WEBVTT NOTE 12.05. Triangular Intervention: Price Control 1 00:00:00.000 --> 00:00:06.000 5. Triangular Intervention, Price Control 2 00:00:06.000 --> 00:00:17.000 A triangular intervention occurs when an intervener either compels a pair of people to make an exchange or prohibits them from making an exchange. 3 00:00:17.000 --> 00:00:31.000 The coercion may be imposed on the terms of the exchange, or on the nature of one or both of the products being exchanged, or on the people doing the exchanging. 4 00:00:31.000 --> 00:00:44.000 The former type of triangular intervention is called a price control because it deals specifically with the terms, that is, the price at which the exchange is made. 5 00:00:44.000 --> 00:00:53.200 The latter may be called product control, as dealing specifically with the nature of the product or of the producer. 6 00:00:53.200 --> 00:01:07.800 An example of price control is a decree by the government that no one may buy or sell a certain product at more, or alternatively, less than X gold ounces per pound. 7 00:01:07.800 --> 00:01:13.800 An example of product control is the prohibition of the sale of this product, 8 00:01:13.800 --> 00:01:19.800 or prohibition of the sale by any but certain persons selected by the government. 9 00:01:19.800 --> 00:01:27.800 Clearly, both forms of control have various repercussions on both the price and the nature of the product. 10 00:01:27.800 --> 00:01:32.800 A price control may be effective or ineffective. 11 00:01:32.800 --> 00:01:38.800 It will be ineffective if the regulation has no influence on the market price. 12 00:01:38.800 --> 00:01:45.720 Thus, if automobiles are selling at 100 gold ounces on the market and the government decrees 13 00:01:45.720 --> 00:01:54.120 that no autos be sold for more than 300 ounces on pain of punishment inflicted on violators, 14 00:01:54.120 --> 00:01:59.880 the decree is at present completely academic and ineffective. 15 00:01:59.880 --> 00:02:06.560 Of course, even a completely ineffective triangular control is likely to increase the government 16 00:02:06.560 --> 00:02:13.920 Bureaucracy dealing with the matter and therefore increase the total amount of binary intervention 17 00:02:13.920 --> 00:02:15.640 over the taxpayer. 18 00:02:15.640 --> 00:02:22.360 However, should a customer wish to order an unusual custom-built automobile for which 19 00:02:22.360 --> 00:02:30.100 the seller would charge over 300 ounces, then the regulation now becomes effective and changes 20 00:02:30.100 --> 00:02:35.500 transactions from what they would have been on the free market. 21 00:02:35.500 --> 00:02:42.220 There are two types of effective price control, a maximum price control that prohibits all 22 00:02:42.220 --> 00:02:49.140 exchanges of a good above a certain price, with the controlled price being below the 23 00:02:49.140 --> 00:02:57.060 market equilibrium price, and a minimum price control prohibiting exchanges below a certain 24 00:02:57.060 --> 00:03:03.140 price, this fixed price being above market equilibrium. 25 00:03:03.140 --> 00:03:11.400 The government, let us assume, imposes a maximum control price above which any sale is illegal. 26 00:03:11.400 --> 00:03:17.820 At the control price, the market is no longer cleared, and the quantity demanded exceeds 27 00:03:17.820 --> 00:03:20.160 the quantity supplied. 28 00:03:20.160 --> 00:03:26.780 In this way, an artificially created shortage of the good has been created. 29 00:03:26.780 --> 00:03:33.120 In any shortage, consumers rush to buy goods which are not available at the price. 30 00:03:33.120 --> 00:03:41.280 must do without. Others must patronize the market, revived as illegal or black, paying 31 00:03:41.280 --> 00:03:47.400 a premium for the risk of punishment that sellers now undergo. The chief characteristic 32 00:03:47.400 --> 00:03:54.560 of a price maximum is the queue, the endless lining up for goods that are not sufficient 33 00:03:54.560 --> 00:04:01.120 to supply the people at the rear of the line. All sorts of subterfuges are invented by people 34 00:04:01.120 --> 00:04:07.260 People desperately seeking to arrive at the clearance of supply and demand once provided 35 00:04:07.260 --> 00:04:08.840 by the market. 36 00:04:08.840 --> 00:04:15.800 Under the table deals, bribes, favoritism for older customers, etc., are inevitable 37 00:04:15.800 --> 00:04:20.160 features of a market shackled by the price maximum. 38 00:04:20.160 --> 00:04:25.720 A bribe is only payment of the market price by a buyer. 39 00:04:25.720 --> 00:04:32.120 It must be noted that even if the stock of a good is frozen for the foreseeable future, 40 00:04:32.120 --> 00:04:38.320 this artificial shortage will still develop, and all these consequences ensue. 41 00:04:38.320 --> 00:04:44.960 The more elastic the supply, that is, the more resources shift out of production, the 42 00:04:44.960 --> 00:04:49.440 more aggravated, ceteris paribus, the shortage will be. 43 00:04:49.440 --> 00:04:54.160 The firms that leave production are the ones nearest the margin. 44 00:04:54.160 --> 00:05:01.620 If the price control is selective, that is, is imposed on one or a few products, the economy 45 00:05:01.620 --> 00:05:08.180 will not be as universally dislocated as under general maxima, but the artificial shortage 46 00:05:08.180 --> 00:05:15.400 created in the particular line will be even more pronounced since entrepreneurs and factors 47 00:05:15.400 --> 00:05:22.200 can shift to the production and sale of other products, preferably substitutes. 48 00:05:22.200 --> 00:05:28.480 The prices of the substitutes will go up as the excess demand is channeled off in their 49 00:05:28.480 --> 00:05:29.780 direction. 50 00:05:29.780 --> 00:05:36.240 In the light of this fact, the typical government reason for selective price control, we must 51 00:05:36.240 --> 00:05:43.440 impose controls on this necessary product so long as it continues in short supply, is revealed 52 00:05:43.440 --> 00:05:46.220 to be an almost ludicrous error. 53 00:05:46.220 --> 00:05:48.780 For the truth is the reverse. 54 00:05:48.780 --> 00:05:55.780 Price control creates an artificial shortage of the product, which continues as long as 55 00:05:55.780 --> 00:05:58.540 the control is in existence. 56 00:05:58.540 --> 00:06:05.360 In fact, becomes ever worse as resources have time to shift to other products. 57 00:06:05.360 --> 00:06:10.460 If the government were really worried about the short supply of certain products, it would 58 00:06:10.460 --> 00:06:15.460 The Theory of Money and Credit 59 00:06:40.460 --> 00:06:48.460 The minimum price is to create an artificial shortage, a minimum price creates an artificial unsold surplus. 60 00:06:48.460 --> 00:06:56.460 The unsold surplus exists even if the stock of the good is frozen for the foreseeable future. 61 00:06:56.460 --> 00:07:02.460 But a more elastic supply will, Ceteris Paribus, aggravate the surplus. 62 00:07:02.460 --> 00:07:06.460 Once again, the market is not cleared. 63 00:07:06.460 --> 00:07:15.460 The artificially high price at first attracts resources into the field, while at the same time discouraging buyer demand. 64 00:07:16.460 --> 00:07:23.460 Under selective price control, resources will leave other fields where they benefit themselves and consumers better, 65 00:07:24.460 --> 00:07:30.460 and transfer to this field where they overproduce and suffer losses as a result. 66 00:07:30.460 --> 00:07:39.460 This offers an interesting example of intervention tampering with the market and causing entrepreneurial losses. 67 00:07:39.460 --> 00:07:49.460 Entrepreneurs operate on the basis of certain criteria, prices, interest rate, etc. established by the free market. 68 00:07:49.460 --> 00:07:56.460 Interventionary tampering with these signals destroys the continual market tendency to adjustment 69 00:07:56.460 --> 00:08:03.460 and brings about losses and misallocation of resources in satisfying consumer wants. 70 00:08:03.460 --> 00:08:13.460 General overall price maxima dislocate the entire economy and deny consumers the enjoyment of substitutes. 71 00:08:13.460 --> 00:08:21.460 General price maxima are usually imposed for the announced purpose of preventing inflation, 72 00:08:21.460 --> 00:08:27.780 Invariably, while the government is inflating the money supply by a large amount, overall 73 00:08:27.780 --> 00:08:33.860 price maxima are equivalent to imposing a minimum on the PPM. 74 00:08:33.860 --> 00:08:38.740 As a result, the money stock exceeds the money demanded. 75 00:08:38.740 --> 00:08:44.460 As a result, people possess a quantity of money in unsold surplus. 76 00:08:44.460 --> 00:08:49.200 They try to sell their money by buying goods, but they cannot. 77 00:08:49.200 --> 00:08:51.840 Where money is anesthetized. 78 00:08:51.840 --> 00:08:57.880 To the extent that a government's overall price maximum is effective, a part of people's 79 00:08:57.880 --> 00:09:02.600 money becomes useless, for it cannot be exchanged. 80 00:09:02.600 --> 00:09:10.160 But a mad scramble inevitably ensues, with each person hoping that his money can be used. 81 00:09:10.160 --> 00:09:15.600 Ironically, the government's destruction of part of the people's money almost always 82 00:09:15.600 --> 00:09:21.360 This case takes place after the government has pumped in new money and used it for its 83 00:09:21.360 --> 00:09:23.000 own purposes. 84 00:09:23.000 --> 00:09:27.440 The injury that the government imposes on the public is twofold. 85 00:09:27.440 --> 00:09:35.040 One, it takes resources away from the public by inflating the currency, and two, after 86 00:09:35.040 --> 00:09:42.000 the money has percolated down to the public, it destroys part of the money's usefulness. 87 00:09:42.000 --> 00:09:56.000 Favoritism, lining up, bribes, etc., inevitably abound, as well as great pressure for a black market, that is, the market, to provide a channel for the surplus money. 88 00:09:56.000 --> 00:10:03.000 A general price minimum is equivalent to a maximum control on the PPM. 89 00:10:03.000 --> 00:10:16.000 This sets up an unsatisfied excess demand for money over the stock of money available, specifically in the form of unsold stocks of goods in every field. 90 00:10:16.000 --> 00:10:30.000 The principles of maximum and minimum price control apply to any prices, whatever they may be, of consumers' goods, capital goods, land or labor services, 91 00:10:30.000 --> 00:10:35.280 Or, as we have seen, the price of money in terms of other goods. 92 00:10:35.280 --> 00:10:38.940 They apply, for example, to minimum wage laws. 93 00:10:38.940 --> 00:10:45.320 When a minimum wage law is effective, that is, where it imposes a wage above the market 94 00:10:45.320 --> 00:10:52.360 value of a grade of labor, above the laborer's discounted marginal value product, the supply 95 00:10:52.360 --> 00:10:59.740 of labor services exceeds the demand, and the unsold surplus of labor services means 96 00:10:59.740 --> 00:11:02.980 Involuntary Mass Unemployment 97 00:11:02.980 --> 00:11:09.420 Selective, as opposed to general, minimum wage rates, create unemployment in particular 98 00:11:09.420 --> 00:11:17.100 industries, and tend to perpetuate these pockets by attracting labor to the higher rates. 99 00:11:17.100 --> 00:11:23.820 Labor is eventually forced to enter less remunerative, less value-productive lines. 100 00:11:23.820 --> 00:11:31.080 This analysis applies whether the minimum wage is imposed by the state or by a labor union. 101 00:11:31.080 --> 00:11:37.080 The reader is referred to Chapter 10 for an analysis of the rare case of a minimum wage 102 00:11:37.080 --> 00:11:40.640 imposed by a voluntary union. 103 00:11:40.640 --> 00:11:47.520 We saw that this creates unemployment and shifts labor to less remunerative and value-productive 104 00:11:47.520 --> 00:11:49.520 of Employment, 105 00:11:49.520 --> 00:11:53.520 but that these results must be treated as voluntary. 106 00:11:53.520 --> 00:12:00.520 To prohibit people from joining unions and agreeing voluntarily on union wage scales 107 00:12:00.520 --> 00:12:07.520 and on the mystique of unionism would subject workers by force to the dictates of consumers 108 00:12:07.520 --> 00:12:11.520 and would impose a welfare loss upon the former. 109 00:12:11.520 --> 00:12:18.200 However, as we have stated, a spread among the workers of praxeological knowledge, of 110 00:12:18.200 --> 00:12:24.720 a realization that union solidarity causes unemployment and lower wage rates for many 111 00:12:24.720 --> 00:12:29.420 workers, would probably weaken this solidarity considerably. 112 00:12:29.420 --> 00:12:36.300 Empirically, on the other hand, almost all cases of effective unionism are imposed through 113 00:12:36.300 --> 00:12:43.940 through coercion exercised by unions, that is, through union intervention in the market. 114 00:12:43.940 --> 00:12:49.140 In the present-day United States, much of the task of coercion has been assumed on the 115 00:12:49.140 --> 00:12:52.440 union's behalf by the government. 116 00:12:52.440 --> 00:12:58.460 This was the essence of the Wagner Act, the law of the land since 1935. 117 00:12:58.460 --> 00:13:04.660 The Taft-Hartley Act was only a relatively unimportant amendment to the Wagner Act, which 118 00:13:04.660 --> 00:13:07.300 which continues on the books. 119 00:13:07.300 --> 00:13:13.780 The crucial provisions of this Act are, one, to coerce all workers in a certain production 120 00:13:13.780 --> 00:13:21.820 unit arbitrarily defined ad hoc by the government into being represented by a union in bargaining 121 00:13:21.820 --> 00:13:28.980 with an employer if a majority of workers agree, two, to prohibit the employer from 122 00:13:28.980 --> 00:13:36.060 from Refusing to Hire Union Members or Union Organizers, and 3, to Compel the Employer 123 00:13:36.060 --> 00:13:38.500 to Bargain with this Union. 124 00:13:38.500 --> 00:13:44.940 Thus, unions have been invested with governmental authority, and the strong arm of the government 125 00:13:44.940 --> 00:13:52.140 uses coercion to force workers and employers alike to deal with the unions. 126 00:13:52.140 --> 00:13:57.540 The effects of union intervention are then the same as the same degree of government 127 00:13:57.540 --> 00:13:59.660 Intervention would have been. 128 00:13:59.660 --> 00:14:07.260 As we have pointed out, the analysis of intervention applies to whatever agency wields the violence, 129 00:14:07.260 --> 00:14:10.700 whether private or governmental. 130 00:14:10.700 --> 00:14:17.220 Unemployment and misallocations of many workers to less efficient and lower paying jobs again 131 00:14:17.220 --> 00:14:23.020 occur in this case, and again, involuntarily. 132 00:14:23.020 --> 00:14:29.940 Our analysis of the effects of price control applies also, as Mises has brilliantly shown, 133 00:14:29.940 --> 00:14:36.700 to control over the price, exchange rate, of one money in terms of another. 134 00:14:36.700 --> 00:14:43.640 This was partially seen in Gresham's Law, one of the first economic laws to be discovered. 135 00:14:43.640 --> 00:14:49.660 Few have realized that this law is merely a specific instance of the general consequences 136 00:14:49.660 --> 00:14:51.740 of price controls. 137 00:14:51.740 --> 00:14:57.940 Perhaps this failure is due to the misleading formulation of Gresham's Law, which is usually 138 00:14:57.940 --> 00:15:03.020 phrased, bad money drives good money out of circulation. 139 00:15:03.020 --> 00:15:08.980 Taken at its face value, this is a paradox that violates the general rule of the market 140 00:15:08.980 --> 00:15:15.220 that the best methods of satisfying consumers tend to win out over the poorer. 141 00:15:15.220 --> 00:15:21.420 The phrasing has been fallaciously used even by those who generally favor the free market, 142 00:15:21.420 --> 00:15:26.420 to justify a state monopoly over the coinage of gold and silver. 143 00:15:26.420 --> 00:15:29.420 Actually, Gresham's Law should read, 144 00:15:29.420 --> 00:15:36.420 money overvalued by the state will drive money undervalued by the state out of circulation. 145 00:15:36.420 --> 00:15:43.420 Whenever the state sets an arbitrary value or price on one money in terms of another, 146 00:15:43.420 --> 00:15:49.420 it thereby establishes an effective minimum price control on one money 147 00:15:49.420 --> 00:15:56.420 and a maximum price control on the other, the prices being in terms of each other. 148 00:15:56.420 --> 00:16:00.420 This, for example, was the essence of bimetallism. 149 00:16:00.420 --> 00:16:06.420 Under bimetallism, a nation recognized gold and silver as monies, 150 00:16:06.420 --> 00:16:11.420 but set an arbitrary price or exchange ratio between them. 151 00:16:11.420 --> 00:16:17.420 When this arbitrary price differed, as it was bound to do from the free market price, 152 00:16:17.420 --> 00:16:27.420 And this became ever more likely as time passed and the free market price changed while the government's arbitrary price remained the same. 153 00:16:27.420 --> 00:16:33.420 One money became overvalued and the other undervalued by the government. 154 00:16:33.420 --> 00:16:45.420 Thus suppose that a country used gold and silver as monies and the government set the ratio between them at 16 ounces of silver to 1 ounce of gold. 155 00:16:45.420 --> 00:16:54.420 The market price, perhaps 16 to 1 at the time of the price control, then changes to 15 to 1. 156 00:16:54.420 --> 00:16:56.420 What is the result? 157 00:16:56.420 --> 00:17:04.420 Silver is now being arbitrarily undervalued by the government, and gold arbitrarily overvalued. 158 00:17:04.420 --> 00:17:11.420 In other words, silver is fixed cheaper than it really is in terms of gold on the market, 159 00:17:11.420 --> 00:17:17.420 and gold is forced to be more expensive than it really is in terms of silver. 160 00:17:17.420 --> 00:17:26.420 The government has imposed a price maximum on silver and a price minimum on gold in terms of each other. 161 00:17:26.420 --> 00:17:32.420 The same consequences now follow as from any effective price control. 162 00:17:32.420 --> 00:17:41.420 With a price maximum on silver, the gold demand for silver in exchange now exceeds the silver demand for gold. 163 00:17:41.420 --> 00:17:49.420 Conversely, with a price minimum on gold, the silver demand for gold is less than the gold demand for silver. 164 00:17:49.420 --> 00:17:58.420 Gold goes begging for silver in unsold surplus, while silver becomes scarce and disappears from circulation. 165 00:17:58.420 --> 00:18:04.420 Silver disappears to another country or area where it can be exchanged at the free market 166 00:18:04.420 --> 00:18:09.220 price, and gold, in turn, flows into the country. 167 00:18:09.220 --> 00:18:15.800 If the bimetallism is worldwide, then silver disappears into the black market, and official 168 00:18:15.800 --> 00:18:20.080 or open exchanges are made only with gold. 169 00:18:20.080 --> 00:18:27.560 No country, therefore, can maintain a bimetallic system in practice, since one money will always 170 00:18:27.560 --> 00:18:34.520 Always be undervalued or overvalued in terms of the other. The overvalued always displaces 171 00:18:34.520 --> 00:18:41.400 the other from circulation, the latter being scarce. Similar consequences follow from such 172 00:18:41.400 --> 00:18:48.960 price control as setting arbitrary exchange rates on fiat monies, and in setting new and 173 00:18:48.960 --> 00:18:56.400 worn coins arbitrarily equal to one another when they discernibly differ in weight. 174 00:18:56.400 --> 00:19:03.960 To sum up our analysis of price control, directly the utility of at least one set of exchangers 175 00:19:03.960 --> 00:19:06.840 will be injured by the control. 176 00:19:06.840 --> 00:19:13.680 Indirectly, as we find by further analysis, hidden but just as certain effects injure 177 00:19:13.680 --> 00:19:20.520 a substantial number of people who thought they would gain in utility from the imposed 178 00:19:20.520 --> 00:19:21.520 controls. 179 00:19:21.520 --> 00:19:27.840 The announced aim of a maximum price control is to benefit the consumer by giving him his 180 00:19:27.840 --> 00:19:35.420 supply at a lower price. Yet the objective effect is to prevent many consumers from having 181 00:19:35.420 --> 00:19:42.780 the good at all. The announced aim of a minimum price control is to ensure higher prices to 182 00:19:42.780 --> 00:19:49.680 the sellers. Yet the effect will be to prevent many sellers from selling any of their surplus. 183 00:19:49.680 --> 00:19:56.460 Furthermore, the price controls inevitably distort the production and allocation of resources 184 00:19:56.460 --> 00:20:03.100 and factors in the economy, thereby injuring again the bulk of consumers. 185 00:20:03.100 --> 00:20:09.400 And we must not overlook the army of bureaucrats who must be financed by the binary intervention 186 00:20:09.400 --> 00:20:15.920 of taxation and who must administer and enforce the myriad of regulations. 187 00:20:15.920 --> 00:20:23.020 This army in itself withdraws a mass of workers from productive labor and saddles them onto 188 00:20:23.020 --> 00:20:29.080 the remaining producers, thereby benefiting the bureaucrats but injuring the rest of the 189 00:20:29.080 --> 00:20:29.580 people.