Inflation, Price Fixing & Consequences

Due to the Fed having kept the interest rate at 0% for over 17 months, the destructive effects of inflation are now being felt all across the world. International stock exchanges, commodity prices, costs of housing, education and healthcare, all continue to rise despite massive unemployment, lack of capital investment and no shift in the fundamentals of the international economy. Unfortunately, since people perceive a rise in the stock market as the prophetic sign of good things to come, regardless of cause or context, most Americans remain oblivious to the other side, the dark side, of the inflationary coin that now swells like a tidal wave out on the open ocean: unnoticed, but inevitable and fast approaching. Soon, all time highs on the gold market will be joined by all time highs on the food market, and it is these price rises that will “cause” heartache and demands for federal action.

But since the average American politician or commentator is unable to think beyond the range of the moment, it is likely that the most simplistic, immediate, short-sighted solution will be put into effect – criminalize price increases, i.e. fix prices.

At first, this may appear to be a truly egalitarian policy. After all, what is the argument against price fixing? It is that if a price is set too low, then there will be more buyers than sellers and there will be a shortage. Yet, if prices are “allowed” to rise, or sky rocket, then only the wealthy can afford their bread, and why should we, the American people, allow only the wealthy to eat? Isn’t that also a shortage?

Leaving aside the moral questions here implicated, the answer lies in the long term inner workings of the pricing mechanism. When a price rises it sends a signal to the market that people “demand” a certain good and that they are willing and able to pay for it. Thus, when the price of bread sky rockets past the cost of say, yodels, food producers, and others looking to make the proverbial “buck”, enter the bread industry in order to “exploit” the people’s need for bread. Consequently, there will be a flood of new bread makers, the supply of bread will increase and the shortage will be solved or at the very least softened.

But under the alternative approach of price fixing the shortage is never solved and, more often than not, is worsened. Since the price is set artificially low, no one ever receives the signal that the people need bread. Thus, no “selfish” capitalists respond by “exploiting” the bread market and the people go hungry to a greater extent than they otherwise would have under “the corrupt, profit driven capitalist system”. Furthermore, those already in the bread industry now receive the signal that the people no longer want their product. After all, if they really wanted bread, would they refuse to pay for it? If you were told that the amount of money you make today is the most you will ever be paid until the government says so, how long would you remain in that profession? Thus, the shortage worsens and the government faces a new dilemma: “unleash” the market or make slaves of men.