Back to basics
I
guess it is not really surprising that leftists and other social
constructivists believe that prices are similarly an arbitrary social
construction so that it is possible to set price controls for a product
and that way make it more affordable to people. They don't seem to
realize that if price controls are used to force the price of some
product to be lower than its free market price, the buyers of the
product will pay the difference some other way, and probably even more.
And this will happen even if we assume that sellers are perfect
exemplars of the species Homo Sovieticus so that the lower price will not make them produce less.
Consider a simple microworld where a certain number of widgets is produced and sold, and there is a set of potential buyers who differ by how much money they have and how eager they are to buy a widget. Let's assume that if the prices are set by the free market, a widget comes to cost $150, at which price there are as many willing buyers as there are widgets. But suppose the leftists are in power and decide that this price is too high, because some people are too poor to buy a widget even though they deserve to have one. To correct this, they impose price controls so that the maximum price of a widget is set to $100. As a thought experiment, what will now happen in this microworld?
When the price is set to $100, there are more willing buyers than there are widgets. It is not possible for all of them to get a widget, so some mechanism necessarily decides which buyers get widgets. First, perhaps the widgets are sold to buyers in the order in which they arrive to buy them. In this systems the buyers compete with each other who is willing to arrive earliest and wait in the line the longest time. This competition is won by those buyers for whom time has the least value. Instead of immediately buying the widget for $150, they pay $100 and lose time up to an amount that is worth $50 to them, whereas every other person waiting in line behind them lost time and gained absolutely nothing.
But perhaps those who succeeded in buying a widget actually benefited from the price controls, since the time they spent in line was worth less than $50 to them! But if there really are people for whom waiting time is cheaper than for others, other buyers will hire such people to wait in line for them (say, perhaps college students who want to study for a final exam). As other buyers either do the same or give up the necessary waiting time needed to buy a widget grows so long that it is worth $50 for every successful buyer. The price control therefore benefited no one, not even those who managed to buy a widget for $100.
The previous scenario requires that the place and time where and when widgets are sold are well known. A well-known example are tickets to popular concerts and sports events which are sold too cheaply compared to their demand and people who want them therefore have to pay the difference by waiting in line, as described above. I wonder if there is any other area in life than concert tickets in which the concept of scalping even exists: why do concert promoters obviously sell the tickets too cheaply? Why don't they raise the prices so that you don't have to buy one in the first ten minutes, but could wait a week or so, perhaps in some form of Dutch auction? I can think of two reasons for this: the fans lining up are good media promotion, and the promoters are afraid of fan backlash in the sense of "Dammit, who do they think they are, success has gone to their heads, so I'm gonna be an individual and rebel and go see something else". The average fan can accept not getting a ticket because he was too slow (besides, this race for tickets proves that the band is great and thus validates his liking it), but not getting a ticket because he wasn't willing to pay as much as others reminds him of his real place in society, which makes him channel this resentment towards the band.
What if widgets are produced occasionally in many different places so that each widget is sold to the first buyer who arrives to buy it? Wouldn't the buyers now benefit from the price controls? No, because the fact that the buyers somehow have to compete with each other who gets the widget hasn't gone anywhere. Instead of competing with waiting time, the buyers now compete who gets to build the most efficient social network that alerts them for a widget coming to market. I seriously doubt that building and maintaining such networks is free. Some lucky people are perhaps better in maintaining networks, but they will eventually have to pay for the tips, otherwise their competitors will pay more and get them. Even so, compared to the clear information that prices convey in the free market, even the best social networks is essentially running around blind, resulting in horrible the economic inefficiencies.
So far, we haven't even made any assumptions on how the price control affects the widget producers. Of course, the lower price guides the produces manufacture fewer widgets, not more. Some marginal buyers again get hurt, not being to able to buy a widget even for the full price.
The next possible way for the buyers to compete for widgets is to pay the price difference secretly to the seller. Such competition between the buyers will result in the price control being meaningless, since to buy a widget you have to pay the full market price $150. Of course, this scenario absolutely requires that it is possible for the seller to refuse to sell a widget to a buyer.
But if the seller cannot refuse when someone comes in and slams the $100 on the table, because otherwise the buyer will go to the police and complain about discrimination, resulting in the seller being thrown to jail? In this case, it is not worthwhile for the seller to even stock the widget, but to sell them wedon'thave instead, while the widget is sold for $150 in the black market. Actually, the price now becomes higher than $150, since it has to cover the cost of maintaining the black market (again, with the lack of public price information, it is running around blind) and the risk of the police finding out and arresting the black market profiteers. Of course they can bribe the police not to arrest then, but these bribes will be passed on to the buyers.
Leftists now probably complain that the model doesn't apply in the real world since in reality, most people are not cruel bastards who "compete" with each other but altruists who want to help other people. Therefore some social control mechanism would emerge among buyers that would direct the widgets towards the buyers who deserve them most (poor, orphans, minorities) who could then buy the widgets for $100 when the other buyers voluntarily give up the competition. Such analysis ignores the costs of producing the propaganda (for the lack of a better word) that convinces the other buyers to give up. Living as a noble and sympathetic victim group (instead of just a plain old victim group) also imposes its own costs: sympathy and goodwill are not free. There are also the costs of wining and dining the commissar (or whatever job title that person has in the proposed system) whose job it is to determine which potential buyer most deserves to buy a widget.
One last possibility is that the excess buyers start competing with each other directly with violence and threat of such, sabotage etc., this way lowering the demand so that the real market price becomes $100. The cost of winning this competition of course escalates to at least $50 per widget. Assuming such competition is even possible so that the police and the legal system can't prevent it: but if they can't do so, they can't enforce the price controls either.
The phenomena described above follow pretty much common sense from the setup of the microworld. I am sure all readers can think of examples of the same phenomena occurring in the real world. Since a leftist by definition believes that price controls and other forms of central planning can and do work, I would have to give up all the above reasoning to become a leftist. This is probably not likely to happen.
Consider a simple microworld where a certain number of widgets is produced and sold, and there is a set of potential buyers who differ by how much money they have and how eager they are to buy a widget. Let's assume that if the prices are set by the free market, a widget comes to cost $150, at which price there are as many willing buyers as there are widgets. But suppose the leftists are in power and decide that this price is too high, because some people are too poor to buy a widget even though they deserve to have one. To correct this, they impose price controls so that the maximum price of a widget is set to $100. As a thought experiment, what will now happen in this microworld?
When the price is set to $100, there are more willing buyers than there are widgets. It is not possible for all of them to get a widget, so some mechanism necessarily decides which buyers get widgets. First, perhaps the widgets are sold to buyers in the order in which they arrive to buy them. In this systems the buyers compete with each other who is willing to arrive earliest and wait in the line the longest time. This competition is won by those buyers for whom time has the least value. Instead of immediately buying the widget for $150, they pay $100 and lose time up to an amount that is worth $50 to them, whereas every other person waiting in line behind them lost time and gained absolutely nothing.
But perhaps those who succeeded in buying a widget actually benefited from the price controls, since the time they spent in line was worth less than $50 to them! But if there really are people for whom waiting time is cheaper than for others, other buyers will hire such people to wait in line for them (say, perhaps college students who want to study for a final exam). As other buyers either do the same or give up the necessary waiting time needed to buy a widget grows so long that it is worth $50 for every successful buyer. The price control therefore benefited no one, not even those who managed to buy a widget for $100.
The previous scenario requires that the place and time where and when widgets are sold are well known. A well-known example are tickets to popular concerts and sports events which are sold too cheaply compared to their demand and people who want them therefore have to pay the difference by waiting in line, as described above. I wonder if there is any other area in life than concert tickets in which the concept of scalping even exists: why do concert promoters obviously sell the tickets too cheaply? Why don't they raise the prices so that you don't have to buy one in the first ten minutes, but could wait a week or so, perhaps in some form of Dutch auction? I can think of two reasons for this: the fans lining up are good media promotion, and the promoters are afraid of fan backlash in the sense of "Dammit, who do they think they are, success has gone to their heads, so I'm gonna be an individual and rebel and go see something else". The average fan can accept not getting a ticket because he was too slow (besides, this race for tickets proves that the band is great and thus validates his liking it), but not getting a ticket because he wasn't willing to pay as much as others reminds him of his real place in society, which makes him channel this resentment towards the band.
What if widgets are produced occasionally in many different places so that each widget is sold to the first buyer who arrives to buy it? Wouldn't the buyers now benefit from the price controls? No, because the fact that the buyers somehow have to compete with each other who gets the widget hasn't gone anywhere. Instead of competing with waiting time, the buyers now compete who gets to build the most efficient social network that alerts them for a widget coming to market. I seriously doubt that building and maintaining such networks is free. Some lucky people are perhaps better in maintaining networks, but they will eventually have to pay for the tips, otherwise their competitors will pay more and get them. Even so, compared to the clear information that prices convey in the free market, even the best social networks is essentially running around blind, resulting in horrible the economic inefficiencies.
So far, we haven't even made any assumptions on how the price control affects the widget producers. Of course, the lower price guides the produces manufacture fewer widgets, not more. Some marginal buyers again get hurt, not being to able to buy a widget even for the full price.
The next possible way for the buyers to compete for widgets is to pay the price difference secretly to the seller. Such competition between the buyers will result in the price control being meaningless, since to buy a widget you have to pay the full market price $150. Of course, this scenario absolutely requires that it is possible for the seller to refuse to sell a widget to a buyer.
But if the seller cannot refuse when someone comes in and slams the $100 on the table, because otherwise the buyer will go to the police and complain about discrimination, resulting in the seller being thrown to jail? In this case, it is not worthwhile for the seller to even stock the widget, but to sell them wedon'thave instead, while the widget is sold for $150 in the black market. Actually, the price now becomes higher than $150, since it has to cover the cost of maintaining the black market (again, with the lack of public price information, it is running around blind) and the risk of the police finding out and arresting the black market profiteers. Of course they can bribe the police not to arrest then, but these bribes will be passed on to the buyers.
Leftists now probably complain that the model doesn't apply in the real world since in reality, most people are not cruel bastards who "compete" with each other but altruists who want to help other people. Therefore some social control mechanism would emerge among buyers that would direct the widgets towards the buyers who deserve them most (poor, orphans, minorities) who could then buy the widgets for $100 when the other buyers voluntarily give up the competition. Such analysis ignores the costs of producing the propaganda (for the lack of a better word) that convinces the other buyers to give up. Living as a noble and sympathetic victim group (instead of just a plain old victim group) also imposes its own costs: sympathy and goodwill are not free. There are also the costs of wining and dining the commissar (or whatever job title that person has in the proposed system) whose job it is to determine which potential buyer most deserves to buy a widget.
One last possibility is that the excess buyers start competing with each other directly with violence and threat of such, sabotage etc., this way lowering the demand so that the real market price becomes $100. The cost of winning this competition of course escalates to at least $50 per widget. Assuming such competition is even possible so that the police and the legal system can't prevent it: but if they can't do so, they can't enforce the price controls either.
The phenomena described above follow pretty much common sense from the setup of the microworld. I am sure all readers can think of examples of the same phenomena occurring in the real world. Since a leftist by definition believes that price controls and other forms of central planning can and do work, I would have to give up all the above reasoning to become a leftist. This is probably not likely to happen.
But what about a situation where the price control is introduced in order to fight price-fixing? I at least suppose that price controls would be used mainly in situations where the cost of producing a widget is well below the market price, so that there should still be incentive to produce widgets for all customers.
Posted by Anonymous | 4:56 PM