Quote of the week...please share your favourite line from Ayn Rand's writings

“Happiness is that state of consciousness which proceeds from the achievement of one's values.”

Tuesday, February 9, 2010

Price Fixing Means Chaos

The Indian Government appointed panel headed by Kirit Parikh has recommended a hike in fuel prices. The media hails the recommendations as a deregulation of the fuel prices. Ayn Rand fans would remember Wesley Mouch (In “Atlas Shrugged”) explaining his plan to Rearden: "Under this plan, we will grant the industry a five per cent increase in the price of steel." Tinky Holloway adds: "A certain increase in prices will have to be granted to the producers of iron ore—oh, three per cent at most—in view of the added hardships which some of them will now encounter.” We hear Rearden speak “I rebelled against the looters' attempt to set the price and value of my steel”. In the same novel, Dagny Taggart wants to raise the prices before price controls are being imposed. Boyle and Mouch opposes her. But, Dagny wins in the end by providing information to Mouch for blackmailing Rearden. When the economy breaks down, Wesley Mouch calls a secret meet of special interest groups. He puts forward Directive Number 10-289, which contains eight policy changes. Point Seven imposes universal price controls.

Jennifer Burns tells us in “Goddess of the Market”, how Ayn Rand vehemently opposed the pamphlet of Friedman and Stigler against Rent Control (which is a form of price controls), as the authors didn’t oppose Rent Controls on moral grounds. She wrote to Mullendore, “Not one word about the inalienable right of landlords and property owners. Not one word about any kind of principles-Just expediency and humanitarian concern for those who can find no houses.”

The economic argument against price fixing by the Government carries much weight. It creates shortages or unsaleable surpluses depending on the case. It leads to black-markets, long queues, wasted time, poor quality products, expensive methods of production, and in the long run, higher prices. But, the primary argument is moral. The Government has no moral right to interfere in deals based on voluntary consent for mutual benefit. Such government interference makes both parties worse off. The argument against price controls hold even if customers benefit (which obviously isn’t the case) from price controls. The consumers don’t have a moral right to buy goods at a price lower than the producers would have set. Price controls are an outright infringement of individual rights. The benefits to tax payers (when subsidies to fuel producers are eliminated) and the cut in the fiscal deficit are only side benefits. Markets aren’t rational when the players don’t have the valuable signals coming from market prices. The market price system left unhampered would lead to more rational behavior on both the sides.

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