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Price Control Fallacy

Steve Chapman, in the Chicago Tribune, does a nice job explaining why a legislated minimum wage harms its alleged beneficiaries.

At their best, price controls such as minimum-wage legislation and prohibitions on so-called ‘price gouging’ are examples of what Matt Ridley calls “the reverse naturalistic fallacy.”  This fallacy is committed whenever someone goes from an “ought” to an “is” – that is, it is committed whenever someone jumps to the conclusion that because something ought to be true, that that something is true.

Minimum-wage legislation, for example, is based on the premise that, because no worker’s services ought to be worth less on the market than whatever hourly wage is specified by the legislature as the ‘minimum wage,’ no worker’s services are in fact worth less than this amount.  So, declare a minimum wage and – voila! – employers will suddenly find that each of their workers produces at least as much value per hour as the minimum wage.

Likewise with price ceilings.  It ought not to be the case that the market value of staple goods such as gasoline, bottled water, and lumber rise so sharply in the immediate aftermath of a natural disaster.  The price hikes that reflect this reality are indeed unpleasant, and the undelying reality that they reflect is truly regrettable and difficult.  It ought not be! Prohibiting price hikes is an attempt to force what is to be what ought.

Legislated price floors and ceilings are no less childish and futile than the acts of children who close their eyes tightly and snuggle deeply into their blankets on Christmas Eve night sincerely convinced that if only they believe hard enough, if only they get to sleep soon enough, if only they want it badly enough, Santa Claus will really visit that night bearing wonderful toys.

Children, of course, grow out of their belief in Santa Claus.

(Thanks to Craig Newmark for the pointer to Chapman’s article.)