An eerie echo of the past

Earlier on I set out how 80 years ago an Austrian economist predicted the ineffectiveness of current efforts to intervene to improve economic conditions.

I have since been directed to an interview with another Austrian economist (this one also a British citizen) that - aside from the poor quality and the stilted voices - could have been recorded yesterday.

In it, Nobel laureate Prof. Friedrich von Hayek explains that inflation is always the result of government action, is the great evil against which we need to battle, and that efforts to intervene to prevent recessions that follow from periods of government-led inflation are doomed to failure.
The part of the inteview from 14.00 minutes to 16.50 minutes is particuarly chilling!

The following is a summary of what he says (I have slightly augmented it with my own understanding of his take on economics, though where possible I have enclosed these additions in square brackets):

1. Germany out-performed the UK in the three decades after WWII because the German trades unionists remembered that inflation is the enemy of the working man;
2. If people do not recognise the danger of inflation they will continue to believe that it can be used as a short-term solution to economic problems, as a result of which inflation will continue to wreak havoc upon the economy;
3. Unemployment results from inflation, which encourages the misdirection of labour [because easy money is made available to enterprises that would not, under normal conditions, be viable, allowing them to offer higher wages than would be possible if the easy money had not been thrown into the system by Government], so it is wrong to suggest that in the long term one needs to tolerate unemployment to curb inflation;
4. Curbing inflation will cause short-term unemployment, but this need only last a year or so [before the market re-asserts itself and labour is employed once again];
5. As Jeffrey Tucker notes, the “hilariously naive and idiotic” line of questioning demonstrates how “people really believe that policy makers can manipulate the economy like a machine, trading off unemployment for inflation and back again, with no trouble”
6. Non-compulsory planning will have no effect and so can do no harm [or, indeed, any good];
7. “Stopping the printing presses” is a euphemism as the real cause of inflation is credit expansion rather than the actual printing of hard money;
8. “All inflation is ultimately the problem of activities which government determines and can control. And all inflations have been stopped in the past by the governments stopping creating money or preventing the central bank from creating more money” [thus putting the lie to the government’s suggestion that inflation is caused by outside factors such as rises in the cost of commodities];
9. A tax cut will not work to stimulate the economy because deficiency of aggregate demand is not the problem. Rather, the problem is that the boom and employment that has been created by the previous inflation can only be sustained by further inflation [which, if perpetuated, would lead to hyper-inflation and ultimately a crisis];
10. If government continues to inflate to sustain the boom it may have to try to ameliorate the effects by imposing price controls which will lead to the imposition of a planned economy [i.e. socialism];
11. Political freedom exists hand-in-hand with economic freedom and the former cannot exist without the latter;
12. The power of labour unions and corporations does not lead to inflation unless that power is used to encourage inflationary policies;
13. Wages/Prices/Incomes policy is utterly ineffective except as a means of managing in the very short term the period of deflation/restoration;Not all problems are solvable in the short-term and trying to do so may cause more harm than good;
14. Equities remain a good investment in the long term;
15. “Inflation is like over-eating and indigestion. Over-eating is very pleasant; so is inflation. Indigestion comes only afterwards and so people do not see the connection”;
16. Economists are intellectually attracted to the concept of a system that they can control and therefore are instinctively opposed to free markets and non-intervention;
17. Continued government-induced inflation and subsequent intervention by government will inevitably destroy capitalism [as Karl Marx predicted and hoped for].

Hat tip to Kit for drawing it to my attention, and to mises.org for hosting it.

City traders need price controls to keep their drinks bills down

When commentators mythologise about evil capitalists charging unfair prices for their goods, they usually juxtapose them with some (economically) poor unfortunate who is unable to exercise choice and so is obliged to part with more of their hard-earned and scanty resources than is fair.

Outside the exercise of monopoly provision of essential services, there is little truth behind these claims. One must eat and drink, and one must be clothed, sheltered and warm. But one does not need a mobile telephone, so no matter how high the prices of mobile telephony, no purveyor of telephones or air-time can “gouge” the poor consumer: if one does not believe the price worth paying, one simply does not buy.

Nonetheless, the image of the poor consumer is an emotive one (“There but for the Grace of God go I”), and is often used to justify government intervention in pricing. Where natural monopolies obtain, regulators oversee prices, but since time immemorial there have been calls for price controls on goods that are freely traded in the market. Both the last years of the Ancien Regime and early Revolutionary France were rocked by battles over whether food prices should be capped; Britain and America experienced rent control (and wages control) in the middle of the last century.

Misguided though these policies are, food and shelter are at least essentials, and the supposed beneficiaries poor. But wine critics know little of poor people, and have their own constituencies (and their own livers) to worry about. Thus the call by wine critics cited in The Times today for a cap on the mark-up restaurants can charge for wine does leave a rather sour and flat taste in the mouth, lacking any overtones of oak or so much as a hint of summer fruits.

Price controls to protect the rich from being exploited are rather futile. Swillers of 1964 Petrus Pomerol Bordeaux operate in the ultimate luxury market. They are more than capable of determining whether an additional £2,900 a bottle is worth paying for dinner at the Dorchester Grill as opposed to Gordon Ramsay’s establishment down the road.

Fortunately, the call will fall on deaf ears. For one thing, it is too reminiscent of the Conservatives introduction and maintenance of the Corn Laws to protect the incomes of rich landowners. But more significantly, it exposes all the stupidities of price controls in any market.

Good wines have been laid down for a long time. Thus those who bought early benefit from their foresight. The owners of the Dorchester note that one could not buy bottles as cheaply as Mr. Ramsey is now able to sell them. He has made a shrewd investment. If the Dorchester were required to sell at a lower price, they might be unable to make any profit at all, and so would simply not sell the wine. Thus supply would fall. In more immediate products a similar problem exists: if one caps rental prices, fewer houses are made available for rent; if one caps sale prices, fewer are built.

In fact, the whole system is based on the assumption that there is a natural and fair price for a product. There is not, or at least if there is it is the price at which both seller and buyer are satisfied. Every purchase is an example of individuals happily swapping one resource (ultimately their labour) for another, and outside the essentials there is always an element of choice. Prices are dictated by supply and demand. Any attempt to interfere with that – to require that prices be kept lower or higher – will merely reduce either supply or demand. Some of us may choose to buy Fair Trade tea and coffee, but if all tea and coffee were elevated in price to ensure a larger income for farmers, consumers would simply drink less tea and coffee, either undermining the benefits of the elevated price or forcing some farmers our of the industry altogether.

Martin Isark may argue that excessive mark-ups “It discourages experimentation and dampens enthusiasm for trading-up”, but capping the mark-up to “£10 a bottle for most wines”, as Malcolm Gluck suggests, is likely to squeeze the middle out of the market. Restaurants will only keep cheaper wines on which they can make a good profit, and very expensive wines that do not fall foul of the new regulations. Thus trading up will be even more difficult, as a large chasm will open up in the middle that it is not worth restaurants servicing.

Ironically, the city traders who have been blowing record bonuses recently know all this. It is not they that are calling for price controls. They are probably getting their full £2,900 worth of value from the exclusivity that results from being able to pay vastly more than other people for an identical product. No genuinely poor people are suffering here. But perhaps the “relatively poor” – which in this case means wine critics struggling on mere five and six figure salaries – will have to accept that enjoying a 1982 Le Montrachet Bouchard Pere & Fils over dinner is simply not worth the price.