Price Controls Don’t Work…unless We Call Them “Living Wages”

In 1850, Frederic Bastiat — one of the greatest of the classical economists — wrote what is arguably one of the most powerful essays which describes the foolishness of government intervention in the free market. In the parable of the broken window, he clearly explains that economic decision making can adequately be described as an iceberg — where what is seen on the surface is barely even a fraction of the story. It is not only that which is seen that is important, but it is that which is unseen — or under the surface — that holds more truth to the nature of economics and the market.

Almost 100 years later, Henry Hazlitt wrote his classic book Economics in One Lesson, the “one lesson” being the fallacy of the broken window. Hazlitt brings the story into the 20th century and shows that the truths in Bastiat’s parable apply to more than the glazier business. Yet, the most important facet of Hazlitt’s book isn’t necessarily found in any one of the chapters, but in the introduction where Hazlitt says,

[This book’s] effort is to show that many of the ideas which now pass for brilliant innovations and advances are in fact mere revivals of ancient errors, and a further proof of the dictum that those who are ignorant of the past are condemned to repeat it.

In other words, these fallacies aren’t going away. Whether in the papers of some ambitious economist or from the mouth of some noble-intentioned politician, the broken window fallacy will rear its ugly head over andover again.

Take price controls, for example. Anyone who has had an introduction to economics course knows the familiar concept of supply and demand. Supply being the stock of a good up for sale and demand being the hypothetical quantities the market will demand for that good at any particular price. When prices are free to fluctuate, then the ultimate price landed upon will allow everyone in the market who wants said good at that price to get it (ie: the equilibrium price).

However, if a control on the price is levied on the market and, say, restricts it from moving above a certain level (price ceiling), then there will be more people in the market who want the good at that price than there are sellers willing to sell the good at that price. In other words, a shortage will occur. Bastiat would say that we can see the lower prices and a shortsighted consumer may be delighted at this situation. However, what we do not see — at least not immediately — is the increased willingness to buy on the part of consumers and decreased willingness to sell on the part of suppliers.

The classic example of this principle at work was the 1973 oil crisis. The OLPEC nations, for political reasons, cut oil exports to the United States. In response, well-intentioned politicians enacted price controls on gasoline which, of course, led to shortages. Rather than having to deal with higher prices and maybe forgoing that weekend scenic drive, drivers too slow to get to the gas station after the pumps were refilled were forced to deal with no gas at all. This, in turn, led to arbitrary rationing of gasoline and popular discontent — all problems that could’ve been avoided with a free price system.

In contemporary times, price controls are a policy which are almost unanimously understood to be detrimental to consumer welfare in the economics community. While politics and economics may not necessarily line up all of the time, in the case of price controls on consumer goods, not many want to relive the situation that occurred in 1973. Taking Batiat’s advice would’ve have saved a lot of people a whole lot of trouble.

However, while price controls may be largely understood as foolish, should we change the name from “price control” to “minimum wage” and suddenly the policy is “necessary,” “obvious,” and helps “protect” workers from the big, bad businesses that are out to exploit the middle class.

Yes, minimum wages are in the news again, due in no small part to our benevolent Commander-in-Chief who recently voiced his approval of raising the federal minimum wage to $10.10 an hour. Of course, it wouldn’t be a foolish government program if multiple levels of government didn’t want to partake in the foolishness. Washington, D.C.’s city council recently came down unanimously in favor of raising the District’s minimum wage to $11.50 per hour. Voters in the town of SeaTac, Washington opted to raise their municipal minimum wage to $15 an hour!

Make no mistake, a wage is simply a price. Yes, the term wage is used exclusively to define the price of labor, but it is a price nonetheless and is built upon the same foundations as any other price in the market; namely, supply and demand.

So, why is something like a minimum wage so popular if it hopes to overcome something so fundamental (and insurmountable) as the forces of supply and demand? Your guess is as good as mine, but as with most foolish economic programs it is likely a mixture of economic ignorance and good intentions.

In one of his earlier works titled Omnipotent Government, Ludwig von Mises said,

In dealing with the problems of social and economic policies, the social sciences consider only one question: whether the measures suggested are really suited to bringing about the effects sought by their authors, or whether they result in a state of affairs which — from the viewpoint of their supporters — is even more undesirable than the previous state which it was intended to alter.

In other words, if a policy like the minimum wage is instituted to prevent people from getting paid at too low a level (“too low,” of course, being arbitrarily defined), then its effectiveness should be weighed against its ability to prevent people from getting paid below said level.

This is pretty intuitive. Yet, the popularity of the minimum wage rages on and it does so at such a level that one can only assume that it must be extremely effective at achieving its stated goals — namely, a better standard of living for low-skilled workers.

At this point, we should make it clear that the minimum wage does not, in fact, increase the likelihood that low skilled labor will magically be worth more to employers. Rather than raising the lowest wages up to or above the arbitrary price floor, it merely reduces those wages to zero.

If I pump gas for 5 dollars and hour and my work adds 6 dollars an hour of value to a company, then a $10 an hour minimum wage will reduce my wage to zero because I’ll be laid off. Simply passing a law doesn’t do anything to increase the value that pumping gas adds to a company — it only ties the hands of myself and the gas station owner and interposes itself in between a previous voluntary agreement we have made.

However, the more pernicious aspect of the minimum wage is not necessarily the effects that are clearly visible — like a low-skilled worker getting laid off shortly after an increase in the minimum wage — but, instead, the aspects that are unseen. Putting an arbitrary floor on wages restricts any new jobs from emerging that would be beneath that level. Jobs that would have otherwise existed now are never even allowed to exist in the first place.

Even more unfortunate is that, more often than not, the people who are still working after the increase are being paid at least the new minimum wage. Their work is visible, people can see them going to and fro about their work, but the guy sitting at home who would’ve had a job had the minimum wage not been raised is out of view and its likely that even he doesn’t recognize that his situation is due, in part, to the minimum wage hike.

The very nature of the program makes it incredibly difficult to shift opinion away from support. Not only do the “seen” (ie: the ones lucky enough to keep their jobs after a minimum wage hike) mask the situtation, but the very people being hurt by the hike, or the “unseen,” don’t even know it. It is a perfect system if you want to make a foolish program popular.

Frederic Bastiat

Of course, there are plenty of voodoo economists out there seeking to save the minimum wage. While I can’t go into the the various arguments in support of the minimum wage from an economic perspective and which claim that they do not, in fact, have negative effects on employment, but Donald Boudreaux at Cafe Hayek has been busy lately in his critique of their arguments. I encourage you to check out his posts on the subject (and this list isn’t even all of them) herehereherehereherehere, and, finally, here.

Perhaps the most unfortunate aspect of the minimum wage is that it traps people already at a disadvantage (because they are low skilled) into a cycle of joblessness. Low skilled labor becomes high skilled labor through work experience, but if we restrict the opportunities for them to get their feet wet and learn a trade, then we restrict them from ever getting to the point where they don’t have to worry about whether they’ll be paid $9 or $10 dollars an hour because the skills they’ve learned are so valuable.

This aspect is particularly evil when you take into account this argument made by economist Walter Williams,

Was racial discrimination in 1948 greater or less than racial discrimination today? In 1948, the unemployment rate for white 16-17 year olds was 10.2 percent while that for blacks was 9.4 percent. Among white 18-19 year-olds, unemployment was 9.4 percent and for blacks it was 10.5 percent. During that period, not only were the unemployment rates similar, black teenagers were either equally as active as whites in the labor force or more so.

As Donald Boudreaux further explains,

That is, the unemployment rate of black teenagers in 1948 was comparable to that of white teenagers, and about 2.5 times higher than the overall unemployment rate of 3.8%.  Today, the unemployment rate for black teenagers is much higher than that for white teenagers, and nearly 5 times higher than the overall unemployment rate of 7.3%…These facts about teenage unemployment are straightforwardly explained by the standard economic theory that predicts that a legislated minimum wage causes the lowest-skilled, most poorly educated, or otherwise least-desirable workers to be the first to be fired and the last to be hired.

Similar arguments have been made by Thomas Sowell.

So, when you go home for Christmas break and are sitting around the tree with your family and that one uncle (you know the one I mean) talks about the benevolence of our elected officials for seeking to correct societal ills through the minimum wage, perhaps you could entertain them with a story of a broken window.

Content published on the Young Americans for Liberty blog is only representative of the opinions and research of the individual authors. It does not necessarily reflect the views, goals, or membership of YAL.

Published in

Post a comment