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Dearness vs. Cheapness

Mises Daily: Wednesday, November 07, 2012 by

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[The Bastiat Collection (2011); originally from the second series of Economic Sophisms (1848)]

I think it necessary to submit to the reader some theoretical remarks on the illusions to which the words dearness and cheapness give rise. At first sight, these remarks may, I feel, be regarded as subtle, but the question is not whether they are subtle or the reverse, but whether they are true. Now, I not only believe them to be perfectly true, but to be well fitted to suggest matter for reflection to men (of whom there are not a few) who have sincere faith in the efficacy of a protectionist policy.

The advocates of liberty and the defenders of restriction are both obliged to employ the expressions, dearness and cheapness. The former declare themselves in favor of cheapness with a view to the interest of the consumer; the latter pronounce in favor of dearness, having regard especially to the interest of the producer. Others content themselves with saying, "The producer and consumer are one and the same person"; which leaves undecided the question whether the law should promote cheapness or dearness.

In the midst of this conflict it would seem that the law has only one course to follow, and that is to allow prices to settle and adjust themselves naturally. But then we are attacked by the bitter enemies of laissez-faire. Regardless of risks they want the law to interfere, without knowing or caring in what direction. And yet it lies with those who desire to create by legal intervention an artificial dearness or an unnatural cheapness to explain the grounds of their preference. The burden of proof rests upon them exclusively. Liberty is always esteemed good till the contrary is proved; and to allow prices to settle and adjust themselves naturally is liberty.

But the parties to this dispute have changed positions. The advocates of dearness have secured the triumph of their system, and it lies with the defenders of natural prices to prove the goodness of their cause. On both sides the argument turns on two words; and it is therefore very essential to ascertain what these two words really mean.

But we must first of all notice a series of facts which are fitted to disconcert the champions of both camps. To engender dearness the restrictionists have obtained protective duties, and a cheapness, which is to them inexplicable, has come to deceive their hopes.

To create cheapness, the free traders have occasionally succeeded in securing liberty, and, to their astonishment, an elevation of prices has been the consequence.

For example, in France, in order to favor agriculture, a duty of 22 percent has been imposed on foreign wool, and it has turned out that French wool has been sold at a lower price after the measure than before it.

In England, to satisfy the consumer, they lowered, and ultimately removed, the duty on foreign wool; and it has come to pass that in that country the price of wool is higher than ever.

And these are not isolated facts; for the price of wool is governed by precisely the same laws that govern the price of everything else. The same result is produced in all analogous cases. Contrary to expectation, protection has, to some extent, brought about a fall, and competition, to some extent, a rise of prices.

When the confusion of ideas thence arising had reached its height, the protectionists began saying to their adversaries: "It is our system that brings about the cheapness of which you boast so much." To which the reply was: "It is liberty that has induced the dearness which you find so useful."[1]

Evidently there is in all this a misconception, an illusion, that it is necessary to clear up; and this is what I shall now endeavor to do.

Put the case of two isolated nations, each composed of a million inhabitants. Grant that, other things being equal, the one possesses double the quantity of everything — wheat, meat, iron, furniture, fuel, books, clothing, etc. — that the other possesses.

It will be granted that the one is twice as rich as the other.

And yet there is no reason to affirm that a difference in actual money prices[2] exists in the two countries. Nominal prices may perhaps be higher in the richer country. It may be that in the United States everything is nominally dearer than in Poland, and that the population of the former country should, nevertheless, be better provided with all that they need; whence we infer that it is not the nominal price of products but their comparative abundance that constitutes wealth. When, then, we desire to pronounce an opinion on the comparative merits of restriction and free trade, we should not inquire which of the two systems engenders dearness or cheapness, but which of the two brings abundance or scarcity.

For observe this, that products being exchanged for each other, a relative scarcity of all, and a relative abundance of all, leave the nominal prices of commodities in general at the same point; but this cannot be affirmed of the relative condition of the inhabitants of the two countries.

Let us dip a little deeper still into this subject.

When we see an increase and a reduction of duties produce effects so different from what we had expected, depreciation often following taxation, and enhancement following free trade, it becomes the imperative duty of political economy to seek an explanation of phenomena so much opposed to received ideas; for it is needless to say that a science, if it is worthy of the name, is nothing else than a faithful statement and a sound explanation of facts.

Now the phenomenon we are here examining is explained very satisfactorily by a circumstance of which we must never lose sight.

Dearness is due to two causes, and not to one only.

The same thing holds good of cheapness.

It is one of the least disputed points in political economy that price is determined by the relative state of supply and demand.

There are then two terms that affect price — supply and demand. These terms are essentially variable. They may be combined in the same direction, in contrary directions, and in infinitely varied proportions. Hence the combinations of which price is the result are inexhaustible. High price may be the result either of diminished supply or of increased demand.

Low price may be the result of increased supply or of diminished demand.

Hence there are two kinds of dearness, and two kinds of cheapness.

There is a dearness of an injurious kind, that which proceeds from a diminution of supply, for that implies scarcity, privation (such as has been felt this year from the scarcity of wheat); and there is a dearness of a beneficial kind, that which results from an increase of demand, for the latter presupposes the development of general wealth.

In the same way, there is a cheapness that is desirable, that which has its source in abundance; and an injurious cheapness, that has for its cause the failure of demand, and the impoverishment of consumers.

Now, please note this: that restriction tends to induce, at the same time, both the injurious cause of dearness, and the injurious cause of cheapness — injurious dearness, by diminishing the supply, for this is the avowed object of restriction; and injurious cheapness, by diminishing also the demand; seeing that it gives a false direction to labor and capital, and fetters consumers with taxes and trammels.

So that, as regards price, these two tendencies neutralize each other; and this is the reason why the restrictive system, restraining as it does, demand and supply at one and the same time, does not in the long run realize even that dearness which is its object.

But, as regards the condition of the population, these causes do not at all neutralize each other; on the contrary, they concur in making it worse.

The effect of freedom of trade is exactly the opposite. In its general result, it may be that it does not realize the cheapness it promises; for it has two tendencies, one toward desirable cheapness through the extension of supply, or abundance; the other toward appreciable dearness by the development of demand, or general wealth. These two tendencies neutralize each other in what concerns nominal price, but they concur in what regards the material prosperity of the population.

In short, under the restrictive system, in so far as it is operative, men recede toward a state of things in which both demand and supply are enfeebled. Under a system of freedom, they progress toward a state of things in which both are developed simultaneously, and without necessarily affecting nominal prices. Such prices form no good criterion of wealth. They may remain the same while society is falling into a state of the most abject poverty or while it is advancing toward a state of the greatest prosperity.

We shall now, in a few words, show the practical application of this doctrine.

A cultivator of the south of France believes himself to be very rich, because he is protected by duties from external competition. He may be as poor as Job; but he nevertheless imagines that sooner or later he will get rich by protection. In these circumstances, if we ask him the question that was put by the Odier Committee in these words:

"Do you desire — yes or no — to be subject to foreign competition?" His first impulse is to answer "No," and the Odier Committee proudly welcomes his response.

However, we must go a little deeper into the matter. Unquestionably, foreign competition — nay, competition in general — is always troublesome; and if one branch of trade alone could eliminate it, that branch of trade would for some time profit largely.

But protection is not an isolated favor; it is a system. If, to the profit of the agriculturist, protection tends to create a scarcity of wheat and of meat, it tends likewise to create, to the profit of other industries, a scarcity of iron, of cloth, of fuel, tools, etc. — a scarcity, in short, of everything.

Now, if a scarcity of wheat tends to enhance its price through a diminution of supply, the scarcity of all other commodities for which wheat is exchanged tends to reduce the price of wheat by a diminution of demand, so that it is not at all certain that ultimately wheat will be a penny dearer than it would have been under a system of free trade. There is nothing certain in the whole process but this — that as there is upon the whole less of every commodity in the country, each man will be less plentifully provided with everything he has occasion to buy.

The agriculturist should ask himself whether it would not be more to his interest that a certain quantity of wheat and cattle should be imported from abroad, and that he should at the same time find himself surrounded by a population in easy circumstances, able and willing to consume and pay for all sorts of agricultural produce.

Imagine a place in which the people are clothed in rags, fed upon chestnuts, and lodged in hovels. How can agriculture flourish in such a locality? What can the soil be made to produce with a well-founded expectation of fair remuneration? Meat? The people do not eat it. Milk? They must content themselves with water. Butter? It is regarded as a luxury. Wool? The use of it is dispensed with as much as possible. Does anyone imagine that all the ordinary objects of consumption can thus be put beyond the reach of the masses, without tending to lower prices as much as protection is tending to raise them?

What has been said of the agriculturist holds equally true of the manufacturer. Our manufacturers of cloth assure us that external competition will lower prices by increasing the supply. Granted; but will not these prices be again raised by an increased demand? Is the consumption of cloth a fixed and invariable quantity? Has every man as much of it as he would wish to have? And if general wealth is advanced and developed by the abolition of all these taxes and restrictions, will the first use to which this emancipation is turned by the population not be to dress better?

The question — the constantly recurring question — then, is not to find out whether protection is favorable to any one special branch of industry, but whether, when everything is weighed, balanced, and taken into account, restriction is in its own nature, more productive than liberty.

Now, no one will venture to maintain this. On the contrary, we are perpetually met with the admission, "You are right in principle."

If it be so, if restriction confers no benefit on individual branches of industry without doing a greater amount of injury to general wealth, we are forced to conclude that actual money prices, considered by themselves, only express a relation between each special branch of industry and industry in general, between supply and demand; and that, on this account, a remunerative price, which is the professed object of protection, is rather injured than favored by the system.

SUPPLEMENT

The article we have published under the title of Dearness, Cheapness, has brought us several letters. We give them, along with our replies:

MR. EDITOR — You upset all our ideas. I endeavored to aid the cause of free trade, and found it necessary to urge the consideration of cheapness. I went about everywhere, saying, "When freedom of trade is accorded, bread, meat, cloth, linen, iron, fuel, will go on falling in price." This displeased those who sell, but gave great pleasure to those who buy these commodities. And now you throw out doubts as to whether free trade will bring us cheapness or not. What, then, is to be gained by it? What gain will it be to the people if foreign competition, which may damage their sales, does not benefit them in their purchases?

MR. FREE-TRADER — Allow us to tell you that you must have read only half the article that has called forth your letter. We said that free trade acts exactly in the same way as roads, canals, railways, and everything else that facilitates communication by removing obstacles. Its first tendency is to increase the supply of the commodity freed from duty, and consequently to lower its price. But by augmenting at the same time the supply of all other commodities for which this article is exchanged, it increases the demand, and the price by this means rises again. You ask what gain this would be to the people? Suppose a balance with several scales, in each of which is deposited a certain quantity of the articles you have enumerated. If you add to the wheat in one scale it will tend to fall; but if you add a little cloth, a little iron, a little fuel, to what the other scales contained, you will redress the equilibrium. If you look only at the beam, you will find nothing changed. But if you look at the people for whose use these articles are produced, you will find them better fed, clothed, and warmed.

MR. EDITOR — I am a manufacturer of cloth, and a protectionist. I confess that your article on dearness and cheapness has made me reflect. It contains something specious that would require to be well established before we declare ourselves converted.

MR. PROTECTIONIST — We say that your restrictive measures have an iniquitous object in view, namely, artificial dearness. But we do not affirm that they always realize the hopes of those who promote them. It is certain that they inflict on the consumer all the injurious consequences of scarcity. It is not certain that they always confer a corresponding advantage on the producer. Why? Because if they diminish the supply, they diminish also the demand.

This proves that there is in the economic arrangement of this world a moral force, a vis medicatrix, which causes unjust ambition in the long run to fall prey to self-deception.

Would you have the goodness, sir, to remark that one of the elements of the prosperity of each individual branch of industry is the general wealth of the community. The value of a house is not always in proportion to what it has cost, but likewise in proportion to the number and fortune of the tenants. Are two houses exactly similar necessarily of the same value? By no means, if the one is situated in Paris and the other in Lower Brittany. Never speak of price without taking into account collateral circumstances, and let it be remembered that no attempt is so vain as to endeavor to found the prosperity of parts on the ruin of the whole. And yet this is what the policy of restriction pretends to do.

Consider what would have happened at Paris, for example, if this strife of interests had been attended with success.

Suppose that the first shoemaker who established himself in that city had succeeded in ejecting all others; that the first tailor, the first mason, the first printer, the first watchmaker, the first physician, the first baker, had been equally successful. Paris would at this moment have been still a village of 1,200 or 1,500 inhabitants. It has turned out very differently. The market of Paris has been open to all (excepting those whom you still keep out), and it is this freedom that has enlarged and aggrandized it. The struggles of competition have been bitter and long continued, and this is what has made Paris a city of a million inhabitants. The general wealth has increased, no doubt; but has the individual wealth of the shoemakers and tailors been diminished? This is the question you have to ask. You may say that according as the number of competitors increased, the price of their products would go on falling. Has it done so? No — for if the supply has been augmented, the demand has been enlarged.

The same thing will hold good of your commodity, cloth; let it enter freely. You will have more competitors in the trade, it is true; but you will have more customers, and, above all, richer customers. Is it possible you can never have thought of this, when you see nine-tenths of your fellow citizens underclothed in winter, for want of the commodity you manufacture?

If you wish to prosper, allow your customers to thrive. This is a lesson you have been very long in learning. When it is thoroughly learned, each man will seek his own interest in the general good; and then jealousies between man and man, town and town, province and province, nation and nation, will no longer trouble the world.

Notes

[1] Author's note: Recently, Mr. Duchatel, who had formerly advocated free trade, with a view to low prices, said to the Chamber, "It would not be difficult for me to prove that protection leads to cheapness."

[2] Translator's note: The expression, prix absolus (absolute prices), which the author employs here and in chapter 9 of the first series (ante), is not, I think, used by English economists, and from the context in both instances I take it to mean actual money prices; or what Adam Smith terms nominal prices.