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Wednesday, September 14, 2011

Mises on price controls

The Austrian-American free market economist Ludwig von Mises (1881-1973) left Switzerland for the United States in August 1940. During the war years he wrote a number of books which criticized government intervention and control of the economy, especially price controls and rationing. He had witnessed firsthand how the Nazis used price controls in Europe and saw something very similar happening in the United States during World War 2. He thought the logical consequence of strict price controls would be a system of socialism:

The aim of price control is to decree prices, wages, and interest rates different from those fixed by the market. Let us first consider the case of maximum prices, where the government tries to enforce prices lower than the market prices.

The prices set on the unhampered market correspond to an equilibrium of demand and supply. Everybody who is ready to pay the market price can buy as much as he wants to buy. Everybody who is ready to sell at the market price can sell as much as he wants to sell. If the government, without a corresponding increase in the quantity of goods available for sale, decrees that buying and selling must be done at a lower price, and thus makes it illegal either to ask or to pay the potential market price, then this equilibrium can no longer prevail. With unchanged supply there are now more potential buyers on the market, namely, those who could not afford the higher market price but are prepared to buy at the lower official rate. There are now potential buyers who cannot buy, although they are ready to pay the price fixed by the government or even a higher price. The price is no longer the means of segregating those potential buyers who may buy from those who may not. A different principle of selection has come into operation. Those who come first can buy; others are too late in the field. The visible outcome of this state of things is the sight of housewives and children standing in long lines before the groceries, a spectacle familiar to everybody who has visited Europe in this age of price control. If the government does not want only those to buy who come first (or who are personal friends of the salesman), while others go home empty-handed, it must regulate the distribution of the stocks available. It has to introduce some kind of rationing. 

But price ceilings not only fail to increase the supply, they reduce it. Thus they do not attain the ends which the authorities wish. On the contrary, they result in a state of things which from the point of view of the government and of public opinion is even less desirable than the previous state which they had intended to alter. If the government wants to make it possible for the poor to give their children more milk, it has to buy the milk at the market price and sell it to these poor parents with a loss, at a cheaper rate. The loss may be covered by taxation. But if the government simply fixes the price of milk at a lower rate than the market, the result will be the contrary of what it wants. The marginal producers, those with the highest costs, will, in order to avoid losses, go out of the business of producing and selling milk. They will use their cows and their skill for other, more profitable purposes. They will, for example, produce cheese, butter, or meat. There will be less milk available for the consumers, not more. Then the government has to choose between two alternatives: either to refrain from any endeavors to control the price of milk and to abrogate its decree, or to add to its first measure a second one. In the latter case it must fix the prices of the factors of production necessary for the production of milk at such a rate that the marginal producers will no longer suffer losses and will abstain from restricting the output. But then the same problem repeats itself on a remoter plane. The supply of the factors of production necessary for the production of milk drops, and again the government is back where it started, facing failure in its interference. If it keeps stubbornly on, pushing forward its schemes, it has to go still further. It has to fix the prices of the factors of production necessary for the production of those factors of production which are needed for the production of milk. Thus the government is forced to go further and further, fixing the prices of all consumer goods and of all factors of production—both human (i.e., labor) and material—and to force every entrepreneur and every worker to continue work at these prices and wages. No branch of industry can be omitted from this all-round fixing of prices and wages and from this general order to produce those quantities which the government wants to see produced. If some branches were to be left free, the result would be a shifting of capital and labor to them and a corresponding fall of the supply of goods whose prices the government has fixed. However, it is precisely these goods which the government considers especially important for the satisfaction of the needs of the masses.

But when this state of all-round control of business is achieved, the market economy has been replaced by the German pattern of socialist planning. The government’s board of production management now exclusively controls all business activities and decides how the means of production—men and material resources—must be used.

The isolated measures of price fixing fail to attain the ends sought. In fact, they produce effects contrary to those aimed at by the government. If the government, in order to eliminate these inexorable and unwelcome consequences, pursues its course further and further, it finally transforms the system of capitalism and free enterprise into socialism.

Many American and British supporters of price control are fascinated by the alleged success of Nazi price control. They believe that the German experience has proved the practicability of price control within the framework of a system of market economy. You have only to be as energetic, impetuous, and brutal as the Nazis are, they think, and you will succeed. These men who want to fight Nazism by adopting its methods do not see that what the Nazis have achieved has been the building up of a system of socialism, not a reform of conditions within a system of market economy.
There is no third system between a market economy and socialism. Mankind has to choose between those two systems—unless chaos is considered an alternative.


  1. Is there ever a point, in your opinion, where the human cost of letting supply and demand dictate prices is too high?


  2. Absolutely in the system that we are in now. Because there is no free market.
    But not in a true free market. If a merchant has a commodity that the people want or need, and he decided to rip those people off, the opportunity would be seen and other merchants would rise up to fill the need. The people that the merchant was ripping off, would not only go to the less costly supplier, they would also stop doing any trade with the rip off merchant for the things that the rip off needed.
    Let's take oil.
    If we take government induced regulation of the production of oil based energy away, they could charge less, if they refused to, other companies would come into play. If they still wanted to gouge us, we would refuse to trade commodities that oil companies need to stay alive, and because now that the lack of government induced monopolies on energy
    (i.e.oil) would be gone, things like coal would come into play, and the people would be free to find and produce other forms of energy. If you wanted to survive, you would have to compete. And I believe this is a real world possibility, not fanciful wishful thinking.
    And with the lack of those regulations, the government would not be busy stealing your wealth to finance enforcing those regulations. Which means more money in your pocket, which gives you greater buying power in the market and enables you to have more choices in your buying process.
    But we don't have that do we? Instead, we have regulation that dictates the prices that we pay. On everything.
    Why is energy so costly. Government regulation.
    Why can't you give your family doctor a chicken to pay for a medical procedure? Government regulation... and on and on.
    This is simplistic, but true.
    Good to hear from you AP, take care of yourself!


  3. If a merchant has property in his inventory how can it be he doesn't set the price at which he parts with it? How can price controls in any way co-exist with liberty and private property? As to the human toll, part of the reason to prepare for a rainy day is that the cost of goods on that rainy day will be elevated due to many people suddenly needing them. If prices aren't allowed to rise then in what manner will rationing be done, and rationing must be done or the prices wouldn't be able to rise. If costs on that rainy day are prevented from rising then there is less incentive for the people to prepare when costs are low, less incentive for a merchant to carry the extra inventory between emergencies for those who didn't prepare, etc. Expectation of price controls encourage unpreparedness thereby making emergencies more dire.