Economic Sophisms

High Prices and Low Prices
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Second Series, Chapter 5

I feel it my duty to present to the reader certain—alas, theoretical—comments on the illusions to which the expressions
high prices and
low prices give rise. At first glance, I know, people may be inclined to consider these comments a little abstruse; but the question is, not whether they are abstruse, but whether they are true. Now, I believe that they are not only perfectly true but particularly well suited to raise some doubts in the minds of those—by no means few in number—who have a sincere faith in the efficacy of protectionism.

Whether we are advocates of free trade or proponents of restrictive measures, we are all obliged to make use of the expressions
high prices and
low prices. The former proclaim themselves in favor of low prices, with a view to the interests of the consumer; the latter declare themselves in favor of high prices, having regard for the interests of the producer. Others take a middle position and say: “The producer and the consumer are one and the same person”; thereby leaving it quite undecided whether the law should aim at high prices or at low.

Faced with this conflict, the law, it would seem, has only one alternative, and that is to permit price to be arrived at naturally. But then one has to meet the objections of the implacable enemies of laissez faire. They absolutely insist that the law intervene, even without knowing in what direction. Yet it is incumbent upon those who want to use the law for the purpose of creating artificially high or unnaturally low prices to explain the grounds of their preference. The burden of proof rests exclusively upon them. Hence, it follows that free trade is always to be deemed good until the contrary is proved, for free trade consists in allowing prices to be arrived at naturally.

But the roles have been reversed. The advocates of high prices have succeeded in making their system prevail, and it is incumbent upon the proponents of natural prices to prove the superiority of theirs. On both sides the argument turns on the meaning of two expressions, and it is therefore essential to ascertain just what these two expressions really mean.

But first we must call attention to a series of events that may well disconcert the champions of both camps.

In order to
raise prices, the restrictionists have obtained protective tariffs; and, much to their surprise and disappointment, prices have fallen.

In order to
reduce prices, the freetraders have sometimes succeeded in securing the adoption of their program, and, to their great astonishment, what followed was a rise in prices.

For example, in France, in order to favor agriculture, a duty of twenty-two per cent was imposed on foreign wool; and yet domestic wool has been selling at a lower price after the law than it did before.

In England, for the relief of the consumer, the duty on wool was reduced and finally removed entirely; and yet the price of English wool is higher than ever before.

And these are not isolated cases, for there is nothing unique about the price of wool that exempts it from the general law governing all prices. The same result is produced whenever the circumstances are analogous. Contrary to every expectation, a protective tariff has more often brought about a fall, and competition more often a rise, in commodity prices.

Then the debate reached the height of confusion with the protectionists saying to their adversaries: “It is our system that brings about these low prices of which you boast so much,” and the latter replying: “It is free trade that brings about those high prices that you find so advantageous.”
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Would it not be amusing to see
low prices in this way become the password in the rue Hauteville, and
high prices in the rue Choiseul?
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Evidently there is in all this a misunderstanding, an illusion, that needs to be dispelled, and this is what I shall now attempt to do.

Imagine two isolated nations, each containing a million inhabitants. Suppose that, other things being equal, one of them has twice as much of everything—wheat, meat, iron, furniture, fuel, books, clothing, etc.—as the other. Evidently, then, one is twice as rich as the other.

However, there is no reason to assert that
money prices will differ in these two countries. They may even be higher in the richer country. It may be that in the United States everything is nominally more expensive than in Poland, and that the American people are nevertheless better provided in all respects; whence we see that what constitutes wealth is, not the money prices of goods, but their abundance. Hence, when we wish to compare protectionism and free trade, we should not ask which of the two produces low prices and which produces high prices, but which leads to abundance and which leads to scarcity.

For it should be noted that, when products are exchanged, a relative scarcity of everything and a relative abundance of everything leave the money prices of things at exactly the same point, but not the relative condition of the inhabitants of the two countries.

Let us enter a little more deeply into this subject.

When tariff increases and reductions are found to produce effects directly contrary to those expected of them—a fall in prices often following a higher duty, and a rise in prices sometimes accompanying the removal of a duty—it becomes the obligation of political economy to seek an explanation of phenomena that controvert all our accepted ideas; for needless to say, science—if it is to be worthy of the name—is but the faithful description and correct explanation of events.

Now, the one that we are examining here can be quite satisfactorily accounted for by a circumstance that must never be lost sight of, namely, that high prices have
two causes, and not just one.

The same is true of low prices.
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One of the best-established principles of political economy is that prices are determined by the relation between supply and demand.

There are, then, two factors that influence prices: supply and demand. These factors are inherently variable. They can work together in the same direction, or they can work in opposite directions, and in infinitely varied proportions in either case. Hence, prices are the resultant of an inexhaustible number of combinations of these two factors.

Prices may rise, either because the supply diminishes or because the demand increases.

They may fall, either because the supply increases or because the demand diminishes.

Hence, there are two types of high prices and two types of low prices.

High prices of the bad type are the results of diminution in the supply, for this implies scarcity and therefore
privation (such as was experienced this year in regard to wheat);
high prices of the good type result from an increase in demand, for this presupposes a rise in the general level of prosperity.

In the same way,
low prices are desirable when they have their source in abundance, and are lamentable when they are caused by a cessation in demand resulting from the poverty of the consumer.

Now, please observe that a policy of protectionism tends to produce, at the same time, both the bad type of high prices and the bad type of low prices: the bad type of high prices, in that it diminishes the supply of goods—which, indeed, is its avowed purpose; and the bad type of low prices, in that it also reduces demand, since it encourages unwise investment of both capital and labor, and burdens the consumer with taxes and restrictions.

Hence,
so far as prices are concerned, these two tendencies neutralize each other; and that is why this system, which restricts demand at the same time as supply, does not in the long run result even in the high prices that are its object.

But, so far as the condition of the population is concerned, these two tendencies do not neutralize each other; on the contrary, they co-operate in making it worse.

The effect of free trade is precisely the opposite. In its general consequences, it may likewise fail to result in the low prices it was intended to produce; for it, too, has two tendencies, the one toward a desirable reduction in prices effected by an increase in the supply, i.e., by way of abundance, and the other toward an appreciable rise in prices resulting from an increase in demand, i.e., in general wealth. These two tendencies neutralize each other in regard to
money prices; but they co-operate in improving the well-being of the population.

In short, in so far as a policy of protectionism is put into effect, men retrogress toward a state of affairs in which both supply and demand are enfeebled; under a system of free trade, they advance toward a state of affairs in which both supply and demand increase together without necessarily affecting money prices. Such prices are not a good criterion of wealth. They may very easily remain the same, whether society sinks into the most abject poverty or advances to a high level of prosperity.

The following remarks may serve to illustrate this point briefly.

A farmer in the south of France thinks he has the treasures of Peru in his hand because he is protected by tariffs from foreign competition. It makes no difference that he is as poor as Job; he nonetheless believes that sooner or later the policy of protectionism will make him rich. In these circumstances, if the question is put to him, in the terms in which it was framed by the Odier Committee: “Do you want to be subject to foreign competition—yes or no?” his first reaction is to answer, “No,” and the Odier Committee
21* proudly gives wide publicity to his answer.

However, one must probe a little more deeply into the matter. Unquestionably, foreign competition—and indeed, competition in general—is always irksome; and if one branch of industry alone could get rid of it, business in that branch would for some time be very profitable.

But protection is not an isolated privilege; it is a system. If it tends to create, to the profit of the farmer, a scarcity of grain and of meat, it tends also to create, to the profit of other producers, a scarcity of iron, of cloth, of fuel, of tools, etc. that is, a scarcity of everything.

Now, if the scarcity of wheat tends to raise its price on account of the diminution in the supply, the scarcity of all the other commodities for which wheat is exchanged tends to lower the price of wheat on account of the diminution in demand; so that it is by no means certain that in the long run the price of wheat will be one centime higher than under a system of free trade. All that is certain is that, since there is less of everything in the country, everyone will be less well provided in every respect.

The farmer really ought to ask himself whether it would not be better for him if a certain quantity of wheat and livestock were imported from abroad, so long as, on the other hand, he was surrounded by a well-to-do population, able to consume and pay for all sorts of agricultural products.

Suppose there were a department in France in which the inhabitants were clothed in rags, dwelt in hovels, and lived on chestnuts. How could you expect agriculture to flourish there? What could you make the earth produce with any reasonable hope of fair return? Meat? It would form no part of their diet. Milk? They would have to be content to drink water. Butter? For them it would be a luxury. Wool? They would use as little of it as possible. Is it to be supposed that all these consumers’ goods could be thus forgone by the masses without exerting a downward pressure on prices concomitantly with the upward pressure exerted by protectionism?

What we have said of the farmer is just as true of the manufacturer. Textile manufacturers assert that foreign competition will lower prices by increasing the supply. Granted; but will not these prices rise again as a result of an increase in demand? Is the consumption of cloth a fixed, invariable quantity? Does everyone have as much of it as he could and should have? And if the general level of prosperity was raised by the abolition of all these taxes and restrictions, would not the first use that people would make of the money be to clothe themselves better?

The problem—the eternal problem—then, is not whether protectionism favors this or that particular branch of industry; but whether, all things considered, restriction is,
by its very nature, more productive than free trade.

Now, no one ventures to maintain this. Otherwise people would not always be granting that we are “right in principle.”

If this is the case, if restriction is advantageous to each particular branch of industry only by impairing the general well-being to an even greater extent, we must conclude that money prices in themselves express a relation between each particular branch of industry and industry in general, between supply and demand, and, accordingly, that a
remunerative price, which is the object of protectionism, far from being realized by such a policy, is actually rendered impossible by it.
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Addendum

The article that we published under the title, “High Prices and Low Prices,” has brought us the following two letters, which we present here, together with our replies:

Dear Editor:

You are upsetting all my ideas. I used to be a staunch champion of free trade and found it very persuasive to use
low prices as an argument. Everywhere I went, I used to say: “Under a system of free trade, bread, meat, wool, linen, iron, and fuel are going to be cheaper.” This displeased those who sold these commodities, but pleased those who bought them. Now you are raising doubts about whether free trade will, in fact, result in
low prices. If not, of what use is it? What will people gain by it, if foreign competition, which can injure them in their sales, brings them no advantage in their purchases?

Dear Freetrader:

Allow us to inform you that you only half read the article that inspired your letter. We said that free trade acts in the same way as roads, canals, railways, and everything else that facilitates communication by removing obstacles. Its first tendency is to increase the supply of the duty-free commodity, and consequently to lower its price. But, by increasing at the same time the supply of everything else for which this commodity may be exchanged, it concomitantly increases the
demand for it, and its price accordingly goes up. You ask how people will gain by free trade. Suppose you have a balance consisting of several scales, in each of which there are a certain number of the items that you have enumerated. If you add a little wheat to one scale, it will tend to tip the balance; but if you add a little cloth, a little iron, and a little fuel to the other scales, the equilibrium will be restored. So far as the beam is concerned, nothing has changed. But so far as the people are concerned, they are evidently better fed, better clothed, and better housed.

Dear Editor:

I am a textile manufacturer and a protectionist. I confess that your article on “High Prices and Low Prices” is causing me to reconsider my position. It has a certain plausibility about it that would require only a conclusive proof to bring about a conversion.

Dear Protectionist:

We say that the object of your restrictive measures is something evil, namely,
artificially high prices. But we do not say that they always realize the hopes of those who support them. It is certain that they inflict on the consumer all the evil consequences of
high prices. But it is not certain that they invariably confer any of the expected benefits on the producer. Why? Because while they diminish the supply, they also diminish the demand.

This proves that in the economic arrangement of this world there is a moral force, a healing power, that makes unjust ambition ultimately meet with disappointment.

Be good enough to observe, sir, that one of the factors making for the prosperity of each individual branch of industry is the general wealth of the community. The
price of a house depends not only on its original cost but also on the number and economic status of the occupants. Do two houses that are exactly similar necessarily have the same price? Certainly not, if one is situated in Paris and the other in Lower Brittany. One should never speak of price without taking all the relevant
circumstances into consideration, and one should recognize quite clearly that no undertaking is more futile than that of trying to base the prosperity of the parts on the ruination of the whole. And yet this is what the policy of protectionism seeks to do.

Competition always has been and always will be troublesome to those who have to meet it. That is why men have always and everywhere struggled to rid themselves of it. We (and perhaps you, too) are acquainted with a municipal council in which the resident merchants wage violent war on nonresident merchants. Their projectiles are their exactions for local permits to stall animals, for licenses to set up stands for the sale of goods, for bridge-tolls, etc., etc.

Now, consider what would have become of Paris if this war had been waged successfully there.

Suppose that the first shoemaker who established himself there had succeeded in keeping out all others; that the first tailor, the first mason, the first printer, the first watchmaker, the first hairdresser, the first doctor, and the first baker had all likewise been successful in maintaining a monopoly on their services. Paris today would still be a village of from 1,200 to 1,500 inhabitants. Instead, the market has been open to everyone (save those whom you still debar), and this is precisely what has made it the great metropolis it is today. For the enemies of competition it has meant only a long series of vexations; but it has made Paris a city of a million inhabitants. No doubt it has raised the general level of prosperity; but has it been detrimental to the individual prosperity of the shoemakers and the tailors? That is the essential question you have to ask yourself. As competitors arrived, you would have said, “The price of shoes is going to fall.” But has it fallen? No; for if the
supply has increased, the
demand has increased as well.

The same will be true of cloth, sir; let it be imported duty-free. You will have more competitors, it is true; but you will also have more customers, and what is more, they will be richer. Has this never occurred to you on seeing nine-tenths of your fellow countrymen in the winter obliged to do without that cloth which you weave so well?

If you wish to prosper, let your customer prosper. This is a lesson it has taken you a very long time to learn.

When people have learned this lesson, everyone will seek his individual welfare in the general welfare. Then jealousies between man and man, city and city, province and province, nation and nation, will no longer trouble the world.