The Common Sense Behind Why Wage And Price Controls Are Terrible

Here's a concept: the more that the cost of something is increased, the less people buy it. Obviously, if the price of cars suddenly is increased by 10x, less people would buy cars, in most cases simply because they wouldn't be able to afford it. This works the same with wages. The more that wages are artificially bid up, the higher the cost of labor becomes. The higher the cost of labor becomes, the less people are employed or able to be employed. Consequentially, rising wages above the market level causes unemployment.

The reverse scenario is possible as well: the more that the cost of something is decreased, the more capable people are of buying it. Obviously, if the price of top-notch cars suddenly dropped to less than 5,000 dollars per car, it would be much easier for people to buy top-notch cars. This works the same with wages. The more that wages are artificially bid downwards, the more employment oppurtunites there may be - however, these employment oppurtunities are at wages lower than the productivity of the work, and therefore unjust.

I reject bidding wages both above and below the market level. The proper determiner of wages is the marginal productivity of labor, not arbitrary governmental decrees or the mere generosity of the employer. The employer is free, of course, to bid up their workers wages on the basis of good performance, overtime and like, but if they do so exessively they would be leading themselves into a loss situation. Wages cannot be whisked into existance artificially. They must result from the productivity of labor.

The wage and price controls that were imposed under the Nixon administration was a unique case - wages and prices were not increased or decreased, rather, they were entirely frozen in place! This inherently implies a cap on wages and a "floor" for prices. Bad idea, as your "price" floor blocks any price decreases, and your wage cap blocks any wage increases. It is impossible for such a situation to last. It inevitably must crumble by its own accord due to the factor of change over time. Real prices and wages are not completely static, as they are a product of uncertainty in a fluid, changing atmosphere.

Similarly, schemes such as "rent control" are abysmal failures. What most rent control schemes did in the past is, not raise or lower rents, but freeze them in place. Once again, the market is being distorted. Once again, a situation is being created in which change in the future forces a failure. If the actual market level for rents rises during this freeze, then this leads to a scenario in which losses are being imposed on the person or people renting it out. As a result, the availability (supply) of property rental will diminish, and the incentive for landlords to supply such rentals will be eroded. Consequentially, low-cost housing will be harder to find for people, as the rent control has eroded the capital structure of the housing market.

On the other hand, if the actual market level for rents lowers during this freeze, then the rent control constitutes a special privilege to the landlords. The market would be flooded with over-priced housing. What's known as "2nd generation rent control" tried to fix this problem by adding more interventions into the mix - "public housing" when the rent control causes a diminished supply. Of course, this did nothing to fix the original problem, and further eroded the incentive for landlords to rent property out.

The reason why prices and wages are inevitably not static is that there are factors that change over time. Technology changes, capital goods improve, consumer preferances change, demand changes, supply changes, productivity changes, etc. If people buy less of something then before, or buy more of something then before, this will inevitably change its price. If people consume something at an increased rate, diminishing supply, this will tend towards an increase in prices, as the availability of the good has been diminished by the consumption spree. If people consume something at a decreased rate, this will tend towards a decrease in prices, as this is a way of providing an incentive for more buyers.

It logically follows that if we want to increase our economic prosperity, we have to moderate and therefore limit our rate of consumption. This is the only path to "saving". It also logically follows that an abundant supply of goods generally tends to make them more available to the multitude, while a limited supply of goods inherently have rather higher prices. This is demonstratef by much of our technology. When many products first come out, they are at what would appear to be very high prices.

This is not because of "greed" per se, it is because the supply is still quite limited. It has not become abundant enough for the price to be lowered to the extent of appeasing the multitude of consumers. Overtime, these seemingly high prices lower as the supply increases. If the buisiness fails to adequately bid the price down in this way, it will go out of buisiness, as in conjunction with the initial conception of this post, less people are able or willing to buy it.

If the government were to impose price controls below or above the market level, a similar scenario occurs as does with rent control. If prices are bid above the market level, this inevitably necesitates a decrease in the availability of the good or service to the multitude, and a special privilege to the provider of that good or service. If prices are bid below the market level, this inevitably necessitates a decrease in the incentive for providing that good or service, as it forces losses on the provider. Inevitably, focus will be shifted away from providing that service and into areas with higher incentives; hence, a "shortage".

As a consequence of the above, prices are a fluid thing. To artificially manipulate prices and wages through governmental intervention only distorts the market, setting up scenarios that are unsustainable as they are unable to adjust to change and people's time-preferances. All of these negative consequences are considered "market failures" by most, but in reality they are the failures, the negative consequences, of the economic interventions in question. They are distortions of the market created by government intervention.

An important question: Why do we have jobs in the first place? Why do we have prices in the first place? The answer is scarcity. There is no such thing as infinite labor, infinite production, infinite resources. As a consequence, things must be produced using the available resources of the earth, which are scarce. Man uses these resources to create tools (capital goods) by which to produce various goods and services (consumer goods). The price of all of this is ultimately determined by scarcity, including the scarcity of human labor itself.

The only way in which we could have no jobs is if anything can be produced by simply waving our magic wands - a utopian fairy tale. This is not reality though. Nothing is free, and our resources and capability to extract them is limited, not infinite. Everything must be produced - it does not just rain on us from the sky as mana. Therefore, it impossible to have "free everything for everyone".