:34.800 --> 00:23:41.040 If the government is unwilling to acquiesce in this undesired and undesirable outcome 253 00:23:41.040 --> 00:23:47.460 and goes further and further, if it fixes the prices of all goods and services of all 254 00:23:47.460 --> 00:23:53.960 orders and obliges all people to continue producing and working at these prices and 255 00:23:53.960 --> 00:23:57.800 wage rates, it eliminates the market altogether. 256 00:23:57.800 --> 00:24:07.100 Then, the planned economy, socialism of the German Zwangswirtschaft pattern, is substituted for the market economy. 257 00:24:07.100 --> 00:24:13.800 The consumers no longer direct production by their buying and abstention from buying. 258 00:24:13.800 --> 00:24:16.800 The government alone directs it. 259 00:24:16.800 --> 00:24:25.800 There are only two exceptions to the rule that maximum prices restrict supply and thus bring about a state of affairs 260 00:24:25.800 --> 00:24:31.080 Prices which is contrary to the aims sought by their imposition. 261 00:24:31.080 --> 00:24:37.320 One refers to absolute rent, the other to monopoly prices. 262 00:24:37.320 --> 00:24:43.240 The maximum price results in a restriction of supply because the marginal producers suffer 263 00:24:43.240 --> 00:24:47.320 losses and must discontinue production. 264 00:24:47.320 --> 00:24:52.920 The nonspecific factors of production are employed for the production of other products 265 00:24:52.920 --> 00:24:55.660 not subject to price ceilings. 266 00:24:55.660 --> 00:25:01.940 The utilization of the absolutely specific factors of production shrinks. 267 00:25:01.940 --> 00:25:07.260 Under unhampered market conditions, they would have been utilized up to the limit determined 268 00:25:07.260 --> 00:25:14.020 by the absence of an opportunity to use the non-specific among the complementary factors 269 00:25:14.020 --> 00:25:17.220 for the satisfaction of more urgent wants. 270 00:25:17.220 --> 00:25:24.080 Now, only a smaller part of the available supply of these absolutely specific factors 271 00:25:24.080 --> 00:25:32.520 can be utilized. Concomitantly, that part of the supply that remains unused increases. 272 00:25:32.520 --> 00:25:38.760 But if the supply of these absolutely specific factors is so scanty that under the prices 273 00:25:38.760 --> 00:25:45.520 of the unhampered market their total supply was utilized, a margin is given within which 274 00:25:45.520 --> 00:25:52.320 the government's interference does not curtail the supply of the product. The maximum price 275 00:25:52.320 --> 00:26:04.320 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. 276 00:26:04.320 --> 00:26:13.320 But at any rate, it results in a discrepancy between the demand for and the supply of the product. 277 00:26:13.320 --> 00:26:19.360 Thus the amount by which the urban rent of a piece of land exceeds the agricultural rent 278 00:26:19.360 --> 00:26:25.640 provides a margin in which rent control can operate without restricting the supply of 279 00:26:25.640 --> 00:26:27.760 rental space. 280 00:26:27.760 --> 00:26:34.020 If the maximum rents are graduated in such a way as never to take away from any proprietor 281 00:26:34.020 --> 00:26:40.180 so much that he prefers to use the land for agriculture rather than for the construction 282 00:26:40.180 --> 00:26:45.940 of Buildings, they do not affect the supply of apartments and business premises. 283 00:26:45.940 --> 00:26:52.060 However, they increase the demand for such apartments and premises, and thus create the 284 00:26:52.060 --> 00:26:57.940 very shortage that the governments pretend to fight by their rent ceilings. 285 00:26:57.940 --> 00:27:03.980 Whether or not the authorities resort to rationing the space available is catallactically of 286 00:27:03.980 --> 00:27:06.060 minor importance. 287 00:27:06.060 --> 00:27:12.820 At any rate, their price ceilings do not abolish the catallactic phenomenon of the urban rent. 288 00:27:12.820 --> 00:27:19.840 They merely transfer the rent from the landlord's income into the tenant's income. 289 00:27:19.840 --> 00:27:25.600 In practice, of course, governments resorting to rent restriction never adjust their ceilings 290 00:27:25.600 --> 00:27:27.920 to these considerations. 291 00:27:27.920 --> 00:27:34.600 They either rigidly freeze gross rents as they prevailed on the eve of their interference, 292 00:27:34.600 --> 00:27:39.420 or allow only a limited addition to these gross rents. 293 00:27:39.420 --> 00:27:46.120 As the proportion between the two items included in the gross rent, urban rent proper and price 294 00:27:46.120 --> 00:27:52.160 paid for the utilization of the superstructure varies according to the special circumstances 295 00:27:52.160 --> 00:27:58.040 of each dwelling, the effect of the rent ceilings is also very different. 296 00:27:58.040 --> 00:28:03.800 In some cases, the expropriation of the owner to the benefit of the renter involves only 297 00:28:03.800 --> 00:28:09.400 There is only a fraction of the difference between the urban rent and the agricultural rent. 298 00:28:09.400 --> 00:28:13.300 In other cases, it far exceeds this difference. 299 00:28:13.300 --> 00:28:18.840 But however this may be, the rent restriction creates a housing shortage. 300 00:28:18.840 --> 00:28:23.960 It increases demand without increasing supply. 301 00:28:23.960 --> 00:28:30.160 If maximum rents are decreed not only for already available rental space, but also for 302 00:28:30.160 --> 00:28:35.480 For buildings still to be constructed, the construction of new buildings is no longer 303 00:28:35.480 --> 00:28:36.920 remunerative. 304 00:28:36.920 --> 00:28:41.320 It either stops altogether or slumps to a low level. 305 00:28:41.320 --> 00:28:43.980 The shortage is perpetuated. 306 00:28:43.980 --> 00:28:50.400 But even if rents in new buildings are left free, construction of new buildings drops. 307 00:28:50.400 --> 00:28:55.520 Prospective investors are deterred because they take into account the danger that the 308 00:28:55.520 --> 00:29:01.480 The government will, at a later date, declare a new emergency and expropriate a part of 309 00:29:01.480 --> 00:29:06.920 their revenues in the same way as it did with the old buildings. 310 00:29:06.920 --> 00:29:10.920 The second exception refers to monopoly prices. 311 00:29:10.920 --> 00:29:15.960 The difference between a monopoly price and the competitive price of the commodity in 312 00:29:15.960 --> 00:29:22.600 question provides a margin in which maximum prices could be enforced without defeating 313 00:29:22.600 --> 00:29:28.940 Among the Ends Sought by the Government If the competitive price is P and the lowest 314 00:29:28.940 --> 00:29:37.380 among the possible monopoly prices, M, a ceiling price of C, C being lower than M, would make 315 00:29:37.380 --> 00:29:44.320 it disadvantageous for the seller to raise the price above P. The maximum price would 316 00:29:44.320 --> 00:29:51.240 re-establish the competitive price and increase demand, production and the supply offered 317 00:29:51.240 --> 00:29:52.240 for Sale. 318 00:29:52.240 --> 00:29:59.240 A dim cognizance of this concatenation is at the bottom of some suggestions asking for 319 00:29:59.240 --> 00:30:05.440 government interference in order to preserve competition and to make it operate as beneficially 320 00:30:05.440 --> 00:30:07.660 as possible. 321 00:30:07.660 --> 00:30:13.760 We may, for the sake of argument, pass over the fact that all such proposals are unrealistic 322 00:30:13.760 --> 00:30:19.680 with regard to all those instances of monopoly prices which are the outcome of government 323 00:30:19.680 --> 00:30:25.620 Interference. If the government objects to monopoly prices for new inventions, it should 324 00:30:25.620 --> 00:30:31.720 stop granting patents. It would be absurd to grant patents and then to deprive them 325 00:30:31.720 --> 00:30:38.380 of any value by forcing the patentee to sell at the competitive price. If the government 326 00:30:38.380 --> 00:30:44.060 does not approve of cartels, it should rather abstain from all measures, such as import 327 00:30:44.060 --> 00:30:50.340 Duties which provide business with the opportunity to erect combines. 328 00:30:50.340 --> 00:30:55.200 Things are different in those instances in which monopoly prices come into existence 329 00:30:55.200 --> 00:30:58.580 without assistance from the governments. 330 00:30:58.580 --> 00:31:05.320 Here governmental maximum prices could re-establish competitive conditions, if it were possible 331 00:31:05.320 --> 00:31:12.700 to find out by academic computation at which height a non-existing competitive market would 332 00:31:12.700 --> 00:31:15.340 have determined the price. 333 00:31:15.340 --> 00:31:21.920 That all endeavors to construct non-market prices are vain has been shown. 334 00:31:21.920 --> 00:31:27.940 The unsatisfactory results of all attempts to determine what the fair or correct price 335 00:31:27.940 --> 00:31:35.020 for the services of public utilities should be are well known to all experts. 336 00:31:35.020 --> 00:31:41.780 Reference to these two exceptions explains why, in some rare cases, maximum prices, when 337 00:31:41.780 --> 00:31:47.620 When applied with very great caution within a narrow margin, do not restrict the supply 338 00:31:47.620 --> 00:31:51.760 of the commodity or the service concerned. 339 00:31:51.760 --> 00:31:57.580 It does not affect the correctness of the general rule that maximum prices bring about 340 00:31:57.580 --> 00:32:02.820 a state of affairs which, from the point of view of the government decreeing them, is 341 00:32:02.820 --> 00:32:12.380 is more undesirable than conditions as they would have been in the absence of price control. 342 00:32:12.380 --> 00:32:17.880 Observations on the Causes of the Decline of Ancient Civilization 343 00:32:17.880 --> 00:32:22.940 Knowledge of the effects of government interference with market prices makes us comprehend the 344 00:32:22.940 --> 00:32:31.100 economic causes of a momentous historical event, the decline of ancient civilization. 345 00:32:31.100 --> 00:32:36.780 It may be left undecided whether or not it is correct to call the economic organization 346 00:32:36.780 --> 00:32:39.980 of the Roman Empire capitalism. 347 00:32:39.980 --> 00:32:46.620 At any rate it is certain that the Roman Empire in the second century, the age of the Antonines, 348 00:32:46.620 --> 00:32:53.220 the Good Emperors, had reached a high stage of the social division of labor and of inter-regional 349 00:32:53.220 --> 00:32:55.280 commerce. 350 00:32:55.280 --> 00:33:01.060 Several metropolitan centers, a considerable number of middle-sized towns, and many small 351 00:33:01.060 --> 00:33:07.700 All towns were the seats of a refined civilization. The inhabitants of these urban agglomerations 352 00:33:07.700 --> 00:33:13.900 were supplied with food and raw materials not only from the neighboring rural districts, 353 00:33:13.900 --> 00:33:19.820 but also from distant provinces. A part of these provisions flowed into the cities as 354 00:33:19.820 --> 00:33:25.860 revenue of their wealthy residents who owned landed property, but a considerable part was 355 00:33:25.860 --> 00:33:32.100 was bought in exchange for the rural population's purchases of the products of the city dwellers' 356 00:33:32.100 --> 00:33:34.900 processing activities. 357 00:33:34.900 --> 00:33:40.700 There was an extensive trade between the various regions of the vast empire. 358 00:33:40.700 --> 00:33:45.780 Not only in the processing industries, but also in agriculture, there was a tendency 359 00:33:45.780 --> 00:33:48.500 toward further specialization. 360 00:33:48.500 --> 00:33:53.780 The various parts of the empire were no longer economically self-sufficient. 361 00:33:53.780 --> 00:33:57.620 They Were Mutually Interdependent 362 00:33:57.620 --> 00:34:02.980 What brought about the decline of the empire and the decay of its civilization was the 363 00:34:02.980 --> 00:34:09.860 disintegration of this economic interconnectedness, not the barbarian invasions. 364 00:34:09.860 --> 00:34:15.400 The alien aggressors merely took advantage of an opportunity which the internal weakness 365 00:34:15.400 --> 00:34:18.380 of the empire offered to them. 366 00:34:18.380 --> 00:34:23.300 From a military point of view, the tribes which invaded the empire in the fourth and 367 00:34:23.300 --> 00:34:28.300 and Fifth Centuries were not more formidable than the armies which the legions had easily 368 00:34:28.300 --> 00:34:30.980 defeated in earlier times. 369 00:34:30.980 --> 00:34:33.580 But the empire had changed. 370 00:34:33.580 --> 00:34:38.740 Its economic and social structure was already medieval. 371 00:34:38.740 --> 00:34:44.740 The freedom that Rome granted to commerce and trade had always been restricted. 372 00:34:44.740 --> 00:34:49.820 With regard to the marketing of cereals and other vital necessities, it was even more 373 00:34:49.820 --> 00:34:53.700 are restricted than with regard to other commodities. 374 00:34:53.700 --> 00:35:00.820 It was deemed unfair and immoral to ask for grain, oil and wine, the staples of these 375 00:35:00.820 --> 00:35:06.980 ages, more than the customary prices, and the municipal authorities were quick to check 376 00:35:06.980 --> 00:35:10.380 what they considered profiteering. 377 00:35:10.380 --> 00:35:16.820 Thus the evolution of an efficient wholesale trade in these commodities was prevented. 378 00:35:16.820 --> 00:35:23.500 The policy of the ANONA, which was tantamount to a nationalization or municipalization of 379 00:35:23.500 --> 00:35:30.920 the grain trade aimed at filling the gaps, but its effects were rather unsatisfactory. 380 00:35:30.920 --> 00:35:36.240 Grain was scarce in the urban agglomerations, and the agriculturists complained about the 381 00:35:36.240 --> 00:35:39.740 unremunerativeness of grain growing. 382 00:35:39.740 --> 00:35:46.540 The interference of the authorities upset the adjustment of supply to the rising demand. 383 00:35:46.540 --> 00:35:52.500 The showdown came when, in the political troubles of the third and fourth centuries, the emperors 384 00:35:52.500 --> 00:35:55.560 resorted to currency debasement. 385 00:35:55.560 --> 00:36:01.520 With the system of maximum prices, the practice of debasement completely paralyzed both the 386 00:36:01.520 --> 00:36:07.940 production and the marketing of the vital foodstuffs and disintegrated society's economic 387 00:36:07.940 --> 00:36:09.780 organization. 388 00:36:09.780 --> 00:36:15.120 The more eagerness the authorities displayed in enforcing the maximum prices, the more 389 00:36:15.120 --> 00:36:20.120 For desperate became the conditions of the urban masses dependent on the purchase of 390 00:36:20.120 --> 00:36:22.040 food. 391 00:36:22.040 --> 00:36:26.600 Commerce in grain and other necessities vanished altogether. 392 00:36:26.600 --> 00:36:32.200 To avoid starving, people deserted the cities, settled on the countryside and tried to grow 393 00:36:32.200 --> 00:36:37.560 grain, oil, wine and other necessities for themselves. 394 00:36:37.560 --> 00:36:42.520 On the other hand, the owners of the biggest states restricted their excess production 395 00:36:42.520 --> 00:36:49.520 of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money 396 00:37:12.520 --> 00:37:21.520 He was forced to look for a substitute to meet his needs by employing handicraftsmen on his own account in his villa. 397 00:37:21.520 --> 00:37:29.520 He discontinued big-scale farming and became a landlord receiving rents from tenants or sharecroppers. 398 00:37:29.520 --> 00:37:38.520 These koloni were either freed slaves or urban proletarians who settled in the villages and turned to tilling the soil. 399 00:37:38.520 --> 00:37:45.920 of Soil, a tendency toward the establishment of autarky of each landlord's estate emerged. 400 00:37:45.920 --> 00:37:53.200 The economic function of the cities of commerce, trade and urban handicrafts shrank. 401 00:37:53.200 --> 00:37:59.320 Italy and the provinces of the empire returned to a less advanced state of the social division 402 00:37:59.320 --> 00:38:00.840 of labor. 403 00:38:00.840 --> 00:38:06.680 The highly developed economic structure of ancient civilization retrograded to what is 404 00:38:06.680 --> 00:38:12.040 is now known as the Minorial Organization of the Middle Ages. 405 00:38:12.040 --> 00:38:17.360 The emperors were alarmed with that outcome, which undermined the financial and military 406 00:38:17.360 --> 00:38:23.440 power of their government, but their counteraction was futile, as it did not affect the root 407 00:38:23.440 --> 00:38:25.080 of the evil. 408 00:38:25.080 --> 00:38:30.560 The compulsion and coercion to which they resorted could not reverse the trend toward 409 00:38:30.560 --> 00:38:37.660 and Social Disintegration, which, on the contrary, was caused precisely by too much compulsion 410 00:38:37.660 --> 00:38:39.800 and coercion. 411 00:38:39.800 --> 00:38:45.320 No Roman was aware of the fact that the process was induced by the government's interference 412 00:38:45.320 --> 00:38:49.040 with prices and by currency debasement. 413 00:38:49.040 --> 00:38:54.880 It was vain for the emperors to promulgate laws against the city-dweller who relicta 414 00:38:54.880 --> 00:38:58.700 civitate rus habitare maluaret. 415 00:38:58.700 --> 00:39:04.840 The system of the Laeturgia, the public services to be rendered by the wealthy citizens, only 416 00:39:04.840 --> 00:39:08.880 accelerated the retrogression of the division of labor. 417 00:39:08.880 --> 00:39:14.600 The laws concerning the special obligations of the shipowners, the naviculari, were no 418 00:39:14.600 --> 00:39:20.040 more successful in checking the decline of navigation than the laws concerning grain 419 00:39:20.040 --> 00:39:26.320 dealing in checking the shrinkage in the city's supply of agricultural products. 420 00:39:26.320 --> 00:39:33.100 The marvelous civilization of antiquity perished because it did not adjust its moral code and 421 00:39:33.100 --> 00:39:37.800 its legal system to the requirements of the market economy. 422 00:39:37.800 --> 00:39:44.440 A social order is doomed if the actions which its normal functioning requires are rejected 423 00:39:44.440 --> 00:39:50.380 by the standards of morality, are declared illegal by the laws of the country, and are 424 00:39:50.380 --> 00:39:54.800 prosecuted as criminal by the courts and the police. 425 00:39:54.800 --> 00:40:02.360 The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. 426 00:40:02.360 --> 00:40:09.040 The policy of interventionism and its political corollary, the Fuhrer Principle, decomposed 427 00:40:09.040 --> 00:40:16.440 As the mighty empire, as they will by necessity, always disintegrate and destroy any social 428 00:40:16.440 --> 00:40:17.080 entity.