Guest article: Should we give the government the power to alter consumer choice?

Do we all have the same preferences and value material goods in the same way, so that we allow someone else to control (influence) our own choices?! If “value” is subjective and market prices are a mirror of consumer desires, then the widespread suggestion that public goods and services are provided for free or at least at a lower price is completely redundant. In fact, starting from here, defining them as free is wrong, since for a good or service to be free, it must exist in abundance for everyone and therefore not be subject to human action.[1] In particular, lower prices benefit consumers only when they are formed as a result of market competition, and not imposed by regulation or administrative “obfuscation”.

If in a free economy, consumers have the sovereign power, they determine who deserves to stay in the market and who should leave it. Competition and tireless ingenuity in finding the right way to satisfy their most pressing needs do not allow private owners, on the one hand, to lower the quality of their work, and on the other, to turn it into bureaucratic routine. For entrepreneurs operating in the free market, profit is achieved by the ability to predict and adapt their actions to the future state of the market, if they do not want to suffer a loss for every inefficiency or missed opportunity.

For those in power, however, the principles of the economy, profit, and satisfaction of consumer needs are not at the forefront, but the regulatory and control mechanisms provided to the public apparatus of coercion as a tool for achieving greater influence and political power. Bureaucrats and officials have no incentive to develop their entrepreneurial skills in order to meet consumer demand.[2] But not because they are perfect or flawless in their qualities and abilities, but because they have the privilege of spending, losing, or devaluing (by printing paper from the central bank) foreign money. In this sense, the greater the state intervention in the economy, the greater the need for excessive seizure and spending of foreign funds to maintain its services.

Perverse incentives are not the only reason why the state cannot act as a good manager. There is no planner who has sufficient information about the individual needs of each person, since knowledge in society is scattered, and price signals act as a precursor to what decisions we should make about our consumption, investment, or savings.[3] However, let us assume that the government sets a marginal price for a certain essential commodity below the market price, so that it becomes affordable even for the poorest citizens. On the one hand, demand for the commodity will increase, but on the other hand, those producers with the highest production costs will start to accumulate losses, since the fixed marginal price will turn out to be lower than the cost of their production. And since they cannot operate at a loss for a long time, they will be forced either to limit their production or to use their resources for other purposes.[4]

It is no coincidence that state control over prices leads to increased demand, decreased supply, and shortages of the respective good. It is difficult for state authorities not to take advantage of the privilege of managing the “choice” of their fellow citizens, since they can continue to fix the prices of more and more goods, services, and means of production. However, artificially imposed prices make the economic calculation of profit and loss impossible, and the result of the absence of market prices and the placing of production material goods under the control of a single institution is a sure step, but not towards freedom and progress, but towards the impasse of socialism, poverty, and misery.

Argentina has been slowly but surely going down this path for years. A few months ago, the government introduced a price control program aimed at preserving the availability and avoiding shortages of consumer goods. By fixing the prices of more than 300 consumer goods through the imposed program, which is also used as a measure to combat high inflation, the state can only temporarily contain the uneven increase in prices for individual products and services.[5] The sharp devaluation of the local currency after the loosening of exchange controls, which aimed to stop capital outflows and maintain the peso’s value against the dollar through central bank interventions, was no surprise. The devaluation was simply confirmation that the peso had already lost much of its value (about 20% against the dollar since the beginning of the year) as a result of an increased money supply (or central bank intervention to finance budget deficits).[6] The ongoing disputes with hedge funds NML Capital and Aurelius Management, creditors who refused to restructure Argentina’s debt obligations after its 2001 bankruptcy, are a waste of time, relying on regulations and government control instead of reforms. Facing another bankruptcy due to the inability to pay its creditors,[7] the Argentine economy is a reminder that access to debt financing, which it currently lacks, not only does not solve the deficit problem, but also deepens it.

In short, just as currency market interventions cannot combat inflation in the long term, so too will price controls on consumer goods prove to be unsustainable, and a possible bankruptcy will serve as a reminder of short memories and unlearned lessons. Unfortunately, the victims will be all those consumers who have allowed the government to have unprecedented power to choose, act, and think for them.

References:

1. Power and Market, Government and the economy, Murray Rothbard – p.216-217;
2. Power and Market, Government and the economy, Murray Rothbard – p.213;
3. The Use of Knowledge in Society, F. A. Hayek;
4. Economic Policy, Ludwig von Mises – see pp. 49-52;
5. http://online.wsj.com/news/articles/SB10001424052702304819004579487993108796228;
6. http://mises.org/daily/6663/Myths-and-Lessons-of-the-Argentine-Currency-Crisis;
7. http://www.reuters.com/article/2014/07/26/us-argentina-debt-idUSKBN0FU1D120140726

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