When Free-Market Prices Are Banned
One would think that basic economics and economic history, including a century of communist experiments, have demonstrated one thing: when prices are forbidden to adjust, shortages are created, the allocation of goods by government becomes a nightmare, and black markets develop. It would seem that especially in times of emergency, whatever government does, it should leave prices alone.
Prices of medical products related to the current epidemic (face masks, disinfecting products, medical gowns and gloves, ventilators, and such) just like prices of common consumer goods were already capped by states’ “price gouging” laws triggered by the governors’ emergency declarations. Price controls have been further tightened by President Trump’s March 23 Executive Order on Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19 and by the March 25 Notice of Designation of Scarce Materials or Threatened Materials issued by the Department of Health and Human Resources. Not surprisingly, shortages have appeared.
Note that, in a free society, if a government wanted to put its hands on a good or service, nothing would prevent it from bidding on the free market like everybody else. A free-market price is the result of a continuous auction. But—and that’s the problem from Leviathan’s viewpoint—the government would have to compete against private bidders, such as individuals or private hospitals. In a statist regime, the majestic state will not humiliate itself into having to bid against ordinary people.
In a shortage situation created by itself, a government may choose to buy things instead of requisitioning them. It will then benefit from the low prices it mandated, which is also a form of requisition. Moreover, it will probably find ways to get in front of the queue. Axios reported an amusing event (“Inside the Start of the Great Virus Airlift,” March 29, 2020): the federal government bought 60% of the total load of medical supplies and all the N95 masks carried on the first FEMA-chartered plane coming from Asia—from Shangai of all places. (And we who thought that imports from China were a calamity!)
Producers and middlemen who hold stocks of the price-controlled products are faced with a quantity demanded much greater than what they can supply; and they are forbidden by law to let prices rise and signal where are the most-valued uses and the most imperative demands. What are they going to do? Sell to the first-come, more or less haphazardly? Ration themselves the product among their customers? In the case of “scarce” or “threatened” products, this might be risky as it could bring on them the wrath of the central planner.
So, reveals an interesting Wall Street Journal story (“Manufacturers Seek U.S. Help in Deciding Where to Ship Scarce Medical Goods,” March 29, 2020), the producers and distributors beg the government to tell them to whom they should ship their products. Two short excerpts:
“We just cannot and never will have a window into what the most urgent need is,” said Scott Whitaker, chief executive of the Advanced Medical Technology Association, a trade association that represents producers of medical devices. …
Charlie Mills, chief executive of Medline Industries Inc., a large privately held manufacturer and distributor of medical supplies, said as the company works to ramp up its production of supplies, it is being inundated with orders. He said he would welcome the government having a “strong say” in how to respond.
Since prices are not allowed to rise with rising short-run marginal costs, the shortage will continue. (In fact, it will continue even in the long term if the long-run industry curve shows diminishing returns to scale.) As by an invisible hand, the government will be pushed into doubling-down on authoritarianism. This reaction was illustrated by Trump’s bossing General Motors around and by Peter Navarro’s talking tough, which is easy when you have laws and decrees and armed men behind you. Navarro is Trump’s new “equipment czar”; the informal title says everything.
A little secret, though, lied in plain sight in Soviet Russia and Eastern Europe, or in Venezuela more recently: coercion does not work very well and does not relieve shortages (although it may be effective in getting the goods in the hands of the Prince’s favorites). The same was true was true when the French government controlled the price and allocation of wheat in the 18th and 19th centuries. In his Treatise on Political Economy (first edition: 1803), Jean-Baptiste Say observed:
Markets are never well supplied by gendarmes and henchmen. [My more literal translation of the original French: “Les marchés ne sont jamais garnis de denrées par des gendarmes et des sbires.”]
When the government bans products or, what partially amounts to the same, caps their prices, black markets develop. Americans being very entrepreneurial, the contrary would be astonishing here. There are some indications that this is starting. The attack on “hoarding” by the president and his attorney general is a move against black markets and is very similar to the reaction of all governments that control prices. Peter Navarro, who—to maintain my academic tone—is not the most knowledgeable and enlightened henchman in the president’s entourage, declared (“‘This is War’: President’s Equipment Czar to Use Full Powers to Fight Coronavirus,” Wall Street Journal, March 28, 2020):
This is war. … The clear signal President Trump wants to send to anybody who thinks they can hoard or price gouge is that they must immediately move their inventory out of their warehouses and offer them at a fair price.
On July 26, 1793, during the Reign of Terror, the National Convention, the most liberticidal parliament that followed the 1789 French Revolution, made hoarding a capital crime and ordered hoarders (“les accaparateurs“) to declare and put for sale the essential products they had. (See Florin Aftalion, L’économie de la Révolution française, Hachette, 1987, p. 356) By that time, needless to say, the individual rights guaranteed in the Declaration of the Rights of Man and the Citizen had been forgotten. These were difficult times, times of emergency.
President Trump even suggested that some hospital employees might be stealing masks (the Wall Street Journal says “mismanaging” masks; “White House Extends Social-Distancing Guidelines Until End of April,” March 30), presumably to sell them on the black market:
“Where are the masks going?” Mr. Trump asked, adding later, “I don’t think it’s hoarding. I think it’s maybe worse than hoarding.”
Theft is, of course, to be condemned, which also covers the cases when the government seizes legitimately obtained private hoardings. Black markets may not be the best way to cultivate virtue but they are mostly a morally legitimate business. For the buyers, they provide a welcome escape route from inescapable shortages. “Hoarders and speculators,” as governments usually call them, are very useful.
Perhaps unwittingly, the Wall Street Journal gave us a glimpse at the legendary inefficiency of government allocation (by FEMA, in this case) when it revealed that, in an attempt to organize the allocation of medical supplies,
FEMA last weekend sent a spreadsheet to producers and distributors.
Not much has changed since old-time government allocation, except that it’s now done electronically. When price adjustment is forbidden, you get the government of the spreadsheet, by the spreadsheet, for the spreadsheet.