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Quotation of the Day…

Posted By Don Boudreaux On February 23, 2013 @ 8:18 am In Prices,Reality Is Not Optional,Work | Comments Disabled

… is from page pages 133-134 of Deirdre McCloskey’s indispensable 1993 collection, Second Thoughts: Myths and Morals of U.S. Economic History [1]; specifically, it’s from Chapter 17, “Can Price Controls Work?” by Hugh Rockoff; Rockoff here is discussing the price-ceilings that Uncle Sam imposed on many goods during World War II:

There were classic examples of black markets, but other forms of evasion were probably even more important.  Butchers added more fat to the hamburger, candy makers reduced the size of their bars and used inferior ingredients, clothing manufacturers used coarser yarn, landlords refused to make repairs, and so on.

Firms have incentives and abilities, along a variety of margins, to adjust to mandated price controls.  (These margins frequently remain unseen by the textbook-obsessed economist until experience reveals them to him – and sometimes he remains blind to adjustments along these margins even when he should be gobsmacked by the reality of them.  Such is the will to believe in the miraculous powers of fine-sounding legislation.)

Note that each and every one of the suppliers mentioned by Rockoff faced a downward-sloping demand curve.  So each one had, if we adopt the calamitously misleading textbook terminology, some “monopoly power.”  His or her marginal-revenue curve sloped downward faster than did the demand curve for his or her product.  So – in a way exactly analogous to the textbook labor-market monopsony graph relied upon by those economists who insist that a modestly higher minimum wage might even increase the employment options of unskilled workers – price controls ‘should’ have increased the consumption options of consumers.  Such controls should have led not to shortages and to other attempts detrimental to consumers, like those mentioned above by Rockoff, of sellers to get around the controls.  Rather, I have a textbook model that ‘proves’ that, at least in principle, a maximum-price mandate will make consumers better off.

Few, if any, economists today doubt that government-mandated maximum prices produce shortages and other unhappy consequences of the sort documented by Rockoff.  Economists (rightly) have no such doubts despite a readily available textbook graph that can assure them that those doubts are misplaced.

Why put such confidence in one simplistic graph for an input market (the labor-market monopsony graph) while understanding that its exact analog for output markets is too ‘thin’ to give anything close to a realistic picture of the reality of price controls?

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[1] Second Thoughts: Myths and Morals of U.S. Economic History: http://www.amazon.com/Second-Thoughts-Morals-Economic-History/dp/0195101189/ref=sr_1_1?ie=UTF8&qid=1318944149&sr=8-1

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