Henry Hazlitt: Price-Fixing Brings Bottlenecks

Henry Hazlitt (1894-1993) was one of the 20th century’s greatest writers on economics. His 1946 classic Economics In One Lesson is still an excellent introduction to the subject for the general reader. And, for a number of years, he was columnist in Newsweek, bringing economic insights to the issues of the day and expressing them with clarity. The article below is a classic example of this. It appeared in Newsweek on this day in 1946.

The meat shortage may serve as an illustration of the way in which price fixing brings about scarcity in general. As a result of ceilings, cattle raisers found it more profitable to fatten their cattle on the lots than to send them to market. This led to a whole series of other shortages. A soap crisis is being created because soap is mainly made from tallow and tallow comes from steers. Synthetic rubber and hence tire production are threatened in turn by the shortage of soap. A meat shortage also means a hide, leather, and shoe shortage. A bread shortage may come from a scarcity of lard needed in baking, for lard comes from hogs.

Production is held back everywhere by missing vital parts: automobile makers wait for sheet steel and radio makers for cabinets. The National Association of Home Builders, reviewing the veterans’ housing program, has pointed out that “the success of the veterans’ program will be measured not by the supply of the most available building material but by the supply of the least available building material.” It points, as one illustration, to the critical shortage of nails, “fast approaching a national scandal.” But as the remedy it proposes, not the termination of price fixing, but “incentive pricing” for nails.

Such a proposal indicates that even the chief victims of price fixing still fail to recognize that the problems which confront price fixers are inherently insoluble. If there is to be incentive pricing for nail manufacturers, why not incentive pricing for everyone? How can the government allow a higher rate of profit for nail makers as compared with brick makers, for example, without laying itself open to charges of favoritism?

How can it decide, in fact, just what rate of profit on nails as compared with bricks is necessary to bring forth just the right amount of nails as compared with the right amount of bricks? Or just the right amount of nails and bricks compared with the right amount of each of tens of thousands of other commodities? The output of every part must be synchronized with that of scores or hundreds of others if there are not to be bottlenecks which slow down whole industries.

The persistent belief among many businessmen that price fixing would be all right if it were “fairly administered”—if it allowed “cost of production plus a reasonable profit”—completely overlooks this problem. A uniform percentage profit for everyone (assuming that price fixing could achieve it) would give no more incentive for producing an article in critically short supply than one in relative excess.

The most brilliant of bureaucrats could not solve through price fixing the problem of balancing and synchronizing the production of thousands of different commodities in relation to each other. Yet this problem is solved quasi-automatically through the mechanism of free markets. When a given article is scarce in relation to demand its price immediately rises; the profit margin in making that article becomes greater than for making articles in ampler supply; manufacturers expand its output and new firms take up its production until the shortage is relieved and the price and profit margin once more fall to an equilibrium level with that in other lines. There is no delay and red tape in getting “price adjustment”; price changes occur daily and hourly the moment unfulfilled demands or increases in supply anywhere make themselves felt.

It is true that, in spite of all the complaints about specific shortages under price fixing, the figures of overall production, as compiled by the Federal Reserve Board, have been high. For July the Federal index of industrial production was 78 percent above the 1935–39 average. But before we attempt to explain this apparent paradox, serious questions must be raised concerning the accuracy of the Reserve index. Andrew Court of General Motors has pointed out that while the Reserve index showed automobile production 78 percent above the 1935–39 average in July, actual production that month was about 300,000 cars and trucks compared with an average of 335,000 for the 1935–39 period—i.e., down 10 percent instead of up 78 percent.

The Reserve index error is apparently the result of measuring production of cars and parts by the treacherous figure of man-hours worked instead of by the actual number of cars and trucks produced.