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Price Controls as Economic Disinformation
Art Carden on The Misuse of Knowledge in Society
The Biden administration recently announced the establishment of a Disinformation Governance Board, which many (including the Wall Street Journal) are calling a “Ministry of Truth.” The Orwellian branch of the Department of Homeland Security will primarily be concerned with policing online speech, but perhaps it should turn its attention to the regulations of other branches of government, which themselves promote dangerous disinformation.
What happens when we stop the price system of competitive markets from working? In a word, untruth. What do competitive markets have to do with truth? Ask a philosopher and you might get one answer. Ask an economist and you will get another. Ask an economist with a philosophical grounding, and you get Art Carden’s fantastic piece, The Misuse of Knowledge in Society: Intervention Means Prices are Lying.
Carden is a senior fellow with the American Institute for Economic Research and a research fellow at the Independent Institute. He joined the show to discuss the article that caught my eye on AIER.org, which is one of the best explanations I’ve ever read of the price mechanism of free markets. A price control, Carden says, is a kind of institutionalized lie. Just because the government says it’s so, doesn’t mean that the underlying scarcity of the good has been altered.
You don’t have to be either a philosopher or an economist to understand the importance of having reliable information when making decisions. I recently asked Art to explain to me and my audience the complex topic of price theory.
Listen or ready the summary below:
What do prices do in a free market?
Market prices are the purest form of information in a free market economy. They reflect the small-d democratic will of the people, by aggregating information about supply and demand into a single, accurate reflection of how valuable something is at a point in time.
Carden puts it this way, “When prices are set in competitive markets, they ensure that we produce the right stuff.”
The right stuff according to who? In the free market, everyone’s vote counts, and the sum total of mutually beneficial exchanges results in a maximization of consumer and producer surplus. In other words, he says, “It makes the world as well off as it can possibly be,” underlining the fact that, “[in] a competitive marketplace, we’re not wasting any resources.”
Waste is, quite simply, when we use more of a given resource than we need to in order to satisfy people’s desires. It does not mean producing “cheap, crappy stuff,” but merely that “there are benefits that we could have gotten that we are not getting because we’re using too much labor and too many resources.” Using too many resources to make cans of sparkling water means fewer of the things that enrich our lives – from health care to tickets to the opera.
“Prices are indispensable guides to help us know whether we are stewarding our resources well, or stewarding our resources wastefully,” says Carden. We know how much others value our output based on how much they are willing to pay. No one gets to set a price unilaterally. The price is zero unless somebody is willing to pay that price, in which case the person paying the price has decided it is as beneficial to the buyer as it is to the seller.
The Dishonesty of “Price Gouging” Legislation
This point becomes particularly important when we consider the function of prices during times of emergency, when higher prices signal acute scarcity and higher demand. Price gouging regulations, prohibiting sellers from raising prices during natural disasters, suppress the truth about the underlying scarcity and cause dire shortages of the goods most needed:
“Every time I teach an introductory economics class, [I remind my students] that the things that we do in the name of helping people actually in the long run often makes them worse off. We’re hurting exactly the people that we’re trying to help, and then we’re patting ourselves on the back for it.
Price gouging legislation is like this. It’s a form of price control. The statutes prohibit sellers from charging more than, say, 20% above wholesale price, or are worded to punish “unreasonable and unconscionable increases in the prices of gas and water,” and things like that….
Every time I look at pictures of say, New Orleans after hurricane Katrina or Houston, you see people lined up down the block waiting for gas or something. This storm didn’t cause that — the price gouging law caused that.”
Prices convey important information about what is valuable, and then reward those who can meet that demand. Legislating maximum prices forces producers to lie about the scarcity, and the signal never gets transmitted to those who could help alleviate the scarcity by bringing more of the needed goods into the affected region.
We see the same problem with California’s drought, due to the heavy-handed regulation of water and lack of market prices. People have no incentives to conserve water because the price is artificially low. The result is that people waste water.
Rent control likewise leads to a waste of the scarce housing supply. An older couple of empty nesters continue living in a three bedroom apartment because it’s rent controlled and artificially cheap, which means they end up using spare bedrooms to store groceries. Once again, the space is wasted.
Finally minimum wage laws represent another distortion of market prices, that harm those they are meant to help. By forcing employers to pay above-market wages, it locks the un-skilled out of jobs and favors the relatively over-qualified at the expense of the least well-off in society. Carden notes that union-backed minimum wages in South Africa were one of the main racist apartheid policies in South Africa that effectively barred non-whites from employment.
The Importance of Profits
Carden sees his mission as trying to help people understand why earning a profit is, in fact, honorable. He is author with Leave Me Alone and I’ll Make You Rich: How the Bourgeois Deal Enriched the World
Profits are the reward for creating something more valuable than the resources that went into making it. That makes profits a particularly important form of a price signal: “It’s the world’s way of saying do more of the thing that you have earned a profit doing,” he says. “If you earn a loss on the other hand, that’s the world’s way of telling you that you’re wasting resources, that you need to do something else.”
So we can only hope that government does not continue to spread misinformation, fake news, and falsehoods through the guise of good intentions, by messing with the free market. Let all prices of all goods and services reach their natural free market level.
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