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Free to Choose
Excerpts
by Milton Friedman (1980)
Intro
Ever since the first settlement of Europeans in the New World—at Jamestown in
1607 and at Plymouth in 1620— America has been a magnet for people seeking
adventure, fleeing from tyranny, or simply trying to make a better life for
themselves and their children.
An initial
trickle swelled after the American Revolution and the establishment of the
United States of America and became a flood in the nineteenth century, when
millions of
people streamed across the Atlantic, and a smaller number across the Pacific,
driven by misery and tyranny, attracted by the promise of freedom and affluence.
When they
arrived, they did not find streets paved with gold; they did not find an easy
life. They did find freedom and an opportunity to make the most of their
talents. Through hard work, ingenuity, thrift, and luck, most of them succeeded
in realizing enough of their hopes and dreams to encourage friends and relatives
to join them.
The story of
the United States is the story of an economic miracle and a political miracle
that was made possible by the translation into practice of two sets of ideas—
both, by a curious coincidence, formulated in documents published in the same
year, 1776.
One set of
ideas was embodied in The Wealth of Nations, the masterpiece that established
the Scotsman Adam Smith as the father of modern economics. It analyzed the way
in which a market system could combine the freedom of individuals to pursue
their own objectives with the extensive cooperation and collaboration needed in
the economic field to produce our food; our clothing, our housing. Adam Smith's
key insight was that both parties to an exchange can benefit and that, so long
as cooperation is strictly voluntary, no exchange will take place unless both
parties do benefit. No external force, no coercion, no violation of freedom is
necessary to produce cooperation among individuals all of whom can benefit. That
is why, as Adam Smith put it, an individual who "intends only his own gain" is
led by an invisible hand to promote an end which was no part of his intention.
Nor is it always the worse for the society that it was no part of it. By
pursuing his own interest he frequently promotes that of the society more
effectually than when he really intends to promote it. I have never known much
good done by those who affected to trade for the public good."
The second
set of ideas was embodied in the Declaration of Independence, drafted by Thomas
Jefferson to express the general sense of his fellow countrymen. It proclaimed a
new nation, the first in history established on the principle that every person
is entitled to pursue his own values: "We hold these truths to be self-evident,
that all men are created equal, that they are endowed by their Creator with
certain unalienable Rights; that among these are Life, Liberty, and the pursuit
of Happiness."
Or, as
stated in more extreme and unqualified form nearly a century later by John
Stuart Mill,
The sole end for which mankind are warranted, individually or collectively, in
interfering with the liberty a of any of their number, is self protection . . .
. The only purpose for which power can be rightfully exercised over any member
of a civilized community, against his will, is to prevent harm to others. His
own good, either physical or moral, is not a sufficient warrant. ... The only
part of the conduct of any one, for which he is amenable to society, is that
which concerns others. In the part which merely concerns himself, his
independence is, of right, absolute. Over himself, over his own body and mind,
the individual is sovereign.
Much of the
history of the United States revolves about the attempt to translate the
principles of the Declaration of Independence into practice—from the struggle
over slavery, finally settled by a bloody civil war, to the subsequent attempt
to promote equality of opportunity, to the more recent attempt to achieve
equality of results.
Economic
freedom is an essential requisite for political freedom. By enabling people to
cooperate with one another without coercion or central direction, it reduces the
area over which political power is exercised. In addition, by dispersing power,
the free market provides an offset to whatever concentration of political power
may arise. The combination of economic and political power in the same hands is
a sure recipe for tyranny.
The
combination of economic and political freedom produced a golden age in both
Great Britain and the United States in the nineteenth century. The United States
prospered even more than Britain. It started with a clean slate: fewer vestiges
of class and status; fewer government restraints; a more fertile field for
energy, drive, and innovation; and an empty continent to conquer.
The
fecundity of freedom is demonstrated most dramatically and clearly in
agriculture. When the Declaration of Independence was enacted, fewer than 3
million persons of European and African origin (i.e., omitting the native
Indians) occupied a narrow fringe along the eastern coast. Agriculture was the
main economic activity. It took nineteen out of twenty workers to feed the country's
inhabitants and provide a surplus for export in exchange for foreign goods.
Today it takes fewer than one out of twenty workers to feed the 220 million
inhabitants and provide a surplus that makes the United States the largest
single exporter of food in the world.
What
produced this miracle? Clearly not central direction by government—nations like
Russia and its satellites, mainland China, Yugoslavia, and India that today rely
on central direction employ from one-quarter to one-half of their workers in
agriculture, yet frequently rely on U.S. agriculture to avoid mass starvation.
During most of the period of rapid agricultural expansion in the United States
the government played a negligible role. Land was made available—but it was land
that had been unproductive before. After the middle of the nineteenth century
land-grant colleges were established, and they disseminated information and
technology through governmentally financed extension services. Unquestionably,
however, the main source of the agricultural revolution was private initiative
operating in a free market open to all—the shame of slavery only excepted. And
the most rapid growth came after slavery was abolished. The millions of
immigrants from all over the world were free to work for themselves, as
independent farmers or businessmen, or to work for others, at terms mutually
agreed. They were free to experiment with new techniques—at their risk if the
experiment failed, and to their profit if it succeeded. They got little
assistance from government. Even more important, they encountered little
interference from government.
Government
started playing a major role in agriculture during and after the Great
Depression of the 1930s. It acted primarily to restrict output in order to keep
prices artificially high.
The growth
of agricultural productivity depended on the accompanying industrial revolution
that freedom stimulated. Thence came the new machines that revolutionized
agriculture. Conversely, the industrial revolution depended on the availability
of the manpower released by the agricultural revolution. Industry and
agriculture marched hand in hand.
Smith and Jefferson alike had seen
concentrated government power as a great danger to the ordinary man; they saw
the protection of the citizen against the tyranny of government as the perpetual
need. That was the aim of the Virginia Declaration of Rights (1776) and the
United States Bill of Rights (1791); the purpose of the separation of powers in
the U.S. Constitution; the moving force behind the changes in the British legal
structure from the issuance of the Magna Carta in the thirteenth century to the
end of the nineteenth century. To Smith and Jefferson, government's role was as
an umpire, not a participant. Jefferson's ideal, as he expressed it in his first
inaugural address (1801), was "[a] wise and frugal government, which shall
restrain men from injuring one another, which shall leave them otherwise free to
regulate their own pursuits of industry and improvement."
Ironically, the very success of economic
and political freedom reduced its appeal to later thinkers. The narrowly limited
government of the late nineteenth century possessed little concentrated power
that endangered the ordinary man. The other side of that coin was that it
possessed little power that would enable good people to do good. And in an
imperfect world there were still many evils. Indeed, the very progress of
society made the residual evils seem all the more objectionable. As always,
people took the favorable developments for granted. They forgot the danger
to freedom from a strong government. Instead, they were attracted by the good
that a stronger government could achieve—if only government power were in the
"right" hands.
These ideas began to influence
government policy in Great Britain by the beginning of the twentieth century.
They gained increasing acceptance among intellectuals in the United States but
had little effect on government policy until the Great Depression of the early
1930s. As we show in Chapter 3, the depression was produced by a failure of
government in one area—money—where it had exercised authority ever since the
beginning of the Republic. However, government's responsibility for the
depression was not recognized—either then or now. Instead, the depression was
widely interpreted as a failure of free market capitalism. That myth led the
public to join the intellectuals in a changed view of the relative
responsibilities of individuals and government. Emphasis on the responsibility
of the individual for his own fate was replaced by emphasis on the individual as
a pawn buffeted by forces beyond his control. The view that government's role is
to serve as an umpire to prevent individuals from coercing one another was
replaced by the view that government's role is to serve as a parent charged with
the duty of coercing some to aid others.
These views have dominated developments
in the United States during the past half-century. They have led to a growth in
government at all levels, as well as to a transfer of power from local
government and local control to central government and central control. The
government has increasingly undertaken the task of taking from some to give to
others in the name of security and equality. One government policy after another
has been set up to "regulate" our "pursuits of industry and improvement,''
standing Jefferson's dictum on its head (Chapter 7).
These developments have been produced by
good intentions with a major assist from self-interest. Even the strongest
supporters of the welfare and paternal state agree that the results have been
disappointing. In the government sphere, as in the market, there seems to be an
invisible hand, but it operates in precisely the opposite direction from Adam
Smith's: an individual who intends only to serve the public interest by
fostering government intervention is "led by an invisible hand to promote"
private interests, "which was no part of his intention." That conclusion is
driven home again and again as we examine, in the chapters that follow, the
several areas in which government power has been exercised—whether to achieve
security (Chapter 4) or equality (Chapter 5), to promote education (Chapter 6),
to protect the consumer (Chapter 7) or the worker (Chapter 8), or to avoid
inflation and promote employment (Chapter 9).
So far, in Adam Smith's words, "the
uniform, constant, and uninterrupted effort of every man to better his
condition, the principle from which public and national, as well as private
opulence is originally derived," has been "powerful enough to maintain the
natural progress of things toward improvement, in spite both of the extravagance
of governments and of the greatest errors of administration. Like the unknown
principle of animal life, it frequently restores health and vigor to the
constitution, in spite, not only of the disease, but of the absurd prescriptions
of the doctor." So far, that is, Adam Smith's invisible hand has been powerful
enough to overcome the deadening effects of the invisible hand that operates in
the political sphere.
The experience of recent years—slowing
growth and declining productivity—raises a doubt whether private ingenuity can
continue to overcome the deadening effects of government control if we continue
to grant ever more power to government, to authorize a "new class" of civil
servants to spend ever larger fractions of our income supposedly on our behalf.
Sooner or later—and perhaps sooner than many of us expect—an ever bigger
government would destroy both the prosperity that we owe to the free market and
the human freedom proclaimed so eloquently in the Declaration of Independence.
We have not yet reached the point of no
return. We are still free as a people to choose whether we shall continue
speeding down the "road to serfdom," as Friedrich Hayek entitled his profound
and influential book, or whether we shall set tighter limits on government and
rely more heavily on voluntary cooperation among free individuals to achieve our
several objectives. Will our golden age come to an end in a relapse into the
tyranny and misery that has always been, and remains today, the state of most of
mankind? Or shall we have the wisdom, the foresight, and the courage to change
our course, to learn from experience, and to benefit from a "rebirth of
freedom"?
If we are to make that choice wisely, we
must understand the fundamental principles of our system, both the economic
principles of Adam Smith, which explain how it is that a complex, organized,
smoothly running system can develop and flourish without central direction, how
coordination can be achieved without coercion (Chapter 1); and the political
principles expressed by Thomas Jefferson (Chapter 5). We must understand why it
is that attempts to replace cooperation by central direction are capable of
doing so much harm (Chapter 2). We must understand also the ultimate connection
between political freedom and economic freedom.
Fortunately, the tide is turning. In the
United States, in Great Britain, the countries of Western Europe, and in many
other countries around the world, there is growing recognition of the dangers of
big government, growing dissatisfaction with the policies that have been
followed. This shift is being reflected not only in opinion, but also in the
political sphere. It is becoming politically profitable for our representatives
to sing a different tune—and perhaps even to act differently. We are experiencing another major change
in public opinion. We have the opportunity to nudge the change in opinion toward
greater reliance on individual initiative and voluntary cooperation, rather than
toward the other extreme of total collectivism.
In our final chapter, we explore why it
is that in a supposedly democratic political system special interests prevail
over the general interest. We explore what we can do to correct the defect in
our system that accounts for that result, how we can limit government while
enabling it to perform its essential function of defending the nation from
foreign enemies, protecting each of us from coercion by our fellow citizens,
adjudicating our disputes, and enabling us to agree on the rules that we shall
follow.
Chapter1
Power
of
the
Market
Every day each of us uses innumerable goods and
services—to eat, to wear, to shelter us from the
elements, or simply to enjoy. We take it for granted
that they will be available when we want to buy
them. We never stop to think how many people have
played a part in one way or another in providing
those goods and services. We never ask ourselves how
it is that the corner grocery store—or nowadays,
supermarket—has the items on its shelves that we
want to buy, how it is that most of us are able to
earn the money to buy those goods.
It is natural to assume that someone must give
orders to make sure that the "right" products are
produced in the "right" amounts and available at the
"right" places. That is one method of coordinating
the activities of a large number of people—the
method of the army. The general gives orders to the
colonel, the colonel to the major, the major to the
lieutenant, the lieutenant to the sergeant, and the
sergeant to the private.
But that command method can be the exclusive or even
principal method of organization only in a very
small group. Not even the most autocratic head of a
family can control every act of other family members
entirely by order. No sizable army can really be run
entirely by command. The general cannot conceivably
have the information necessary to direct every
movement of the lowliest private. At every step in
the chain of command, the soldier, whether officer
or private, must have discretion to take into
account information about specific circumstances
that his commanding officer could not have. Commands
must be supplemented by voluntary cooperation—a less
obvious and more subtle, but far more fundamental,
technique of coordinating the activities of large
numbers of people.
Russia is the standard example of a large economy
that is supposed to be organized by command—a
centrally planned economy. But that is more fiction
than fact. At every level of the economy, voluntary
cooperation enters to supplement central planning or
to offset its rigidities sometimes legally,
sometimes illegally.
In agriculture, full-time workers on government
farms are permitted to grow food and raise animals
on small private plots in their spare time for their
own use or to sell in relatively free markets. These
plots account for less than 1 percent of the
agricultural land in the country, yet they are said
to provide nearly a third of total farm output in
the Soviet Union (are "said to" because it is likely
that some products of government farms are
clandestinely marketed as if from private plots).
In the labor market individuals are seldom ordered
to work at specific jobs; there is little actual
direction of labor in this sense. Rather, wages are
offered for various jobs, and individuals apply for
them—much as in capitalist countries. Once hired,
they may subsequently be fired or may leave for jobs
they prefer. Numerous restrictions affect who may
work where, and, of course, the laws prohibit anyone
from setting up as an employer—although numerous
clandestine workshops serve the extensive black
market. Allocation of workers on a large scale
primarily by compulsion is just not feasible; and
neither, apparently, is complete suppression of
private entrepreneurial activity.
The attractiveness of different jobs in the Soviet
Union often depends on the opportunities they offer
for extralegal or illegal moonlighting. A resident
of Moscow whose household equipment fails may have
to wait months to have it repaired if he calls the
state repair office. Instead, he may hire a
moonlighter—very likely someone who works for the
state repair office. The householder gets his
equipment repaired promptly; the moonlighter gets
some extra income. Both are happy.
These voluntary market elements flourish despite
their inconsistency with official Marxist ideology
because the cost of eliminating them would be too
high. Private plots could be forbidden—but the
famines of the 1930s are a stark reminder of the
cost. The Soviet economy is hardly a model of
efficiency now. Without the voluntary elements it
would operate at an even lower level of
effectiveness. Recent experience in Cambodia
tragically illustrates the cost of trying to do
without the market entirely.
Just as no, society operates entirely on the command
principle, so none operates entirely through
voluntary cooperation. Every society has some
command elements. These take many forms. They may be
as straightforward as military conscription or
forbidding the purchase and sale of heroin or
cyclamates or court orders to named defendants to
desist from or perform specified actions. Or, at the
other extreme, they may be as subtle as imposing a
heavy tax on cigarettes to discourage smoking—a
hint, if not a command, by some of us to others of
us.
It makes a vast difference what the mix is—whether
voluntary exchange is primarily a clandestine
activity that flourishes because of the rigidities
of a dominant command element, or whether voluntary
exchange is the dominant principle of organization,
supplemented to a smaller or larger extent by
command elements. Clandestine voluntary exchange may
prevent a command economy from collapsing, may
enable it to creak along and even achieve some
progress. It can do little to undermine the tyranny
on which a predominantly command economy rests. A
predominantly voluntary exchange economy, on the
other hand, has within it the potential to promote
both prosperity and human freedom. It may not
achieve its potential in either respect, but we know
of no society that has ever achieved prosperity and
freedom unless voluntary exchange has been its
dominant principle of organization. We hasten to add
that voluntary exchange is not a sufficient
condition for prosperity and freedom. That, at
least, is the lesson of history to date. Many
societies organized predominantly by voluntary
exchange have not achieved either prosperity or
freedom, though they have achieved a far greater
measure of both than authoritarian societies. But
voluntary exchange is a necessary condition for both
prosperity and freedom.
COOPERATION THROUGH VOLUNTARY EXCHANGE
A delightful story called "I, Pencil: My Family Tree
as Told to Leonard E. Read" dramatizes vividly how
voluntary exchange enables millions of people to
cooperate with one another. Mr. Read, in the voice
of the "Lead Pencil––the ordinary wooden pencil
familiar to all boys and girls and adults who can
read and write," starts his story with the fantastic
statement that "not a single person . . . knows
how to make me." Then he proceeds to tell about
all the things that go into the making of a pencil.
First, the wood comes from a tree, "a cedar of
straight grain that grows in Northern California and
Oregon." To cut down the tree and cart the logs to
the railroad siding requires "saws and trucks and
rope and ... countless other gear." Many persons and
numberless skills are involved in their fabrication:
in "the mining of ore, the making of steel and its
refinement into saws, axes, motors; the growing of
hemp and bringing it through all the stages to heavy
and strong rope; the logging camps with their beds
and mess halls, . . . untold thousands of persons
had a hand in every cup of coffee the loggers
drink!"
And so Mr. Read goes on to the bringing of the logs
to the mill, the millwork involved in converting the
logs to slats, and the transportation of the slats
from California to Wilkes-Barre, where the
particular pencil that tells the story was
manufactured. And so far we have only the outside
wood of the pencil. The "lead" center is not really
lead at all. It starts as graphite mined in Ceylon.
After many complicated processes it ends up as the
lead in the center of the pencil.
The bit of metal––the ferrule––near the top of the
pencil brass. "Think of all the persons," he says,
"who mine zinc and copper and those who have the
skills to make sheet brass from these products of
nature."
What we call the eraser is 'known in the trade as
"the plug". It is thought to be rubber. But Mr. Read
tells us the rubber is only for binding purposes.
The erasing is actually done by "Factice," a
rubberlike product made by reacting rape seed oil
from the Dutch East Indies (now Indonesia) with
sulfur chloride.
After all of this, says the pencil, "Does anyone
wish to challenge my earlier assertion that no
single person on the face of this earth knows how to
make me?"
None of the thousands of persons involved in
producing the pencil performed his task because he
wanted a pencil. Some among them never saw a pencil
and would not know what it is for. Each saw his work
as a way to get the goods and services he
wanted––goods and services we produced in order to
get the pencil we wanted. Every time we go to the
store and buy a pencil, we are exchanging a little
bit of our services for the infinitesimal amount of
services that each of the thousands contributed
toward producing the pencil.
It is even more astounding that the pencil was ever
produced. No one sitting in a central office gave
orders to these thousands of people. No military
police enforced the orders that were not given.
These people live in many lands, speak different
languages, practice different religions, may even
hate one another––yet none of these differences
prevented them from cooperating to produce a pencil.
How did it happen? Adam Smith gave us the answer two
hundred years ago.
THE ROLE OF PRICES
The key insight of Adam Smith's Wealth of Nations is
misleadingly simple: if an exchange between two
parties voluntary, it will not take place unless
both believe they will benefit from it. Most
economic fallacies derive from the neglect of this
simple insight, from the tendency to assume that
there is a fixed pie, that one party can gain only
at the expense of another.
This key insight is obvious for a simple exchange
between two individuals. It is far more difficult to
understand how it can enable people living all over
the world to cooperate to promote their separate
interests.
The price system is the mechanism that performs this
task without central direction, without requiring
people to speak to one another or to like one
another. When you buy your pencil or your daily
bread, you don't know whether the pencil was made or
the wheat was grown by a white man or a black man,
by a Chinese or an Indian. As a result, the price
system enables people to cooperate peacefully in one
phase of their life while each one goes about his
own business in respect of everything else.
Adam Smith's flash of genius was his recognition
that the prices that emerged from voluntary
transactions between buyers and sellers––for short,
in a free market could coordinate the activity of
millions of people, each seeking his own interest,
in such a way as to make everyone better off. It was
a startling idea then, and it remains one today,
that economic order can emerge as the unintended
consequence of the actions of many people, each
seeking his own interest.
The price system works so well, so efficiently, that
we are not aware of it most of the time. We never
realize how well it functions until it is prevented
from functioning, and even then we seldom recognize
the source of the trouble.
The long gasoline lines that suddenly emerged in
1974 after the OPEC oil embargo, and again in the
spring and summer of 1979 after the revolution in
Iran, are a striking recent example. On both
occasions there was a sharp disturbance in the
supply of crude oil from abroad. But that did not
lead to gasoline lines in Germany or Japan, which
are wholly dependent on imported oil. It led to long
gasoline lines in the United States, even though we
produce much of our own oil, for one reason and one
reason only: because legislation, administered by a
government agency, did not permit the price system
to function. Prices in some areas were kept by
command below the level that would have equated the
amount of gasoline available at the gas stations to
the amount consumers wanted to buy at that price.
Supplies were allocated to different areas of the
country by command, rather than in response to the
pressures of demand as reflected in price. The
result was surpluses in some areas and shortages
plus long gasoline lines in others. The smooth
operation of the price system––which for many
decades had assured every consumer that he could buy
gasoline at any of a large number of service
stations at his convenience and with a minimal
wait––was replaced by bureaucratic improvisation.
Prices perform three functions in organizing
economic activity: first, they transmit information;
second, they provide an incentive to adopt those
methods of production that are least costly and
thereby use available resources for the most highly
valued purposes; third, they determine who gets how
much of the product––the distribution of income.
These three functions are closely interrelated.
Transmission of Information
Suppose that for whatever reason, there is an
increased demand for lead pencils––perhaps because a
baby boom increases school enrollment. Retail stores
will find that they selling more pencils. They will
order more pencils from their wholesalers. The
wholesalers will order more pencils from the
manufacturers. The manufacturers will order more
wood, more brass, more graphite––all the varied
products used to make a pencil. In order to induce
their suppliers to produce more of these items, they
will have to offer higher prices for them. The
higher prices will induce the suppliers to increase
their work force to be able to meet the higher
demand. To get more workers they will have to offer
higher wages or better working conditions. In this
way ripples spread out over ever widening circles,
transmitting the information to people all over the
world that there is a greater demand for
pencils––or, to be more precise, for some product
they are engaged in producing, for reasons they may
not and need not know.
The price system transmits only the important
information and only to the people who need to know.
The producers of wood, for example, do not have to
know whether the demand for pencils has gone up
because of a baby boom or because 14,000 more
government forms have to be filled out in pencil.
They don't even have to know that the demand for
pencils has gone up. They need to know only that
someone is willing to pay more for wood and that the
higher price is likely to last long enough to make
it worthwhile to satisfy the demand. Both items of
information are provided by market prices––the first
by the current price, the second by the price
offered for future delivery.
A major problem in transmitting information
efficiently is to make sure that everyone who can
use the information gets it without clogging the
"in" baskets of those who have no use for it. The
price system automatically solves this problem. The
people who transmit the information have an
incentive to search out the people who can use it
and they are in a position to do so. People who can
use the information have an incentive to get it and
they are in a position to do so. The pencil
manufacturer is in touch with people selling the
wood he uses. He is always trying to find additional
suppliers who can offer him a better product or a
lower price, Similarly, the producer of wood is in
touch with his customers and is always trying to
find new ones. On the other hand, people who are
currently engaged in these activities and are not
considering them as future activities have no
interest in the price of wood and will ignore it.
The transmission of information through prices is
enormously facilitated these days by organized
markets and by specialized communication facilities.
It is a fascinating exercise to look through the
price quotations published daily in, say, the Wall
Street Journal, not to mention the numerous more
specialized trade publications. These prices mirror
almost instantly what is happening all over the
world. There is a revolution in some remote country
that is a major producer of copper, or there is a
disruption of copper production for some other
reason. The current price of copper will shoot up at
once. To find out how long knowledgeable people
expect the supplies of copper to be affected, you
need merely examine the prices for future delivery
on the same page.
When readers even of the Wall Street Journal are
interested in more than a few of the prices quoted.
They can readily ignore the rest. The Wall Street
Journal does not provide this information out of
altruism or because it recognizes how important it
is for the operation of the economy. Rather, it is
led to provide this information by the very price
system whose functioning it facilitates. It has
found that it can achieve a larger or a more
profitable circulation by publishing these
prices––information transmitted to it by a different
set of prices.
Prices not only transmit information from the
ultimate buyers to retailers, wholesalers,
manufacturers, and owners of resources; they also
transmit information the other way. Suppose that a
forest fire or strike reduces the availability of
wood. The price of wood will go up. That will tell
the manufacturer of pencils that it will pay him to
use less wood, and it will not pay him to produce as
many pencils as before unless he can sell them for a
higher price. The smaller production of pencils will
enable the retailer to charge a higher price, and
the higher price will inform the final user that it
will pay him to wear his pencil down to a shorter
stub before he discards it, or shift to a mechanical
pencil. Again, he doesn't need to know why the
pencil has become more expensive, only that it has.
Anything that prevents prices from expressing freely
the conditions of demand or supply interferes with
the transmission of accurate information. Private
monopoly––control over a particular commodity by one
producer or a cartel of producers––is one example.
That does not prevent transmission of information
through the price system, but it does distort the
information transmitted. The quadrupling of the
price of oil in 1973 by the oil cartel transmitted
very important information. However, the information
it transmitted did not reflect a sudden reduction in
the supply of crude oil, or a sudden discovery of
new technical knowledge about future supplies of
oil, or anything else of a physical or technical
character bearing on the relative availability of
oil and other sources of energy. It simply
transmitted the information that a group of
countries had succeeded in organizing a price-fixing
and market-sharing arrangement.
Price controls on oil and other forms of energy by
the U.S. government in their turn prevented
information about the effect of the OPEC cartel from
being transmitted accurately to users of petroleum.
The result both strengthened the OPEC cartel, by
preventing a higher price from leading U.S.
consumers to economize on the use of oil, and
required the introduction of major command elements
in the United States in order to allocate the scarce
supply (by a Department of Energy spending in 1979
about $10 billion and employing 20,000 people).
Important as private distortions of the price system
are, these days the government is the major source
of interference with a free market system––through
tariffs and other restraints on international trade,
domestic action fixing or affecting individual
prices, including wages (see Chapter 2), government
regulation of specific industries (see Chapter 7),
monetary and fiscal policies producing erratic
inflation (see Chapter 9), and numerous other
channels.
One of the major adverse effects of erratic
inflation is the introduction of static, as it were,
into the transmission of information through prices.
If the price of wood goes up, for example, producers
of wood cannot know whether that is because
inflation is raising all prices or because wood is
now in greater demand or lower supply relative to
other products than it was before the price hike.
The information that is important for .the
organization of production is primarily about
relative prices––the price of one item compared with
the price of another. High inflation, and
particularly highly variable inflation, drowns that
information in meaningless static.
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