Knowledge And Decisions

How accurately these prices convey knowledge depends on how freely they fluctuate. The use of force to limit those fluctuations or to change the relationship of one price to another means that knowledge is distorted to represent not the terms of cooperation possible between A and B, but the force exerted by C. Looked at another way, the array of options people are willing to offer each other are reduced when force is applied to limit the level or the fluctuation of prices, and the array can shrink all the way to the vanishing point when the price is specified by a third party, if his specification does not happen to coincide with trade-offs mutually acceptable to entities contemplating transactions. Price fixing as a process cannot be defined by its hoped for results — “a decent wage,” “reasonable farm prices,” “affordable housing.” Price fixing does not represent simply windfall gains and losses to particular groups according to whether the price happens to be set higher or lower than it would be otherwise. It represents a net loss to the economy as a whole to the extent that many transactions do not take place at all, because the mutually acceptable possibilities have been reduced. The set of options simultaneously acceptable to A and B is almost inevitably greater than the set of options simultaneously acceptable to A, B, and C — where C is the third party observer with force, typically the government.

The form in which force is applied to constrain price communication varies widely, including (1) establishing an upper limit beyond which force will be applied (fines, jail, confiscation, etc.) to anyone charging and/or paying such prices, (2) establishing a lower limit, (3) indirectly raising some prices by taxing particular items moreso than others, and indirectly lowering some prices by subsidizing the product with assets forcibly transferred from the taxpayers rather than having the product paid for only by assets voluntarily transferred by consumers of that product.

Direct price controls are not the only method of superseding the market. Other methods include forcibly controlling the characteristics (“quality”) of the product, forcibly restricting competition in the market, forcibly changing the structure of the market through antitrust laws, and comprehensive economic “planning” backed by force. Again, the use of force is emphasized here not simply because of the incidental unpleasantness of force, but because the essential communication of knowledge is distorted when what can be communicated is circumscribed. All these ways of distorting the free communication of knowledge (preferences and technological constraints) have been growing, but each has its own distinct characteristics.

CONTROLLING PRICES

FORCIBLY RAISING PRICES

Minimum wage laws and laws forbidding businesses from selling goods “below cost” are typical of government’s forcibly setting a lower limit to price fluctuations. Although minimum wage laws may be more extensive in their coverage, the laws against particular businesses’ selling “below cost” are more readily revealing as to the nature and distortions of such processes.

It may seem strange — indeed, incomprehensible — that a business enterprise set up for the explicit purpose of making a profit would have to be forcibly prevented from selling at a loss, quite aside from the larger social question of whether such a prohibition benefits the economy as a whole. Yet much government regulation — of airlines, railroads, various agricultural markets, and of imported goods in general — limits how low prices will be allowed to go, whether in the explicit language of forbidding sales “below cost” or of preventing “ruinous competition,” “dumping,” “predatory pricing,” or more positively of “stabilizing the industry” or creating “orderly markets” or other euphonious synonyms for price fixing.

In addition to these direct prohibitions on lower prices, the administration and judicial interpretation of antitrust laws makes sales “below cost” damning evidence against a business. Moreover, the government’s required permission to enter various regulated industries or professions — transportation, broadcasting, medicine, etc. — is often denied or restricted to keep competition from forcing prices “too low” or “ruining” incumbents — often erroneously described as “the industry.”