The Price Is Right

Last week I outlined just how complicated the economy really is. Society is confronted with the almost incalculable problem of how to meet the indefinite needs of a massive and diverse population. Anyone who has raised a decent-sized family knows just how hard it is to satisfy even a small group of people whom you know inside and out, actually love, and talk to every day. How much more enormously complicated — nearly impossible — seems the task of trying to keep millions of people not just alive but working steadily in useful, cooperative ventures that meet each others’ needs promptly and without enormous waste of resources and effort. Wilhelm Röpke, whose principled, subtle analyses I will be data-mining for the next few weeks, laid out the predicament of economics in his layman’s introduction, Economics of a Free Society:

Consider, for a moment, the problem of the daily provisioning of a great city. Its millions of inhabitants must be provided with the basic necessities, to say nothing of the “luxuries” which cheer and brighten existence: so many tons of flour, butter, meat, so many miles of cloth, so many millions of cigars and cigarettes, so many reams of paper, so many books, cups, plates, nails, and a thousand other things must be daily produced in such wise that a surplus or deficiency of any particular good is avoided. The goods must be available hourly, monthly, or annually (according to the kind of good in question) in exactly the quantities and qualities demanded by a population of several millions. But the people’s demand for goods is necessarily dependent upon their purchasing power (money). The existence of purchasing power presupposes, in turn, that the millions who appear in the market as consumers have previously as “producers” (whether employees or independent proprietors) so adjusted their output, both in quantity and quality, to the general demand for goods that they were able to dispose of their stock without loss. Now the highly differentiated modern economic system encompasses not alone a single city, however great, not alone a country however vast, but, in a way to which we shall give our particular attention later, the whole terrestrial globe. The craftsman in an optical instrument factory makes lenses for export to the most distant countries, which in turn supply him with cocoa, coffee, tobacco and wool. While he is polishing lenses he is also producing, indirectly, all these things more abundantly and more cheaply than if he produced them directly.

This immensely extended and intricate mechanism can function only if all its parts are in such constant and perfect synchronization that noticeable disorder is avoided. Were this not the case, the provisioning of millions would be immediately imperiled.

Who is charged with seeing to it that the economic gears of society mesh properly? Nobody. No dictator rules the economy, deciding who shall perform the needed work and prescribing what goods and how much of each shall be produced and brought to market.

The absence of such a dictator has troubled many a thinker over the centuries. Looking at society as a family, and its inhabitants as the ruler’s many short-sighted, rebellious children, political philosophers have sought to organize human efforts in much the way a stern, patriarchal father (such as Brad Pitt plays in Tree of Life) might command a gaggle of adolescent sons. This paternalistic tradition in political thought, as Frederic Bastiat observed in The Law, stretches from Plato’s Republic through Thomas More’s Utopia right up into modern systems of utopian and revolutionary socialism: The rulers possess greater wisdom and virtue than the ruled, and hence should dictate the priorities for the latter’s work and wealth:

Happily, according to these writers, there are some men, termed governors and legislators, upon whom Heaven has bestowed opposite tendencies, not for their own sake only, but for the sake of the rest of the world.

Whilst mankind tends to evil, they incline to good; whilst mankind is advancing toward darkness, they are aspiring to enlightenment; whilst mankind is drawn toward vice, they are attracted by virtue. And, this granted, they demand the assistance of force, by means of which they are to substitute their own tendencies for those of the human race.

For such thinkers, abstract principles, philosophically derived, should govern the lower orders as the mind commands the body, or a charioteer controls his horses. To make this concrete, strict laws should ensure that the prices paid for each product, and the wages paid for each type of work, conform to “justice” and support the proper hierarchy of values that reflects the society’s vision of the Good. Thus will men’s activities — instead of being anarchic and subject to their sinful, irrational passions — be firmly guided from above toward the pursuit of virtue.

Plug in terms like “community” for “ruling elite” and switch out the values imposed by force upon individuals, and the above also describes the ethos of democratic socialism, as well as the liberalism that dominates the Democratic Party and the thinking of many Catholic bishops. The masses, like the laity, were put on earth to pay, pray, and obey.

 

There are two objections to such a top-down method of managing human work, and the first one is moral. As Bastiat pointed out, the philosophers or rulers who imagined themselves dominating other men this way were elevating themselves above the human condition, marking themselves as effectively a higher sort of being than those men they ruled. Those other, lesser men might be goaded by selfishness, pride, and other passions — which is precisely why they needed to be controlled by a better class of men, such as… intellectuals. Thus rulers and thinkers were virtually deified and subjects degraded to the status of clever animals. Hence those subjects’ economic behavior must be closely regulated according to codes designed to check their grubby passions: guild regulations fixing wages and prices, royal monopolies stifling competition from upstarts, tariffs keeping foreigners out of the market, and “sumptuary” laws denying luxuries to those who hadn’t been born a part of the noble class. In our own day, such laws have given way to a bewildering array of regulations imposing a different moral code on the governed, one driven by leftist and collectivist egalitarian goals. But the goal of imposing control, by government force, on other men’s lives and work remains unchanged.

Does history offer any evidence that men who rise to power — the kind of men who crave it, can get it, and hold it — are in fact qualitatively different from ordinary men? The record of tyrants in the ancient world, feudal lords in the Middle Ages, tyrannical kings in the Renaissance and Reformation periods, utopian revolutionaries in France, Spain, Mexico, and Russia suggests that they are not. It was the melancholy record of how men with unaccountable power abuse it that led America’s founders to seek a “government of laws, and not of men,” and to arrange for the “separation of powers,” such that the hunger for power of various factions would lead them to cancel each other out, and replace “perfect” tyrannical programs with safe, if shabby, compromise.

The great Catholic libertarian Lord Acton is famous for observing that “power tends to corrupt, and absolute power to corrupt absolutely.” I don’t quite agree. I think, instead, that power reveals what is in a man — and what it typically shows most clearly is the truth of original sin. As histories of the Renaissance make clear, even popes are not immune — though they are held back from committing a single, very grave sin: teaching heresy. That’s all Christ ever promised us, so none of this should scandalize the orthodox. The papacy hasn’t changed, nor have new divine promises been granted concerning the popes, since the reign of the Borgia Pope Alexander VI — despite what a Catholic shrink in New York City once tried to tell me (on my dime), when he solemnly assured me (through a mouth full of penne puttanesca) that Pope John Paul II, unlike all previous popes, had been “granted special powers by the Holy Spirit.” (I referred him to another, secular shrink.) Of course, we have been blessed since the early 19th century with a (mostly) holy and (largely) prudent series of pontiffs. But God grants us no guarantees. There may be a Borgia in our future. There’s nothing in the record even of the papacy that should make us comfortable granting absolute temporal power to any human being, or overweening power to any government, however constituted.

 

The second objection to the top-down model of the economy is that it leads to the making of millions of ill-fitting black left shoes, all size 12, sitting in warehouses, and to hungry housewives standing in line for bread and salt. While heroic resistance to Communist tyrannies was typically led by men of faith in God and (hence) in human dignity, like Solzhenitsyn, Mindszenty, Wyzinsksi, Wojtyla, and Walesa, what ultimately brought the system down was its economic incoherence, its inability to provide people with even the simple pleasures in life: clothes that fit, fresh food, productive work, and the hope of a better life for their children. Indeed, in Soviet Russia, the system couldn’t even provide apartments large enough to house more than one or two children, a fact that contributed to one of the highest abortion rates in history.

As Röpke’s mentor Ludwig von Mises predicted in 1920 — only three years into the great Marxist experiment–such catastrophes were bound to happen, and for an implausibly simple reason: lack of accurate information about what people want and how much they want it. That is what prices are — irreplaceable, accurate data about what millions of individuals prefer on a moment-to-moment basis, transmitted constantly from every consumer and producer in the world to a decentralized database, which almost instantaneously starts up the process of responding to those preferences. Each time you go to Amazon to buy, say, a Catholic humor book (hint, hint), you are sending the bookseller, the publisher, and the author a thank-you note in the form of money. Or, if you prefer, think of it as a vote. It’s a vote you likely earned by providing some good or service to someone else — who in turned earned his votes by serving still other people. This is the origin of the astounding organic order that emerges from the apparent chaos of economic life, when men and women are left essentially free to express their personal preferences and trade the labor they’re willing to do for the goods they wish to buy. Thus they harness themselves to each other and cooperate in building the future.

In a fully collectivist economy such as the Soviet Union’s, it is virtually impossible to determine what anyone wants, since prices are set arbitrarily by the government. So are wages. But no government, however powerful, could collect, sort, and transmit the kind of data about what people want that the price system spontaneously generates and seamlessly uses to tweak what some people produce to match what others wish to consume. Given the sheer impossibility of this task, which not even Orwell’s dystopian government in 1984 could hope to pull off, the state shrugs off the effort to figure out what people want and decides instead to dictate what they shall have. Wise bureaucrats determine the bare minimum human needs — black bread, cheap coffee, a drab green uniform — and strive amidst the inherent anarchy of any socialist system to produce and distribute them. Since the state controls both the production and distribution, dissenters can expect to struggle or even starve. Instead of the messy, organic order that is the marketplace, men live in the thinly veiled chaos of a prison camp — and strive to win favor with the kapos.

While Mises was a countercultural prophet in his time for pointing all these things out, most Westerners today would accept that a completely collectivist economy is impossible. They remember the Berlin Wall, which was built to keep people who lived in the prison camp from escaping into the marketplace. What too few of us realize today is that every direct intervention by the government in the economy does introduce some distortion in the price system, jamming the signals people send and adding a measure of confusion. Soviet-style socialism was, in this sense, absolute chaos, like a PC completely compromised with viruses, sending out only spam instead of email. Our own economic system — with all its confusing and confiscatory taxes, non-market incentives, regulations, and litigations — is more like a laptop riddled with spyware, whose works are so gummed up that it functions at half the speed it should. But at least it runs.

Now, this isn’t to say that the price system ought to be absolute, untrammeled by laws that restrict what can be sold or bought. There are certain types of transactions (for instance, nuclear weapons) that the state can and should refuse to permit, some contracts (such as gay “marriage”) the community can simply refuse to enforce. We can and should impose pollution and safety regulations that protect innocent third parties from the toxic side-effects that often accrue with industry, which often are not accounted for in the prices of goods or services. But our interventions will be fewer, more prudent, and more reluctant if we remember that the price system and the market are, at heart, the source of economic order, an exquisitely subtle organic system that we no more wish to distort and destroy than we do the human reproductive system.

John Zmirak

By

John Zmirak is the author, most recently, of The Bad Catholic's Guide to the Seven Deadly Sins (Crossroad). He served from October 2011 to February 2012 as Editor of Crisis.

  • Gian

    The Misean view of the price discovery can not be the whole story. Man have an intuition of fair price for things.
    It would be monstrous for a buyer to want to pay nothing for an item and a seller to want $ 1T for the same
    and then they compromise on $100 (This example is taken from an anecdote told by Mr Jeffrey Tucker at this very site).

    Far from being a Christian attitude, it is not even pagan since to want to pay zero for a non-zero good is not justice,
    leaving aside love.

    • Cord Hamrick

      Gian:

      You make an assertion here, but in no sense have you offered an argument to back it up.

      Why should it be “monstrous” for a seller to want — in a pie-in-the-sky, this’ll-never-happen kind of way — a trillion dollars for a day’s yard work, and the buyer to want to pay nothing for it?

      In a sense, this is a temptation: He’s never going to get the unrealistic price, and he is tempted to continue pursuing it long after he knows it will never be found.

      But it’s a very mild temptation because it’s one which reality itself conspires to punish. For of course if the seller “holds out” for a trillion dollars, he’ll never find a buyer. If the buyer “holds out” for zero, he’ll never find a seller. How perfect! (It is almost as if there were a compassionate and all-wise God who constructed reality so as to teach His children this lesson!)

      What is beautiful and Godly is when buyer and seller both put aside their pie-in-the-sky dreams of unrealistic prices and find, through respectful negotiation, a price with which neither is ecstatic, but to which both can comfortably agree.

      That is beautiful, and it is Godly. For in doing this, each adopts the attitude towards the other that the other is a person, created in the image of God, possessing intrinsic human dignity, and thus not to be treated like an object. Each side knows he must take into account the free decisions of the other side.

      The alternative to this is when one side decides to exert force or pressure or intimidation upon the other to get him to agree to a price at which he would not normally have been willing to buy or sell.

      To do that is Satanic: It treats the other not as a person, whose free choices must be dealt with respectfully, but as an object to be kicked or shoved about. One does not haggle with a rock.

      But of course that is what government price controls do. Government price controls are, in general, Satanic: They treat persons as objects, and shove them about against their will in order to achieve some good end as envisioned by busybodies who, in general, are both ignorant about the details of the transactions they regulate and insulated from the consequences of making unwise regulations.

      So that is the choice before us: A free market in which we treat persons as persons, or a regulated market in which we treat persons as objects in direct proportion to the degree of regulation.

  • Gian

    Mr Zmirak,
    Surely Miseans don’t agree with you that the State has right to ban certain transactions. For if the State has this right, then naturally it has the right to interfere in the price discovery of permitted transactions as well and it is only by prudence that State limits itself from particular interferences.

    So do you claim that it is unjust for State to interfere in price discovery or it is not prudent for the State to do so?

    I wish Catholic writers like you would examine Belloc’s admiration for Rousseau’s Social Contract, put pretty strongly in The French Revolution. The concepts Common Good, General Will need to be examined from fresh Catholic viewpoint.

  • Blake Helgoth

    So, how does the a centeralized bank that controls the value of money and sets interest rates play into this? What happens when international corporations become so large and powerful that they can manipulate the desires of the consumers?

  • Tom

    Blake, if corporations can simply brainwash us into buying their goods, why do they spend so much money on marketing research?

  • Tom

    In other words, why are they so interested in finding out what the public wants, when they can just make us want whatever they’re selling?

    Why couldn’t the Coca-Cola corp force new Coke on us?

  • Tom

    Belloc’s admiration for Rousseau is the worst aspect of his whole career, not something we should want to pursue.

  • Tom

    Gian, you are so hostile you cannot even think clearly. You mean you wouldn’t like to win a washing machine in a sweepstakes? You would indignantly return it?

    The point of the example, which in your search for iniquity you completely missed, is simply that neither buyer nor seller can unilaterally dictate price.

  • Martial Artist

    Mr. Zmirak,

    Yet another excellent explication of how the economy actually works when not distorted by government interference.

    Pax et bonum,
    Keith Töpfer

  • Gian

    Entering into a lottery to win something is an entirely different sort of transaction than buying something.

    Mr Tucker also imputed to the seller an unconscious desire to want $ 1T. So by Misean reasoning, each price discovery
    starts iteration between $0 and $ 1T. Such a process is pure fantasy.
    The price discovery must be ruled by Justice and Charity. The Misean model recognizes neither but only Consent and Will.

    • Cord Hamrick

      Gian:

      Justice and Charity are moral concepts.

      As such, they can only be implemented by free-willed beings. A cloud is not just or unjust if it rains on your picnic; a rock has not been uncharitable to you if you stub your toe upon it. But if a person splashes you with water, or hits you with a rock, they may by doing so be acting morally (or immorally). They are capable of morality (or immorality), because they were capable of freely deciding their actions.

      The Misean model recognizes Will, as you say. But it does so in order that there might be the capacity for human beings to implement justice and mercy through their decisions. The decisions made by an economic actor are not at all antithetical to Justice and Mercy. They are the prerequisite for Justice and Mercy even to exist.

      Likewise the Misean model recognizes (nay, strongly emphasizes) Consent, as you say. Why so?

      Well, because there are two ways that persons make decisions in a fallen world: (a.) Freely, without fear of any negative consequences other than those which flow naturally from the decision itself; or, (b.) Under duress, compelled by fear of some threat to make a decision other than that which they would have freely made.

      The Misean model shuns compulsion, advocating instead that economic decisions should be made free of fear, that there might be Justice and Charity. There cannot be Justice or Charity when an action is compulsory anyway, for if a decision to act in a particular way is prompted not by the desire of the actor to be just or merciful, but only by the desire of the actor to avoid some harsh penalty unrelated to the natural consequences of his actions, then the actor is neither being Just nor Charitable, but only self-interested and perhaps even a coward.

      So the antithesis you pose between the Misean model (on the one hand) and the Christian call to Justice and Charity (on the other) is non-existent. These things are not enemies, but friends; indeed, were it not for the former, the latter would be impossible.

      As for the notion that each price discovery “starts iteration between $0 and $1T” …of course that’s “pure fantasy!” No free-markets advocate would deny it; such musings are used to illustrate concepts (and are useful for that purpose) but nobody believes that each transaction is reasoned out that way.

      Gian, respectfully, I don’t think you know what free-market advocates think. You seem (to me) to have internalized the kinds of caricatures which feature so amusingly in socialist agitprop…which is a bit like using the writings of John Calvin as a catechism for learning Catholicism!

  • Samuel

    Clear, radiant and true! Thanks Dr. Zmirak

  • Cherie

    Interesting. I know and understand shamefully little about economics, but your articles are simple enough for me to comprehend and pleasant and brief enough to maintain my interest. Thanks!

    I have a question… does a high level of debt affect this? If many consumers spend more than the price of goods by paying interest on the purchases, and some spend more than they earn, continuously racking up debt, does that interfere with the price system?

  • Mary Drennen

    This was very cool and interesting to read. I have enjoyed reading all of your articles!
    Mary Drennen

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