THE DANGERS OF PRICE CONTROLS

by Henry Hazlitt

The first thing to be said about wage and price fixing is that it is harmful at any time and under any conditions. It is a giant step toward a dictated, regimented, and authoritarian economy. It makes impossible arrangements that both sides are willing
to agree to. It sets aside contracts that have already been made in good faith. If an employer wishes to give a man a raise in pay, and the man deserves it, he is nonetheless forbidden to do it under the new regulations. This is a grave abridgment of individual
liberty.

Price fixing and wage fixing do harm even if there is no inflation. In a free economy prices are constantly changing. They are changing to reflect changes in supply and demand, in costs, and in a hundred other conditions. Some prices are going up, other prices are going down. If an effort is made to freeze these prices and wages and costs exactly
where they are, it immediately disturbs the relationship of prices and comparative profit margins which decides what things will be made and what quantities they will be made in. It upsets the process by which the free market decides how thousands of different commodities and services are to be made in the proportions in which people want them.

Of course, if we are in a period of inflation, price fixing does immensely.more harm. And it is never a cure for inflation. What causes inflation is an increase in the supply of money and credit. This is always brought on, directly or indirectly, by governmental policy – especially by governmental deficits which lead to an increase in the supply of money and credit.

In the last 42 years there has been a deficit in the federal budget for 33 years. In 1971 – that is, the fiscal year that ended June 30 of this year, there was a deficit of $23 billion. This was second only to a deficit of $25 billion in 1968; apart from that, it was the highest peace-time deficit in our history. We are facing in the present fiscal year an estimated deficit of $28 billion.

Now these deficits over the years have been
financed by the issuance of paper money. At the end
of 1939 demand bank deposits and currency in the
hands of the public totalled $36 billion; today that
figure is $227 billion. That is an increase of 530 per
cent, in other words, a six-fold expansion of money.
And this is the sole cause of the rise in prices over
that same period of 195 per cent. American consumer
prices have tripled in the last 32 years. What we have
today is price fixing with monetary inflation. This
must lead to shortages and to a profit squeeze. And it
v~ill tend to distort and to reduce production.

Sometimes people talk as if it would be possible to
have universal price fixing. That is to say, the
government would fix every wage, every price, every
cost. This is absolutely impossible. While nobody
knows how many separate prices and separate
wages there are, there are good reasons for thinking
that there cannot be fewer than about 10 million.

If you try to fix 10 million prices, what you are
trying to fix is something in the order of 50 trillion
cross-relationships of prices. This is something that
no government is capable of determining – not to
speak of policing. If they could police it, they would
have to impose rationing and allocation of individual
goods in order to keep prices where they were if they
kept increasing the money supply. And even then,
the whole project would be impossible for the simple reason that the government cannot control prices of
imports. These are out of their control. And they
would not know how to pass these increases in
import prices through the economy without creating
disruptions and distortions.

Now on August 15, 1971 the President did
announce what purported to be a complete freeze of
both wages and prices. But this freeze was purely
rhetorical. There was not even an attempt to police it.
In fact, nobody can police the actions and decisions
of millions of employers and sellers and of 80 million
workers.

It is not difficult to fix prices, or to pretend to fix
prices, for a period of 90 days. But the trouble with
fixing prices for a period of only 90 days is that if you
continue to increase the money supply – and if all
the other factors are what they were – then at the
end of that period prices will jump to where they
would have been anyway. So when the
administration recognized this, in order to avoid the
criticism that the whole 90 days price fixing was
useless and pointless it had to extend the wage-andprice
fixing. So we are now in Phase Two.

Nobody knows when Phase Two will end. And for
a very good reason. When we get toward the end,
there will again be fears: “As soon as we stop this
price fixing, prices will jump, won’t they?” So there’s
a self-perpetuating gimmick in so-called temporary
price fixing. Once you hold prices down by edict, you
have to keep holding them down in order to prove
that you are doing some good.

If, on the other hand, the money supply were kept
down, prices would not tend to rise and the price
fixing would not be at all necessary. I’d like to say
here, of course, that I’m simplifying somewhat in
talking about the effects of changes in the money
supply. There is usually a lag between increases in
the supply of money and increases in prices. This
may range from 6 months to a year. But everything
depends on the special conditions that exist. Just
let’s keep in mind that it’s changes in the money
supply that determine changes in the level of prices.

Phase One ostensibly froze every price and wage
just where it was. Phase Two is supposed to be
looser and more flexible. It is supposed to allow for
and prevent hardships to individual producers.
Therefore, it turned things over to a board, or a group
of boards, so they could use their discretion. But
discretion in the hands of bureaucrats is a very
dangerous thing. The members of these three boards
for price fixing and wage fixing are not even officials
of the American government. They are ostensibly
private citizens. Now to have private citizens telling
everybody what they can charge and what they can
pay raises legal and constitutional questions of a very
grave nature.

The administration has set up three separate boards. One is a Cost of Living Council, which is
supposed to preside over the whole arrangement.
Then there is a Pay Board which is supposed to take
care of wages and salaries. And a Price Commission
that is supposed to fix prices. What is the relationship
between these three bodies? It’s been purposely kept
quite vague.

The Price Commission is composed ostensibly only
of members of the public. The Cost of Living Council
is composed ostensibly only of members of the
public. The Pay Board is a tripartite group of fifteen
persons, five supposedly representing labor, five
employers, and five public. Now union labor
constitutes only one quarter of the labor in this
country, yet every one of the five members of the Pay
Board is a union leader. This is a little lopsided. And
then Mr. Meany made it quite clear early on that the
unions would feel free to pay no attention to any
ruling that wasn’t in their favor. That isn’t going to
help.

Then the Pay Board can fix wages and the Price
Commission can fix prices. But when the Pay Board
fixes wages, it pays no attention to prices because
they aren’t within its jurisdiction. Prices are in the
jurisdiction of the Price Commission. But costs have
already been set by the Pay Board. So if the Price
Commission doesn’t follow along submissively and
endorse all the decisions of the Pay Board by
allowing these increased costs to pass through, or if it
tries not to let them pass through, then it is going to
create great disruptions in the economy.

As a result of having two bodies governing wages
and prices respectively, we have two formulas: one
formula governing wages and another formula
governing prices. Wages are to be allowed to go up
5.5 per cent, but prices are to be allowed to go up
only 2.5 per cent.

Let’s look at this 2.5 per cent for a moment. It’s a
completely arbitrary figure taken out of the air. If we
want to control prices, why not just control prices –
fix them just where they are? What is the point of
allowing an increase of 2.5 per cent? If we fear it
would do harm not to allow price increases of 2.5 per
cent, why doesn’t it do harm to allow increases of
only 2.5 per cent?

But why is the wage increase figure set at three
percentage points above the price figure? Why is the
allowable wage rise set at 5.5 per cent, and the
allowable price rise at only 2.5 per cent?
The rationale for this has grown up over the years.
The Bureau of Labor Statistics has long been making
estimates of the “man-hour productivity” in the
country. These estimates have shown an average
increase of about 3.2 per cent a year over the period
since World War II. The Bureau now estimates that
for the 1970’s this increase in productivity will average 3 per cent a year.

Th~s man-hour productivity, or production per
man-hour, is not only a dubious average, but an
average of an average. For example, it’s an average
of the average of man-hour-productivity rises over a
series of years. But this includes one year in which
the rise was calculated to average 4.6 per cent and
another year in which it didn’t rise at all. Then again,
this figure lumps together thirty-two different
industries – or rather it lumps all industries together;
but if you break this down into thirty-two industries,
you find a very wide disparity from industry to
industry. For example, the estimated increase in manhour-productivity
in footwear has averaged only 1 per
cent a year; but in petroleum pipelines, it has
averaged 10 per cent a year. Of course, if you break
this figure down further toshowd~fferences between
individual firms, the discrepancy is far wider still.

And whatever validity the overall 3.2 per cent manhour-productivity
figure may once have had, it
doesn’t exist any longer. From 1965 to 1970, the
Bureau of Labor Statistics’ own figures show that the
average increase in man hour productivity was only
1.8 per cent. In 1970, it was less than 1 per cent. And
a recent study published by the Federal Reserve Bank
of St. Louis points out that the increase from 1965 to
1970 was only seven-tenths of 1 per cent for all
private business. The author of that made his
calculations on a slightly different basis than does the
Bureau of Labor Statistics. But this shows how tricky
and undependable all these statistics are. Yet this 3
per cent “annual increase” figure has been kept. It is
constantly repeated in newspaper editorials. It has
become a sanctified figure in Washinton. It is an
article of faith that labor productivity goes up 3 per
cent a year regardless of what happens.

There are two main myths about this so-called
man-hour-productivity. One is that it is labor
productivity; the other is that it occurs automatically.
We would get a much better idea of what we were
talking about, if instead of speaking of man-hourproductivity
we talked of man-machine-hourproductivity
or labor-capital-productivity. This
increase in productivity doesn’t occur because
workers work 3 per cent harder every year or 3 per
cent better every year. It increases only because
capital investment is increasing. It is this capital
investment that increases the productivity. If a man,
for example, can mow a half an acre of lawn in an
hour with a hand mower, and his employer then gets
him a power mower and he can now mow an acre in
an hour; and then if his employer gets him a still
bigger power mower and he can now mow two acres
in an hour, then productivity has gone up four-fold.
Suppose he then came around and asked for a fourfold
increase in pay per hour? Well, first of all, the
employer who bought the machine, if he had known
in advance that his employee was going to demand this, wouldn’t have bought the machine in the first
place.

This is what is overlooked. New investment goes
on in industry, increasing man-hour-productivity, first
only if there has been enough profit in the past to
yield the added capital to make that investment, and
second, only if the dutlook for future profits, for
future return on new investment, remains sufficiently
attractive. But if labor gets the whole gain from every
increase in productivity, and nothing is left for capital,
then investment will stop, and productivity increases
will stop. This is a point which seems to have been
overlooked.

But I don’t know why I should be spending so
much time examining these formulas for an allowable
5.5 per cent increase per year for labor and 2.5
per cent for prices, because no sooner were these
formulas framed then thev were violated. The Pav
Board announced this 5.5 per cent figure on
November 8. On November 19, only 11 days later, it
ratified a wage increase in the coal industry that came
to 16.8 per cent in the first year. This is more than
triple what it said it would allow. Then on December
9, it awarded the railway signal men a 46 per cent
increase over forty two months. That’s at an annual
rate of 13 per cent over a period of 3.5 years. Such
flagrant examples are numerous.

Now let’s turn to prices. American Motors was
granted a 2.5 per cent increase in its prices. General
Motors was granted a 2.5 per cent increase in
prices. Then Ford Motors was granted a 2.9 per cent
increase in prices. And then Chrysler was granted a
4.5 per cent increase in prices. What has become of
equality of treatment for all? And what is achieved by
this kind of hocus-pocus? After Chrysler was
permitted a 4.5 per cent increase, it turned around
and said, “We are only going to increase prices 3 per
cent.” Why? Because competition compelled them
to limit their price increase to that figure.

Of course; it’s competition that holds down prices
– not government ukase. And it’s competition that
we should continue to depend on. Competition exists
in this country for at least nine-tenths of the
commodities and services that we daily use. And that
competition is no keener anywhere than in the
automobile industry. Rival cars will sell within a dollar
of each other in the same district. The automobile
companies produce altogether about 380 different
models – the American automobile companies
alone, not counting foreign imports. That sounds like
a big figure, but if you stop to think that there are
about ten different types of Chevrolets, ten different
types of Pontiacs, and so on, even within the General
Motors Company, you can see how that gets to a
very high total. Each one of these companies has to
price its cars low enough to meet the competition
anti to maximize its own sales. Nobody is compelled to buy one make of car rather than another. Nobody
is even compelled to buy a new car rather than a
second-hand car. Most of us can postpone the
purchase of a new car indefinitely. But this is the kind
of situation that business daily faces. And this is the
kind of competition that constantly keeps down
prices to a minimum in relation to the general
economic situation.

What the government ought to be doing to get
prices low is to free and encourage the producers –
not to put them in a strait jacket. But price fixing does
exactly the opposite. And it’s doing exactly the
opposite now. We’ve seen that the Pay Board gave
the coal miners a 16.8 per cent increase for the first
year; then when the first coal mine company asked
for an increase in price, the Price Commission
allowed it only a 4 per cent increase in price to meet
that 16 per cent increase in wages. On the
Commission’s own estimate, this would at best allow
the coal companies to pass through about 60 per cent
of the cost of the increased wage. With this kind of
whipsaw there will be a terrific squeeze on profits.
The result will be to discourage investment and
therefore to increase unemployment. That certainly
wasn’t the original object of the price control act.

Price – and wage – fixing is always harmful.
There is no right way of doing it. There is no right
way of doing a wrong thing. There is no fair way
doing something that oughtn’t be done at all. We
can’t even define a fair price or a fair profit or a fair
wage apart from the market, apart from the state of
supply and demand. Instead of talking of “fair”
prices, “fair” profits, and “fair” wages, we ought to
be talking about functional wages, functional prices,
and functional profits. Prices have work to do. What
they do in effect is to give the necessary signals to
production. They direct production into the things
that are most wanted socially, to provide a balance
among the thousands of different commodities and
services in the proportions that the consumers want
them.

Price fixing destroys the signals on which this everchanging
balance depends. It always does harm. And
it is never a cure for inflation. Not only is price fixing
never a cure for inflation, but in the long run it
prolongs and increases inflation. Quack cures divert
attention from real causes and real cures. The real
cause of the price rises of the inflation that we have
had over the last 30 years, and that has intensified in
recent years, has been the increase in the supply of
money resulting from the enormous deficits that we
have been piling up steadily. Yet today, when the
attention of Congress, of the Administration, and of
the press, is focused on whether price fixing is
working well or not, we are building up the greatest
deficit in our peace-time history. We are also building
up an increasing money supply and intensifying the
problem. False remedies drive out real remedies.

I’d like to say a final word about the morality of all
this. I prefer not to make my own judgment but to
quote one of the price controllers themselves. This
was said by Mr. Earl D. Rhode, who is executive
secretary of the Cost of Living Council. “The citizen’s
role in this program is to rat on his neighbor if his
neighbor violated the controls.” I leave the moral
judgment of that to each of you.

im.pri.mis fim-pri’m~s) adv. In the first place. Middle English,

IMPRIMIS is the journal from The Center for Constructive
from Latin in primis, among the first (things). . . Alternatives. As an exposition of ideas and first principles, it
offers alternative solutions to the problems of our time.

Copyright @ 1972 by Hillsdale College. Permission to reprint in whole or in part is hereby granted, provided customary credit is given.