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Quotation of the Day…

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… is from page 3 of T.R. Malthus [2]‘s 1800 essay, “An Investigation of the Cause of the Present High Price of Provisions [3]” as reprinted in volume one of the 2013 collection History of Economic Theory [4]:

The two shillings of a poor man are just as good as the two shillings of a rich one; and, if we interfere to prevent the commodity from rising out of the reach of the poorest ten, whoever they may be, we must toss up, draw lots, raffle, or fight, to determine who are to be excluded.

Market prices are not arbitrary.  Prices are determined by the forces that economists comprehend with the theory of supply and demand.  An attempt by government to change a price or wage from what that price or wage would be without government price controls at best masks the true price or wage – in the way that dressing up a woman to look like a man at best changes the woman’s outward appearance without altering her chromosomes.  (Many proponents of minimum wages and other price controls – those proponents who deny that such price controls generate negative effects – are victims of the primitive superstition that the superficial appearance of something is the essence of that something.)

In addition, as Malthus recognizes in the above quotation, market prices also perform an important allocative role.  Forcing prices away from the levels that they would attain on the market does nothing to avoid the need for somehow ‘deciding’ or determining which buyers get, and which buyers must forego, available supplies of good X, and which sellers manage to sell, and which sellers fail to sell, their supplies of X.  Proponents of price controls typically imagine, contrary to any evidence or any reason, that their favored group (usually thought to be ‘the poor’) constitutes the buyers and sellers who succeed in the market with price controls while disfavored groups (‘the rich’) are the ones who suffer any ill-consequences that might result from such controls.

Such a belief is groundless, not least because a price ceiling – meant to make the good or service more affordable – actually increases its market value by making it artificially more scarce, while a price floor – meant to make the good or service more ‘dear’ (as a classical economist might have said) – actually decreases its market value by making it artificially more abundant.  [Some second-order qualifications attend the analysis of price floors, but none that are relevant here.]  And the amount that people are willing to pay for a good or service is determined at bottom by its market value (and not by its nominal price if that price differs from the market value).

One beautiful feature of a market price is that it tends to reflect at each moment in time the underlying market value of the good or service.  One ugly feature of a price control is that it causes the listed money price to differ from the market value of the good or service.  Yet it is the market value of the good or service that ultimately determines the intensity with which buyers will compete to acquire the good; it is the market value of the good or service that determines the amount of resources that buyers will spend in competition with each other to acquire the good or service.

And when the money price of the good or service is the same or near the market value of the good or service, the vast bulk of the resources that buyers spend to acquire the good or service is transferred (voluntarily) to sellers of the good or service – a reality that gives sellers maximum possible knowledge and incentives to produce appropriate amounts of this good or service.  But when the money price of the good or service is kept by price controls from equaling the market value of the good or service, much – and perhaps most – of the resources that buyers spend to acquire the good or service are wasted in a zero-sum competition among buyers; these resources – such as the time that buyers spend queuing – do not go to sellers.  Sellers, therefore, have less knowledge and incentive to produce appropriate amounts of the good or service.

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