Quotation of the Day…

by Don Boudreaux on June 19, 2017

in Myths and Fallacies, Prices, Reality Is Not Optional, Seen and Unseen, Work

… is from page 180 of the 2012 revised edition of Steven Landsburg’s 1993 book, The Armchair Economist:

In World War II price controls [in the United States] were administered by the Office of Price Administration (OPA).  I have been present at discussions where serious attempts were made to assess the OPA’s damage to the Allied cause, measured in terms of the equivalent number of German panzer divisions.  The estimates tended to be large.

DBx: Price controls – both price ceilings and price floors – reduce the quantities of price-controlled goods and services that consumers actually get.  Forcing the money price of a good or service down with a government-imposed price ceiling reduces the amount of this good or service that consumers actually get by reducing the quantity supplied (from what that quantity would be were the money price not forced downward).  Forcing the money price of a good or service up with a government-imposed price floor reduces the amount of this good or service that consumers actually get by reducing the quantity demanded (from what that quantity would be were the money price not forced upward).  In both cases, the government intervention reduces economic output.

Minimum wages, statutory prohibitions on so-called “price gouging,” and other price controls reflect irrational mysticism.  These controls are all premised on the notion that by forcibly changing the nominal reported value of a good or service – that is, by forcibly changing the name of the value – the real value of the good or service will change to correspond to the dictated name.  It’s a notion no less batty than is the belief, say, that the New York Times can actually change the number of people killed in a terrorist attack by changing the name of the number.  Yet who believes that if, say, 18 people are killed in a terrorist attack that the number of dead people will miraculously be reduced by three if the New York Times reports that “15 people were killed in a terrorist attack”?  The answer, of course, is no one.  Indeed, anyone who would suppose that reality is changed simply when newspaper reports of it are changed is recognized as being too far detached from reality to take seriously.

Those who support price controls are just as detached from reality.  The market-determined price of a good or service is as accurate a report as is possible of the value of each unit of a good or service.  This value will not move up or down simply if the government orders it to move up or down.

But the case of price controls is even worse than the case of a faulty report by the New York Times.  A faulty newspaper report is unlikely to cause people to behave in destructive ways.  As already noted, an inaccurate newspaper report on the number of people killed in a terrorist attack won’t cause the actual number of people killed to fall, but nor will it cause this number to rise.  Price controls, in contrast, generally cause the values of price-controlled goods and services to move in the direction opposite that which government commands these values to move.

A price ceiling on, say, gasoline – by reducing the quantities of gasoline supplied to the market – raises the market value of each gallon of gasoline.  And the fact that consumers are prohibited from paying this full, higher value completely with money does nothing to prevent consumers from paying the full, higher value in other ways – such as incurring the costs of waiting in line (or, as the British say, “queuing”).  Likewise, a minimum wage – by causing the supply of low-skilled workers over time to increase (because it reduces the number of such workers today who get jobs) – reduces the value of each hour of low-skilled labor.

None of this matters to proponents of price controls.  Such proponents are satisfied with the fact that the names of the values of good or services are changed in ways that please the eye and ear of the economically illiterate.  If it is now possible to say that the highest name of the value of a gallon of gasoline is $1.00, then these proponents are content to believe that the real value is indeed $1.00.  If it is now possible to say that the lowest name of the value of an hour of low-skilled labor is $7.25, then these proponents are content to believe that the real value is indeed $7.25.

It’s a foolish superstition.  It is, however, a superstition that is very widespread, especially among those who today fancy themselves to be immune to superstitions.

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