Notes: Economics in One Lesson by Henry Hazlitt, chs. 17-18
Description: Fixing prices NEVER works… and this includes when it takes the form of minimum
wages!
Previous chapter: speculators serve a valuable function
CHAPTER 17: GOVERNMENT PRICE-FIXING
- We’ve seen that fixing the prices of commodities above the levels the market would have
them
o Now: turn to below their market level
o Nearly always happens during wartime
- Look at a single commodity
o Set the price level below natural level: price ceiling
o When govts do this, often for basic necessities
 They say: poor must be able to still get these products at reasonable prices
 Bread, milk, meat
Argument for holding down prices
- Price will be pushed up in free market by cmopetititve bidding so that only the rich will get it
- Schemes for price fixing usually being as way to “keep the cost of living from rising”
o They assume that theres something normal or special about the price at the moment
that the fixing begins
o Any price above the starting price is assumed to be unreasonable, regardless of
changes in supply and demand
- Two consequences much naturally occur when govt fixes price below market price
o 1. Increase demand
o 2. reduce supply
o bc people by more, the supply is more quickly taken from the shelves
o in addition, production is discouraged
o profit margins reduced/wiped out
o marginal producers are driven out
o even most efficient producers may be called upon to make the product at a loss
 ww2: slaughterhouses required by office of Price Admin to slaughter and
process meat for less than the cost of doing so
- fixing of a maximum price  shortage
o opposite of intent
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o when they limit the ewages and profits, discourage production, stimulate the
production of less essential goods
Some of these conseqs became apparent to the regulators  try other schemes
- rationing, cost-control, subsidies, universal price-fixing
when shortage comes along, rich are accused of hoarding, or taking more than their fair share
- my example: gas stations/pipeline burst
- govt then may put rules in place, who shall have priority, in what quantities, how shall it be
rationed
- no matter how much one would be willing to pay, can only have a certain amount
o what happens at this point?
o Points/coupons for rations become like money
- Govt may try to ensure supply through additional controlscosts of production
o May fix wholesale price of beef, price of live cattle, price of feed, wages of
farmhands, etc.
o As this price fixing continues on backwards through production structure, extends
same consequences
 Shortages!
 Labor
 Feedstuffs
 Wheat
 All capital goods
 Shortages in ever widening circles
o Govt may try to fix this situation by offering subsidies to farmers, producers, etc. to
continue producing
 Conseq: consumers are being subsidized
 Producers are getting no more for their milk, but the consumers are
getting their supply cheaper than the market price
 Unless the subsidized commodity is also rationed, those with most
purchasing power are subsidized the mostthey can buy the most
In the very short term, price fixing may seem to be effective
- In wartime, may seem to be working
- Longer it goes, most the difficulties
- When prices are arbitrarily held down by govt decree, demand is always in excess of supply
o Govt will try to extend price controls more and more vertically through production
structure, but also horizontally across the industry/economy.
 If ration one, must ration others as well
 As grows scarce, must put more pressure on the unrationed
commodities
 Consequence
o Won’t stop until completely regimented economy
o Wages must be held down
o Labor rationed
o Raw materials rationed
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
o Govt would tell each person how much he could have
 Tell manuf how much raw materials and labor he
could have
o Totalitarian econ
 Abandonment of libertries
Hamilton: “A power over a man’s subsistence amounts to a power
over his will.”
During WW2, esp in europe: some conseqs mitigated by black market
- People could stay alive by going on black market for necessities
- Some countires: black market kept growing until it became the de facto market
- Black market supplants price ceiling, but you can’t say that there was no harm done
o Economic and moral harm
 As price controls go into effect and black market emerges, the large, capital
intensive and long established firms are forced by govt edict to restrict or
cease production
 In their place comes overnight industries with little capital, experience, or
respect for the law
 These new firms are inefficient and turn out inferior and dishonest
goods at much higher production costs
 These new firms owe their existence to the fact that they are willing
to violate the law…. And their customers are willing to violate the
law as well to get what they want/need
 My example: drug cartels and the drug war
At the core of the effort to fix prices is misunderstanding of what causes prices to rise
- Real cause: either sc rcity of goods or surplus of money
o Legal price ceilings cannot cure either
o They merely intensify the shortage of goods
o Price fixing result of thinking of interests of people only as consumers and forgetting
about them as producers as well
o And the political support for these policies comes from similar confusion in the
publics mind
o People don't want to pay more for milk, butter, things
o Whenever prices rise on consumer goods, people feel like they've been wronged
To end the chapter:
“Each one of us, in brief, has a multiple economic personality. Each one of us is producer, taxpayer,
consumer. The policies he advocates depend upon the particular aspect under which he thinks of
himself at the moment. For he is sometimes Dr. Jekyll and sometimes Mr. Hyde. As a producer he
wants inflation (thinking chiefly of his own services or product); as a consumer he wants price
ceilings (thinking chiefly of what he has to pay for the products of others). As a consumer he may
advocate or acquiesce in subsidies; as a taxpayer he will resent paying them. Each person is likely to
think that he can so manage the politi- cal forces that he can benefit from the subsidy more than he
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loses from the tax, or benefit from a rise for his own product (while his raw mate- rial costs are
legally held down) and at the same time benefit as a con- sumer from price control. But the
overwhelming majority will be deceiving themselves. For not only must there be at least as much
loss as gain from this political manipulation of prices; there must be a great deal more loss than gain,
because price-fixing discourages and disrupts employment and production.”
CHAPTER 18: MINIMUM WAGE LAWS
Another way of fixing prices: price floor
A wage is in fact a price
Talking about the subject is always emotional and political biased: most discussions completely
ignore the fundamental principles
- First thing that happens after min wage law is passed for $30 for forty hr week  no one
who is not worth $30/week to an employer will be employed at all
- “You cannot make a man worth a given amount by making it illegal for anyone to offer him
anything less.”
o You deprive him of right to earn what his abilities and situation would permit
o Deprive community of his services
o Instead of a low wage, you get unemployment
 Harm all the way around
 Typical victims
 Elderly
 High school students
 Uneducated
 Homeless people
o One exception to this rule:
 When a group of workers is getting a wage actually below its market worth
 Likely only in special circumstances/localities where competitive
forces do not operate freely/adequately
One argument made: if law forces wages up, then industry can then just charge higher prices  then
burden is just shifted to consumers
- But this shift isn’t easily made
- And, conseqs of artificial wage raising are not easily escaped
o Higher price may not be possible
 May just drive consumers to substitute good
 Or, higher price makes people buy less of it
- If price not raised as result of wage floor: marginal producers driven out
o Reduced production and unemployment will occur in this way
- Always a group who replies:
o “Very well; if it is true that the X industry cannot exist except by paying starvation
wages, then it will be just as well if the min- imum wage puts it out of existence
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altogether.” But this brave pro- nouncement overlooks the realities. It overlooks,
first of all, that con- sumers will suffer the loss of that product. It forgets, in the
second place, that it is merely condemning the people who worked in that industry
to unemployment. And it ignores, finally, that bad as were the wages paid in the X
industry, they were the best among all the alterna- tives that seemed open to the
workers in that industry; otherwise the workers would have gone into another. If,
therefore, the X industry is driven out of existence by a minimum wage law, then the
workers pre- viously employed in that industry will be forced to turn to alternative
courses that seemed less attractive to them in the first place. Their competition for
jobs will drive down the pay offered even in these alternative occupations. There is
no escape from the conclusion that the minimum wage will increase
unemployment.”
A possible solution that govts often think of are relief programs to offset the unemployment caused
by the min wage law
- say, 75 cents an hour min wage = $30/week
o and offer $18/week of relief to the unemployed caused by the min wage increase
- what has been done:
o deprived man of being usefully employed at any wage below $30/week, say
$25/week, so that the govt can support him at $18/week doing nothing
 deprived society of his services
 deprived the man of independence/self respect even at earning a low wage
o these same consequences follow with any relief payment below $30
 the higher the relief payment, the worse the situation
o say, offer $30 in relief payment  offering men just as much to do no work than to
work
 whatever the sum we offer for relief, create situation in which everyone is
working only for the difference between his wages and the amount of relief
 if relief is $30/week, workers offered wage of $40/week are being asked to
work for only $10/week essentially, they can get the rest without doing
anything
this does not mean there is not way to raise wages
- it points out that the “easy” method of raising them by govt decree is the wrong way and the
worst way
- cannot in the long run pay labor as a whole more than it produces
o best way to raise wages = raise labor productivity
o many methods:
 increase in capital accum
 increase in machines to aide workers
 increase in new inventions/improvements
 more efficient mgmt.
 more industriousness and efficiency
 better education/training
o more the indiv worker produces, the more he increases wealth of whole community
o more he produces, more his services are worth to consumers, and to employers
o more he is worth to employers, more he will be paid
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“Real wages come out of production, not out of government decrees.”
Key points:
- Fixing prices causes negative consequences
o Setting price ceilings creates shortages
o Setting price floors, creates oversupplies
o Setting price floors on labor (minimum wages) creates unemployment and lower
productivity