Here’s a letter to a very confident first-year economics grad student (not at GMU!):
Mr. Michael Kim
“Dissatisfied” with my argument that price controls spread false information throughout the economy, you write that “market imperfections sometimes cause market prices to spread misleading information. Price controls, including minimum wages, correct those imperfections and make prices conveyers of more accurate information.”
I’m well aware that economics textbooks and journals overflow with demonstrations of how real-world deviations from abstract descriptions of ‘perfect’ markets can be ‘corrected’ by ideal interventions. That the existence of this possibility can be demonstrated is news to no one. It’s rather like demonstrating the existence of the possibility for an omniscient, omnipotent, and benevolent god to intervene in our lives in ways that improve our well-being. Who doubts it, given that the demonstration amounts to nothing more than an assumption of successful intervention?
The relevant question is this: How probable is such successful intervention? I say ‘not at all.’ I say this not least because there’s absolutely no reason to suppose that the real-world human beings who do the intervening have enough knowledge to intervene in ways assumed by textbook writers.
I grant that at any time some market prices convey false information. My solution is to rely upon individuals on the ground, using their own resources and local knowledge, to discover these misleading prices and then – seizing the profit opportunities that are implied by these misleading prices – act in ways that make these prices conveyors of more-accurate information. In contrast, your solution is to substitute the inadequate information of government officials for the misleading information of currently ‘imperfect’ prices. How will such a substitution improve matters, especially given that prices constrained by government are no longer able to respond fully to changes in supply and demand?
Suppose I told you, truthfully, that every day a handful of newspaper reports are factually incorrect and hence convey false information. What solution would you propose? If you really believe that government officials can be trusted to control prices because a handful of prices are misleading, then you should propose to fix the problem of faulty newspaper reports by empowering government officials, sitting in their offices, both to discover which of the countless daily reports are misleading and to accurately rewrite these misleading newspaper reports despite these officials’ utter lack of knowledge of any of the relevant details of the events that are reported on.
Only if you think that such government intervention will result in more trustworthy newspaper reports should you continue to believe that government controls on prices will result in more trustworthy prices.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030