Out of the controversies over governmental regulation of prices, wages, and interest rates, the science of political economy developed. For hundreds and even for thousands of years the authorities have attempted to influence prices through the use of their power apparatus. They have imposed the heaviest penalties on those who refused to obey their orders. Innumerable lives have been lost in this struggle. In no other field has the police force displayed more eagerness to use its power, and in no other case has the vindictiveness of the authorities found more enthusiastic support by the masses. And still all these attempts failed of their objective.
The explanation which this failure has found in the philosophical, theological, political, and historical literature precisely reflects the opinion of the authorities and of the masses. It was maintained that human beings were egoistical and bad by nature and that the authority had been too weak and too reluctant to use force; what were required were hard and ruthless rulers.
The discovery of the inevitable laws of the market and exchange was one of the great achievements of the human mind. It laid the cornerstone for the development of liberal sociology and gave rise to liberalism and thus brought with it our modern culture and economy. It paved the way for the great technological achievements of our time. It was at the same time the starting point of a systematic science of human action, that is, of economics.
The science of political economy began with the realization that there is another limit for the sovereignty of those in power. The economist looks beyond the state and its power apparatus and discovers that human society is the outcome of human cooperation. He discovers that there prevail laws in the realm of social cooperation which the state is unable to modify. He recognizes that the process of the market, which is the result of these laws, determines prices and that the system of market prices provides the rationale of human cooperation. Prices no longer appear as the result of an arbitrary attitude of individuals dependent on their sense of justice but are recognised as the necessary and unequivocal product of the play of market forces. Each specific constellation of data produces a specific price structure as its necessary corollary. It is not possible to change these prices - the "natural" prices without having previously changed the data. Every deviation from the "natural" price releases forces which tend to bring the price back to its "natural" position.
This opinion is directly contrary to the belief that the authority can alter prices at will through its orders, interdictions, and penalties. If prices are determined by the structure of data, if they are the element in the process which effects social cooperation and which subordinates the activities of all individuals to the satisfaction of the wants of all members of the community then an arbitrary change of prices, that is one independent of changes in the data, must necessarily create a disturbance in social cooperation. It is true that a strong and determined government can issue price orders and can cruelly revenge itself on those who fail to obey.
But it will not achieve the aim it seeks through the price orders. Anyone attempting to refute the logic of these conclusions denies the possibility of analysis in the field of economics. There would otherwise be no such thing as economics and everything that has been written on economic matters would be meaningless. If prices can be fixed by the authority without producing a reaction in the market which is contrary to the intentions of the authority, then it is futile to attempt an explanation of prices on the basis of market forces. The very essence of such an explanation of market forces lies in the assumption that each constellation of the market has a corresponding price structure and that forces operate in the market which tend to restore this "natural” structure of prices if it is disturbed.
In their defence of price controls, the representatives of the Historical School of Political Economy, and nowadays the Institutionalists, reason quite logically from their viewpoint because they do not recognize economic theory. To them economics is merely an aggregate of authoritarian orders and measures. Illogical, however, is the argument of those who on the one hand study the problems of the market with the methods of theoretical analysis but on the other hand refuse to admit that price control measures necessarily produce results contrary to purpose.
The only alternatives are statutory law or economic law. Prices are either arbitrarily determined by the individuals in the market and may, therefore, be channelled by orders of the authorities in any desired direction; or prices are determined by the market forces commonly called supply and demand and the intervention of the authority affects the market as but one of many factors. There is no compromise possible between these two viewpoints.
See: http://mises.org/etexts/mises/interventionism/interventionismtext.pdf.
The book can also be obtained as a hard copy from http://www.mises.org/.
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