All Commentary
Wednesday, June 1, 1966

How Price Control Leads to….. Socialism

Excerpted by permission from Dr. Mises’ lec­ture, “Middle-of-the-Road Policy Leads to So­cialism,” published and available as a pamph­let from Libertarian Press, 366 East 166th Street, South Holland, Illinois. Single copies, 25 cents.

The government believes that the price of a definite commodity, e.g., milk, is too high. It wants to make it possible for the poor to give their children more milk. Thus it resorts to a price ceiling and fixes the price of milk at a lower rate than that prevailing on the free market. The result is that the marginal producers of milk, those producing at the high­est cost, now incur losses. As no individual farmer or businessman can go on producing at a loss, these marginal producers stop pro­ducing and selling milk on the market. They will use their cows and their skill for other more profitable purposes. They will, for example, produce butter, cheese, or meat. There will be less milk available for the consumers, not more.

This, of course, is contrary to the intentions of the government. It wanted to make it easier for some people to buy more milk. But, as an outcome of its inter­ference, the supply available drops. The measure proves abortive from the very point of view of the government and the groups it was eager to favor. It brings about a state of affairs, which —again from the point of view of the government — is even less de­sirable than the previous state of affairs which it was designed to improve.

Now, the government is faced with an alternative. It can abro­gate its decree and refrain from any further endeavors to control the price of milk. But if it insists upon its intention to keep the price of milk below the rate the unhampered market would have determined and wants nonetheless to avoid a drop in the supply of milk, it must try to eliminate the causes that render the marginal producers’ business unremunera­tive. It must add to the first de­cree concerning only the price of milk a second decree fixing the prices of the factors of produc­tion necessary for the production of milk at such a low rate that the marginal producers of milk will no longer suffer losses and will therefore abstain from re­stricting output.

But then the same story repeats itself on a remoter plane. The sup­ply of the factors of production required for the production of milk drops, and again the gov­ernment is back where it started. If it does not want to admit defeat and to abstain from any meddling with prices, it must push further and fix the prices of those factors of production which are needed for the production of the factors necessary for the production of milk.

Hopelessly Enmeshed

Thus the government is forced to go further and further, fixing step by step the prices of all con­sumers’ goods and of all factors of production — both human, i.e., labor, and material — and to order every entrepreneur and every worker to continue work at these prices and wages. No branch of industry can be omitted from this all-round fixing of prices and wages and from this obligation to produce those quantities which the government wants to see pro­duced. If some branches were to be left free out of regard for the fact that they produce only goods qualified as non-vital or even as luxuries, capital and labor would tend to flow into them and the result would be a drop in the supply of those goods, the prices of which the government has fixed precisely because it considers them as indispensable for the sat­isfaction of the needs of the mass­es.

But when this state of all-round control of business is attained, there can no longer be any question of a market economy. No longer do the citizens by their buying and abstention from buying determine what should be pro­duced and how. The power to decide these matters has developed upon the government. This is no longer capitalism; it is all-round planning by the government — it is socialism.

It is, of course, true that this type of socialism preserves some of the labels and the outward ap­pearance of capitalism. It main­tains, seemingly and nominally, private ownership of the means of production, prices, wages, in­terest rates, and profits. In fact, however, nothing counts but the government’s unrestricted autoc­racy. The government tells the entrepreneurs and capitalists what to produce and in what quantity and quality, at what prices to buy and from whom, at what prices to sell and to whom. It decrees at what wages and where the workers must work. Market exchange is but a sham. All the prices, wages, and interest rates are determined by the authority. They are prices, wages, and interest rates in ap­pearance only; in fact they are merely quantity relations in the government’s orders. The govern­ment, not the consumers, directs production. The government de­termines each citizen’s income, it assigns to everybody the position in which he has to work. This is socialism in the outward guise of capitalism.



What Price Control Means

When one condemns the processes of a free market, as he is doing when he endorses any form or degree of price control, he is invalidating the rights of either buyer or seller. If the buyer and seller agree to trade the bushel of potatoes at $2 and a dictator sets a price limit of $1.80, he is economically disfranchising the seller in the market. He is doing exactly the same thing as the robber who takes the bushel of potatoes and then hands the poor victim a gratuity of what he wishes, in this case $1.80. This is not disfranchisement of the seller by 10% — it is complete dis­franchisement, and the seller is completely at the mercy of the control instead of being able to pursue his rights in a free market.

F. A. HARPER, The Crisis of the Free Market

  • Ludwig von Mises (1881-1973) taught in Vienna and New York and served as a close adviser to the Foundation for Economic Education. He is considered the leading theorist of the Austrian School of the 20th century.