Leadership to Freedom

A while back I read an article on Mishs Global Economic Analysis blog about France doing something pretty strange. They wanted to make books more expensive. They didn’t come out and word it that way of course; they said they were trying to protect their culture of reading.

I found this argument to be preposterous, yet at the same time I wasn’t surprised, knowing the type of information people have when it comes to this field. This is why it came as no shock to see a very similar situation here in Quebec, with the government wanting to make books more expensive. There are some benefits to certain individuals, but it’s important to consider the costs as well, and what it means to our freedoms and overall prosperity.

In France, it was about stopping online retailers like amazon from being allowed to offer free shipping in order to protect the local bookstores, while in Quebec it’s about not allowing stores to offer too big a discount on new books.

Its price controls. When price controls are in place, they are never good; whether it’s to make things cheaper for consumers or more expensive to serve suppliers.

The Benefits

The benefit is fairly straightforward, and is the reason for the law in the first. The benefit is for the people who are incapable, for whatever reason, of supplying books as cheaply and efficiently as other in the marketplace. They allow them to stay competitive and/or stay in business. By putting a ‘bottom’ on what retailers are allowed to sell an item, it allows those who don’t serve consumers very well to stay in business without having to change anything. Without this special deal, they may have to close shop and find some other way to make a living; they may have to work harder.

We can feel sorry for these individuals all we want, but it’s the profit-loss system that makes the economy work for the best of everyone. It’s the risk of losing that makes good businesses improve, or to get out and do something different, more in the interest of the consumers. It may bad for that particular business owner that was beaten out of the market by someone with a better deal, but it is for the greater good.

Without the risk of loss, businesses have no need to serve the public better, no need to improve on anything.

The Costs

There is a wide range of repercussions to price controls. Let’s just cover the basics.

Higher prices & lower standard of living

In this particular case with making books more expensive (i.e. stopping them from being cheaper), it hurts the general public where it counts; their wallets. People who want to buy these books now have less of a budget to work with. They can buy fewer books and read less, or they can buy the same amount and have less money left over for other things in their lives. Either way their standard of living goes down; all to ‘save’ the independent book store. Readership will drop in this case, in the name of preserving the culture of reading as the people of France were told.

We are taking away the freedom of people who would choose to pay less for books rather than support the local bookstore. If People wanted to pay more because they valued going into a particular store to get it, they have the freedom to do so; but it should be up to that store to bring value to those customers to get them in the doors. If people want to pay less and don’t care about the local bookstore that ‘might’ be in trouble, they should have the freedom to do so. That’s called being fair to everyone.

Loss of innovation

Whenever there is a floor to what can be charged for a product or service, it removes incentives for innovation and improvements. Entrepreneurs spend money on research and development to improve products and services, in many cases making them cheaper so that they can have a leg up on competition. Without the possibility of lowering the price, there is less incentive to risk investing money to lower the costs. Sure they may have a better bottom line from the lower costs to the price level, but it may not be as big a gain as bringing in more customers.

People innovate because there is a big enough incentive to do so. Remove part of that incentive, and it may no longer be big enough to innovate.

Government regulated high prices are good for one group, and one group only; the people who can’t or who don’t want to sell at a lower price.

Lower prices & lower standard of living

Although not the case in this instance of price controls on books, we should look at the whole picture which includes price limits. We don’t want to consider the information above and decide we should just make everything really cheap, thinking our standard of living would rise.

We can look at so many times and places in history where governments stopped people from charging higher prices, only to have the economy nosedive into oblivion. The latest example is in Venezuela, where you weren’t able to find toilet paper.

It all comes back to the idea of incentives. If something costs a certain amount to make, and you’re not allowed to charge market price to make a profit, you have no incentive to produce it; you limit the supply. You may still have some producers capable of manufacturing  the good or service with a low enough cost to still be profitable, but the more price drops, so does the number of people who will be in that situation. Eventually the supply will no longer be limited, but eliminated altogether.

If you can’t earn a profit from it, why would you do it? You may feel that people should do it for the greater the good, but whatever you feel people should do, it doesn’t matter when facing the reality of what people will do. As told in the 2^nd law of decline, Bastiat’s Law, people will do the least amount of work to get the most gain; which also means if they don’t stand to gain, they won’t do any work.

If no one is producing a good any more, and no one is importing it due to the cost of importing being more than what it can sell for, there is no more goods. When you are no longer even capable of buying a good at any price, it doesn’t matter what it’s ‘price’ is; you’re standard of living goes down. Imagine living in Venezuela and not being able to get toilet paper!

If a price is ever too much for consumers, then the consumer can vote with his wallet and not buy it. That will force the suppliers to lower the price until it is a price that consumers agree is good enough for them. The only exceptions to this are government imposed monopolies, or laws forcing people to buy them at any price (like the requirement for people in Quebec to take driving lessons through official driving schools – it more than quadrupled the price in just over 10 years)

In all these instances, you’ve lost your freedom to purchase what you want at the price you and the seller were both OK with. Regardless of whatever else may be wrong with price controls that alone should be enough to never agree with them.