Knowledge And Decisions

Interest rate ceilings — usury laws — tend similarly to reduce a major service performed by the lender (risk taking) by causing him to eliminate more borrowers as insufficiently good risks. When one considers that the risk of losing money considerably exceeds 50 percent when drilling an oil well (that is, a well whose hoped-for result is oil), it is clear that high risk alone will not deter capital suppliers if the rate of return is allowed to vary sufficiently to compensate the risk. But by forcibly restricting the rate of return on personal loans to what is “reasonable” in the experience of good-credit-risk, middle-class people who write such laws, credit is often denied or restricted to low income people who may be only slightly less dependable risks and would be able to get credit at only slightly higher interest rates. Instead, they are left with no other choice but to resort to illegal “loan sharks” whose interest rates are much higher and whose collection methods are much rougher. Like other forms of price controls, usury laws distort the communication of correct facts about credit risks without in any way changing those facts themselves.

One of the more dramatic recent examples of the effect of forcibly keeping prices below the market level has been the so-called “gasoline crisis” of 1979. Because of the complexities in long-standing government regulations controlling the price of gasoline, their full effects began to be felt in the spring of 1979. As in the case of rent control, the effects were not primarily on the quantity of the physically defined product — gallons of gasoline in this case — but on the auxiliary services not articulated in the law. Just as rent control tends to reduce such auxiliary services as maintenance, heat, and hot water, so controlling the price of gasoline reduced such auxiliary services as hours of service at filling stations, credit card acceptance, and checking under the hood. Indeed, what was called a “gasoline shortage” was primarily a shortage of hours of service at filling stations, and the traumatic effects of this indicate that unarticulated aspects of the physically defined product are by no means incidental. In New York City, for example, the average filling station was open 110 hours a week in September 1978 and only 27 hours a week in June 1979.¹⁸ The actual amount of gasoline pumped declined by only a few percentage points, while the hours of service declined 75 percent. That is, filling stations tried to recoup their losses from price control by reducing the man-hours of labor they paid for, while the motorists’ losses of man-hours waiting in gasoline lines went up by many times what the filling stations had saved. Moreover, the motorists suffered from increased risks in planning long distance trips, given the unpredictability of filling station hours en route. This prospective psychic loss to motorists was reflected in dramatically declining business at vacation resorts, for example, but retrospective data on the actual amount of gasoline sold showed only small percentage declines. In short, the real cost of the so-called gasoline shortage was not simply the small statistical change in the quantity of the physical product, but the large prospective change in the ability to get it when and where it was wanted. As in so many other cases, objective retrospective data do not capture the economic reality.

FORCIBLY CHANGING COSTS

Costs to the economy as a whole may be given at a given time under given technology. But, even so, costs as experienced by the decision making unit can be raised by special taxes or lowered by subsidies. Any tax represents force used to influence decisions, and subsidies represent taxes forcibly extracted from others. It is indirect price fixing. A special tax, over and above the normal tax on items of similar value, misstates the cost transmitted through the economic system. The extra money paid by the consumer is not a loss suffered by the economy as a whole. The higher price is just an internal transfer of wealth among individuals in the same system — making the system as a whole no richer or poorer. What makes the system as a whole poorer are the transactions that do not take place because of the artificially high price. Where a high price conveys an actual scarcity of material or a reluctance of people to do certain work, then it accurately conveys information about the incremental cost to the economic system. But when the price is simply made higher by government fiat — whether by direct price fixing or by a special tax — then it conveys a false picture of the cost, thereby causing potential consumers to forego the product even though others are perfectly willing to supply it for a price that they are willing to pay.