Can Wage and Price Controls Cure Inflation?
OCTOBER 01, 1965 by F. A. HARPER
Dr. Harper, for years a member of the staff of the Foundation for Economic Education, continues his research, writing and teaching as Executive Vice President of the Institute for Humane Studies at Stanford, California.
Continuing inflation inevitably poses the question: Are wage and price controls effective medicine for the illness? Does the bottle contain a potent remedy, or is it filled with the false potions of quackery?
A doctor diagnoses illness from his knowledge of a healthy body and how it functions. The economic doctors must do likewise. So our first step is to study the anatomy of a healthy trading economy.
Ours is a nation of 195 million persons. Like any other giant and complicated machine, its operation can best be seen by focusing our attention on its small, integral, and essential working parts, so that we may clearly observe how they relate to one another.
So let’s start with Jones, a pioneer in the primeval forest. He hunts and fishes and grows some crops in his little clearing. He tames a few animals and uses them for toil or to provide food.
Then along comes Smith to be Jones’ neighbor. He, too, hunts and fishes and farms. But Jones is the better hunter, and Smith is the better farmer. As they follow their respective abilities, Jones comes to acquire an abundance of furs, but is short of corn for his meal; Smith has a goodly supply of corn, but is short of furs. So one cold day in winter, Jones—warm in his furs, but hungry—wanders over to see Smith, who is well-fed but shivering in his cave. Jones proposes to trade some furs for some corn.
The two men may higgle and haggle over the terms of the trade. The margin for bargaining may appear to be wide in this instance, in contrast to real life in our complex economy. No alternative market exists for the product each has in surplus, except to keep it himself. But on closer scrutiny, we find that each has an effective bargaining tool against the other: Each knows that the other realizes the advantage of making a trade, as compared with keeping his surplus product. Each knows that there is little sense in driving so hard a bargain that it kills off a trade. Each realizes the absurdity of continuing to suffer for want of what the other has for trade. So we may assume that trade will somehow be arranged between them.
Now, what terms of the trade between Jones and Smith might be called fair and just?
The question of a just price presumes certain antecedent questions: Says who? In whose judgment? By what right to speak? Justice always presumes a judge with some principle by which to judge. Who is to be the judge, and what is the principle involved?
Would it be fair to make Jones the sole judge, empowered to force upon Smith whatever terms of trade he shall dictate? Hardly, for to do so is to deny Smith all rights of ownership of the corn he has labored to produce. It would allow Jones to confiscate Smith’s property.
Would it be fair to make Smith the sole judge? No—and for the same reason.
The Historical Concept
Historically, the concept of "a just price dictated by a disinterested third party" has usually been offered as the solution of this seeming dilemma. This concept has persisted in the affairs of man since earliest times—since ancient man first congregated into groups of three or more, thus making it possible for one person to interject himself into the economic affairs of two other persons. Let us say that the third party in this instance is Joe Doakes, a new and distant neighbor. Joe seems to be qualified to render justice since he is "distinterested, impartial, unprejudiced, and objective." He might be called the "public representative." Shall it be left to Joe to decide what is a fair price?
Joe’s presumed qualifications for judging what price is fair—being disinterested, and all that—are precisely the reasons why he is not really qualified at all. He has not one iota of right to speak as an owner because he has done nothing to produce either the furs or the corn. He has no relevant information except what he might obtain from Jones and Smith. They alone can know their own wants, and whether, at each specified price, they should keep what they have produced or exchange it. At best, Joe knows less about it than does either Jones or Smith.
Bluntly and in simple terms, Joe is unqualified for the job of determining a fair price; and furthermore, it is none of his business. To empower him to throw the bargain this way or that is to grant him the equivalent of ownership of both products; and by the test of who has produced them and who owns them under private property, he deserves no such right. At best, he is an interloper; at worst, he is an outright racketeer, holding a power by which he can demand a bribe from either or both parties.
What is wrong with this theory of an impartial judge determining what price is fair? Why is this any different from a judge in a court of law who presides, let us say, in a civil suit concerning an alleged violation of contract?
Such a civil suit involves an impasse of conflict, in which one or the other side must lose by a judgment of "guilty" or "not guilty."
A judgment is rendered based on the evidence: Was there a contract? Was it valid? What were its terms? Were the terms violated by the actions of the person?
Yet none of these conditions exist in the instance of Jones’ and Smith’s trade. There is no impasse which must be resolved against one party or the other; each may keep his property and maintain his status the same as it was before they met. In that sense, neither must lose. If they trade voluntarily, both will be better off than before. And the ownership of what is his own gives to each the right of veto—the right to decree that there shall be no trade between them. As was said above, to violate this right by allowing Joe to force a trade at terms he dictates is to violate the right of ownership.
How, then, is the problem to be resolved? Jones has been disqualified as the sole judge. And so has Smith. And so has Joe. Since that excludes all who comprise this society, the problem may appear to be insolvable. But it seems that way only if one persists in looking for a single judge—some one person qualified to make the decision.
There is the appeal of simplicity, among other things, in having authority reside with one person—some Joe—empowered to establish a just price. Throughout all history, this practice has been in evidence. In Medieval times, for instance, kings or lords fixed prices for goods, and thereby supported the traditional thought of the time, which presumed a just price according to the powerful church influence and the ecclesiastical "logic" of the time. More recently, various arrangements of government have done likewise. But always there has been some Joe occupying the seat of authority, like our own heads of OPA and OPS. There has always been the urge, in other words, to find some one person who should be empowered, as the all-wise, to decide the price that would be just. And therein lies the error of the search.
Under the beginning concept that Jones owns his furs and Smith owns his corn, it is clear that no rights are violated if no trade occurs and each keeps what he has. There is no conflict in that sense. The only sense in which a conflict can arise is if either Jones or Smith—or some third Joe—presumes ownership of what is not his, and acquires a power to dictate the terms of a trade beyond his own rights as owner. But so long as the basic right of ownership is preserved, a contemplated trade is never a conflict; it is an attempted act of cooperation under which both parties, not merely one, stand to benefit. Each has a voice in the decision. Since both reserve the right of veto, their voices are equal in a decision that must be unanimous or else there is no "case in court" and no verdict.
The exchange process involves two persons, not just one. There is no free exchange unless and until two persons, serving as judges, agree on what the price shall be. The only persons who qualify as judges are the owners of the goods to be exchanged.
The 195 Million Traders
In our 1965 economy, there are some 195 million Joneses and Smiths. The ebb and flow of their trade and exchange is too complex for any human mind to grasp fully. What is a just price for shoes or wheat or a day’s work in this economy?
There is no one just price for all shoes sold today. Justice, as already analyzed, rests on freedom of exchange for each pair of shoes, between the store which offers it for sale and the consumer who considers buying it. So the only way to have justice in the price for shoes today is to have free trade and free terms of exchange for each and every separate deal. Justice in prices, then, precludes any legal or authoritative decree of price for any trade of anything.
Justice on a large scale cannot be composed of subsidiary injustices. Justice in the aggregate comes only from justice in each of its parts—free and voluntary terms of exchange for each buyer and seller. That demands the preservation of private property rights, above all else. Justice resides in the right to keep what is one’s own, if all buying offers are unsatisfactory; in the right of every offerer and bidder to resist coercion—even by the government, the presumed agency of legal justice. Once the search for justice ceases to focus on individual buyers and sellers and scans the national "price of wheat" or "hourly wage," the hound is off the trail. In a free economy where personal rights are preserved, there is no national price of anything; there are innumerable prices, trade by trade.
When prices are freely arranged between each buyer and seller, an over-all condition develops which is one of almost miraculous balance. Both surpluses and shortages disappear. Peace appears where otherwise there would be chaos and conflict. "Who shall have what?" is resolved in the only way possible if a person’s time is to remain his own; if what he has produced is to remain his; if he may give his property to whom he wishes, or trade it on whatever terms are satisfactory to both him and the buyer.
The manner in which this balance occurs is revealed by the accompanying chart. It combines two simple economic facts:
1. Consumers will buy less of a thing at a high price than at a low price.
2. Producers will produce more of a thing in anticipation of a high price than of a low price. Another economic fact, not shown in the chart, is important in interpreting it: For a society as a whole, the consumers are the producers, and the producers are the consumers. This fact, coupled with the simple truth that we cannot consume what is not produced, necessitates a balance between consumption and production. As the chart shows, a balance in this instance is found at the free price (at 30¢, where neither surplus nor shortage exists. The free price also generates a maximum amount of trading; and the terms of trade will have been accepted by every seller and every buyer as benefiting himself—as evidenced by their having traded willingly. The only just price is the free price.
Against this background of the anatomy of a sound economic body, we may now proceed with its pathology. What is the economic illness for which the stand-by controls are intended? What are the symptoms that will signal a rush to the economic medicine cabinet for the presumed remedy?
"It will be when wages and prices soar due to war or inflation or some other serious disruption; when some emergency causes acute shortages of certain things." These, in the minds of those who favor stand-by controls, are the symptoms of the illness.
Appearing before Congress, a former Defense Mobilizer said: "I am always delighted to see a return to the free market, but I must be sure that circumstances permit it."
The same view was expressed in the following release from the Chamber of Commerce of the
Such persons believe that the free market with free exchange is a pleasant luxury—a lovely thing to be enjoyed only in those happy times when the economy is sailing over untroubled waters. At all other times, the government should prohibit the citizens from such wasteful indulgence, and should dictate prices and wages under the control of administrative law. Freedom of exchange, by this reasoning, should be considered a pleasant pastime—a privilege granted to us and bestowed upon us by the government only when officials of government consider that the circumstances warrant it.
Weakness in Emergencies
As clearly implied in the Defense Mobilizer’s statement, those who favor stand-by controls for emergencies look upon controlled prices as strength and upon free prices as weakness. Why, otherwise, would they prescribe the medicine of controls in emergencies?
Any price either above or below the point of a free price, forced by some "Joe" armed with political authority rather than with rights as owner, is injustice. As prices depart from that point, more and more trading is killed off, to the detriment of both buyers and sellers. Then further controls over the affairs of workers and producers are likely to be added in order to obfuscate the new difficulties brought about by the first injustice. Error is piled on error in an inverted pyramid of interferences, until eventually the monument of mistakes must be dismantled or collapse under its own unstable weight. Whenever a false premise is adopted for medication, the "cure" is likely to aggravate the condition; then there is the temptation to apply more and more of it under the assumption that the dosage was inadequate or that the area of application was too narrow. Nothing—not even the famous guinea pig—is as prolific as controls in the hands of political authorities, during so-called emergencies.
In the light of the previous analysis, enacting stand-by controls ofwages and prices amounts to having a medicine cabinet stocked with injustice to be used in times of emergency; to creating surpluses and shortages, rather than balanced distribution, when emergencies arise; to giving a poison as an antidote for itself. If justice is strength and injustice is weakness, it amounts to prescribing weakness at precisely those times when strength is most needed. Goodness and justice, it would seem, are luxuries to be tolerated during an indulgent binge; but when the going gets rough and sobering realities must be faced, it seems that the emergency bottle should contain injustice.
Historical Failure of Control
For those who find the proof of the pudding only in the eating, history affords continuous and ample evidence, since the first known price control laws were enacted in
It is ever the same. When a government inflates the money or some other cause pushes prices upward, attempts are made to conceal the symptoms, rather than to attack inflation at its source or otherwise get at the root-cause. The attempt is made to adjust the scale on the thermometer by edict, rather than to cure the fever that causes the mercury to rise—so to speak. The treatment applied to the fever victim is to throw him into a deepfreeze.
National Socialism Via Control
The evidence against controls, even during emergencies, is so overwhelming—by logic, and as revealed in the historical record—that one wonders how their enactment has gained so much credence in this "land of the free." Could it be that we have been so busy manning the machines of physical defense that an intellectual mass attack upon our bastions has gone unnoticed? Sometimes our perspective on such matters is helped if we back away from the illusory belief we have embraced and look at the evidence from a distance.
Lassalle, the German Socialist, in a letter to
"What is truth? For the multitude it is that which they constantly read and hear… what it [the press] wants, is true. Its commanding officers engender, transform, and exchange truths. Three weeks’ work by the press, and allthe world has perceived the truth." In the early forties, when we were at war with national socialist
This source warned us that as the plan of national socialism progresses, an authority is to be made supreme; his decisions are to be final and always right; his followers are to owe him the duty of unquestioning obedience. This is the same concept that was advocated by the ardent nationalistic philosopher, Johann Gottlieb Fichte.
But under the influence of Napoleon’s repulsive example, Fichte later opposed absolutism in the state, foretelling the character of a future führer and describing how he might come to attain his power: The future führer would educate his people in cool and deliberate piracy; he would encourage extortion; robbery would be made the honorable token of a fine reason; the State should virtually eliminate private enterprise, setting up a rigidly planned corporate economy—including, of course, price controls and other controls of various sorts; there would be strict governmental control of labor and production, concealed inflation and blocked currency, international barter agreements, and intensive armament as a prelude to territorial expansion.
Those are the concepts embodied in controls, whereby legalized looting of some persons by others is authorized under guise of fighting inflation. It is the blueprint of national socialism as told by our own State Department. We should read it again and again—and judge our own acts by its measure.
This quotation from Henry J. Taylor, of what Goering said in an interview long after Goering, Ribbentrop, and others had been jailed following the surrender of
"Will it be as it always has been that countries will not learn from the mistakes of others and will continue to make the mistakes of others all over again and again?"
This same view—believe it or not—was confirmed by the then Vice-president of the Council of People’s Commissars and People’s Commissioner of Foreign Trade, in an interview printed in all Soviet newspapers on May 18, 1945.4 In explaining the serious food situation in Germany, he blamed the Hitler regime for having forbidden free trade of all articles of daily consumption. He stated that the trouble was due to the closing of all markets and the forced delivery of all farm products to the government, thus killing the incentive to produce.
It is not, perhaps, entirely a coincidence that the man who was the administrative head of German Price Administration until 1923, when their inflation exploded, came to the
A Matter of Degree
Now, rather than being at war with a national socialist
In 1848, Karl Marx, the "father" of communism, listed ten measures for a successful communist-socialist revolution. Among them are several which specify controls by the State of prices in their various forms, and also the confiscation of private property.
In 1950, Earl Browder, former leader of the Communist Party in
Stand-by Controls for What?
The most kindly charge that can be made against one who favors stand-by controls for emergencies, it seems to me, is that he does not understand the workings of a free market and that he lacks confidence in the performance of free men working with private property in a voluntary exchange economy. And if that be his belief, why does he not propose government controls of everything, all the time? Why not use the "strength" of controls all the time, not just in emergencies?
Stand-by controls? For what? Not, to be sure, for the purpose of either productive efficiency or justice! Not to maximize trade, nor to balance distribution so that shortages and surpluses will disappear! Not to further the freedom of man in this land which we claim will be the last bastion of freedom in the world struggle in which we are now engaged!
To enact stand-by controls would mean putting into the law of the land a permanent endorsement of a basic tenet of socialism—the principle that control of the vital mainstreams of commerce and confiscation of the rights of private property are sound and just practices. A nation of freedom cannot enact even stand-by controls and remain basically free.
" . . . it hath been found by Experience that Limitations upon the Prices of Commodities are not only ineffectual for the Purposes proposed, but likewise productive of very evil Consequences to the great Detriment of the public Service and grievous Oppression of Individuals."6
One Set of Ills for Another
The results have been astonishingly uniform…. The history of government limitation of price seems to teach one clear lesson: that in attempting to ease the burdens of the people in a time of high prices by artificially setting a limit to them, the people are not relieved but only exchange one set of ills for another which is greater…. The man, or class of men, who controls the supply of essential foods is in possession of supreme power…. They had to exercise this control in order to hold supreme power, because all the people need food and it is the only commodity of which this is true.
Mary G. Lacy, Food Control During Forty-six Centuries
‘Hearings before the Committee on Banking and Currency, United States Senate, Eighty-Second Congress, Second Session on 5.2594 and 5.2645.
²Economic Intelligence, Number 55, February 1953,
³Raymond E. Murphy and others, National Socialism: Basic Principles, Their Application by the Nazi Party’s Foreign Organization, and the Use of Germans Abroad for Nazi Aims, Department of State Publication No. 1864 (Washington, D. C.: U. S. Government Printing Office, 1943), pp. 11, 12, 15, 22.
4‘Supplied through the courtesy of Professor Jacques Rueff, of the Institut d’Etudes Politiques,
5Gaining Recruits for an Idea, single sheet, Foundation for Economic Education.
6Tune 4, 1778. Journals of the Continental Congress (1908 ed.), p. 569, Vol. XI.