All Commentary
Friday, February 1, 1980

Book Review: The Government Against The Economy by George Reisman

(Caroline House Publishers, Inc., P.O. Box 738, Ottawa, III. 61350) 1979 • 207 pages • $12.95 cloth

“This book is about the destructive effects of price controls,” the author tells us. “It explains why price controls are destructive in principle and shows how they have actually been destructive in practice.”

But the book is more than this. Reisman details how the profit motive and private ownership operate in a free society to produce consequences beneficial to all. He con trasts this with socialism, which destroys the possibility of rational economic activity and maintains control through-compulsion. He demonstrates how housing is provided efficiently in a free market, then examines the chaos of rent controls. He explains why shortages cannot exist in a free economy, then explodes the myths surrounding the energy crisis.

But by far the greatest importance of this book is that it comes at a time when “voluntary” wage and price guidelines are upon us and calls are increasing for the imposition of mandatory controls. This book demonstrates once again that you cannot fight inflation (an increase in the quantity of money) by trying to hide one of the symp-toms- rising prices—with price controls. Reisman uses fresh arguments and examples to do battle with this worn out economic concept.

One of the blessings of a free economy is the peaceful social cooperation that results from free exchange. Reisman describes the free market as “a truly awe-inspiring complex of relationships in which the rational self-interest of individuals unites all industries, all markets, all occupations, all production, and all consumption into a harmonious, pro gressing system serving the well-being of all who participate in it.” The consumer is sovereign. “The real advocates of the consumers their virtual agents—are businessmen seeking profit, not the leaders of groups trying to restrict the freedom of businessmen to earn profits.”

Under price controls, the relationship between buyer and seller—consumer and businessman—is dramatically altered. Price controls cause shortages; rather than sellers seeking and serving buyers, the sellers have more buyers than they can possibly supply. As you may have noticed, your gas station attendant no longer routinely cleans your windshield and checks under the hood. If he loses your business, he suffers no financial loss since there are others in line—more than he can accommodate—hoping to buy his product. In fact, as we observed in the summer of 1979, consumers were offering gifts to gas station owners and taking their cars in for unnecessary tune-ups and minor repairs, all in an effort to keep on good terms with the seller. Price controls allow sellers to disregard consumer desires.

To understand this, it is important to see the distinction Reisman makes between a scarcity and a shortage. “An item can be extremely scarce, like diamonds, Rembrandt paintings, and so on,” Reisman writes, “yet no shortage exists.” Shortages exist when buyers demand more goods than sellers are willing to supply. This can only occur when prices are not free to reflect the constantly changing demand for, and supply of, the goods being exchanged. In a free market, if demand increases or supply decreases, prices tend to rise. This has two effects: it discourages the marginal uses of a product, while simultaneously encouraging the production of more goods. Controls prevent prices from approaching market-clearing levels.

A shortage, in other words, means that prices are held too low. Therefore, “in order to blame the oil companies for the shortage [of oil], one would have to show that the oil companies deliberately charged too low a price for their oil. That would be the only conceivable way they could have caused the shortage. But that is absolutely absurd. It was not the oil companies that were responsible for too low a price, but the government, with its price controls.”

Reisman also shows how government acted directly to limit the supply of oil and was responsible for an enormous artificial increase in demand for petroleum products.

Reisman’s analysis of price controls is hard-hitting. He uses brilliant examples to drive home his points. Unfortunately, his approach is sometimes holistic, rather than focusing on the individual. Also, his explanations of profit and what determines price are unclear. But the overall forcefulness of his conclusions concerning the central thesis of the book more than compensates and makes this a book well worth reading.

Americans experienced the chaos of comprehensive price controls in the early 1970s and again, on gas and oil last summer. Let us hope that Reisman’s arguments get the attention they deserve, so that the destructiveness controls have caused over the centuries will be avoided in the years to come.

  • Roger Ream is president of The Fund for American Studies.