Freeman

ARTICLE

The First Law of Economics

MAY 01, 1956 by ANTHONY REINACH

Mr. Reinach is a financial consultant, formerly a member of a New York Stock Exchange firm.

The economic facts of life are many. But the grandfather of them all is the law of demand and supply. If this one law alone were thoroughly understood, it is highly improbable that government interference in the market place would ever again be tolerated. Let’s see how this law works in your everyday life:

You own at least one pair of shoes—probably several. Your least expensive pair of shoes may have cost you as little as $5.00. This least expensive pair—the one you can most easily afford—will serve to help clarify the law of demand and supply.

Had this pair been priced at $1.00 or an even more ridiculously low figure, it is quite probable that you would have bought several pairs in anticipation of future needs, or just as a luxury. But had this pair been priced at some exorbitant price like $2,000, you would either be going shoeless, be reduced to making your own shoes, or be keeping your feet protected and comfortable in some other way. At $2,000 per pair, even the wealthy man’s wardrobe wouldn’t contain many shoes.

Now between $1.00 and $2,000, there is a price at which you will own several pairs, a price at which you will own only one pair, and a price at which you will own no shoes at all. Working down from the top figure of $2,000, let’s say that the retailer starts reducing his price a penny at a time—and let’s also assume that at each new price you are unable to predict any further reductions. Your active interest in shoes may not be aroused until he gets his price down to somewhere under $100. But at some price under $100, you will say to yourself: “Well, I guess I’d better buy one pair, anyway.”

That hypothetical price at which you say, “O.K., I’ll take them,” may be $87.72. This means that you turned down those shoes when they were offered to you at $87.73. There is a very narrow margin between a sale and no sale. This same thing holds for everybody else who may want shoes, and it is just as true for every other thing that is traded in the market place—yachts, houses, bread, and medical services. Turning the example around, it can be clearly seen that every penny reduction in the price of goods and services permits additional people to enjoy those goods and services, and each cent rise discourages somebody from that enjoyment. Prices, of course, also guide production, a higher price being a stimulant and a lower price a sedative to the producer.

All of us are consumers of literally thousands of goods and services. The items now in your home probably number well into the hundreds. And yet each of us produces only three or four goods or services—or maybe just one. We trade the one that we produce for those thousands of things that make our lives more gratifying. Here’s what happens to the consumer in particular, and to trade in general, when the government interferes in the market place:

There was once a time when the Czechoslovakians were the most efficient makers of shoes. They traded their shoes to Americans for automobiles, farm equipment, and other things which we produced more efficiently than they or our competitors. Our own shoe manufacturers were therefore faced with converting their production to something wherein they, too, would be competitively productive. But they feared change. So, cloaking their fear in a worthy cause, they sought government “protection.” Aid was forthcoming in the form of a tariff on Czech shoes.

Prices of shoes went up. A few wealthy citizens felt that they could no longer afford as many shoes as they once had, and the less wealthy were obliged to own fewer shoes or deprive themselves of something else they may have wanted. Some, who could afford to wear shoes at Czech prices, now chose to go shoeless rather than pay the new “protected” prices.

Although we are mainly concerned with the consumer, it can also be seen that government interference affects others. For example, some marginal retail shoe stores were now forced out of business, and more prosperous stores found themselves less prosperous through loss of trade. The same holds true for the shoe importers, wholesalers, jobbers, and others. The Czechs, of course, have had their shoe market curtailed. And the manufacturers of those items which had been used in trade for the Czech shoes were injured in proportion. This is only part of the picture, but it does serve to illustrate the endless harm generated when government enters the market place.

Take silver as another example. How much more silverware would you own today if there were a free market price for silver?

The examples are endless. The government today is in thousands of market places—directly and indirectly. Indirectly, the government can price an article beyond the reach of millions simply through taxation. The tax on luxury items, such as jewelry and furs, is an excellent example. How many husbands have saved to buy their wives a piece of jewelry only to find that, although they could afford the desired item, they couldn’t afford the tax thereon?

The extent of such hindrance to trade is truly enormous when one weighs the total cost of government against the fact that the margin for exchange may be no wider than a penny.

The government can never repeal this basic law of demand and supply—nor its consequences. Its interference in the market place can only increase total costs and prices—and thus prevent your owning and enjoying additional goods and services you want and could afford at free market prices.


Filed Under : Free Markets

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May 1956

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