“Parity” Prices and Saving the X Industry

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“Parity” Prices and Saving the X Industry

When someone suggests prices for a certain industry should remain “on par” with some previous historical standard, they are advocating something known as “parity prices.”

This was a common argument made by farmers during the 1930’s. In the face of falling agricultural prices, instead of altering their products or even their professions, they preferred to use the strong arm of government to force agricultural prices higher. The market was sending farmers one message (reduce production), but it was far easier to get legislators to do their bidding than to provide consumers a product they actually want.

Of course, when calling for parity prices, the farmer (or anyone making this argument) must offer justification with “feel good” rhetoric about protecting public interests. They insist that since farm prices have dropped, farmers can no longer afford to buy to products of industry. In a vicious cycle, industrial workers would then be laid off because farmers are no longer purchasing their products. What society allegedly needs is to bring back the previously established price relationship between farm goods and industrial products in order to restore proper balance and ensure that purchasing power is distributed amongst workers in all sectors.

Although the above is chock full of fallacies and absurdities, the focus here will remain on one distinct truth; namely that “there is no sound reason for taking the particular price relationships that prevailed in a particular year or period and regarding them as sacrosanct, or even as necessarily more “normal” than those of any other period.” Prices cannot be manipulated to achieve societal goals. At best, price manipulation can benefit some people but only at the expense of many others.

Hazlitt asks: “Why not preserve perpetually the price relationship of every commodity at that time to every other?” The price of computers has fallen drastically since the 1980’s, would we be better off if we pegged the price of computers to some other commodity? Prices convey information and manipulating them does not change this reality.

If production increases mean that farm goods (or any industry’s product) are cheaper to make because of better machines, knowledge, fertilizers, pesticides or any reason; prices are going to fall, assuming all other relevant factors remain the same.

If prices are propped up artificially, there is only a shift in purchasing power, not an increase in purchasing power. Nationwide, our standards of living are improved only if we can produce more with less, that is, if we are efficient and more productive.

It may be a “seen” factor that the status of farmers is improved when they artificially receive an extra dollar per bushel of sales. What remains unseen is that industrial workers now have one less dollar to spend on other industrial goods. “On net balance industry in general has gained nothing. It loses in city sales precisely as much as it gains in rural sales.” Even worse, in practice these agricultural price increases are brought about through production decreases that have the effect of make everyone in society worse off, not better.

The issue of corporate bailouts is much more relevant today than “parity prices.” Hazlitt describes bailouts as “Saving the X Industry,” illustrating that the bailouts for privileged firms in 2008/2009 was just a new version of an age-old trick. Governments and their cronies extract money from the poor and middle class workers and give it to wealthy executives running companies that are deemed “essential” or “Too Big to Fail.”

As always, this special-interest wealth transfer is sold to the public as beneficial and essential. If we don’t save the X industry, “it will pull down the general economy with it, and that if it is artificially kept alive it will help everybody else.”  This logic was completely fallacious when Hazlitt was writing and the same fact is true today.

The main way to “save the X industry” — if we put aside protectionist occupational licensing schemes or government regulations limiting competition — is to offer public funds in the form of a subsidy. Like the other lessons we have previously discussed, there is nothing mysterious going on: “the taxpayers must lose precisely as much as the X industry gains…other industries must lose what the X industry gains.” Once again, this is not just a zero-sum shifting of resources, the result is a net loss for society. Moving money and resources from where they are more highly valued to an industry where they are less urgently valued means consumers wants go unsatisfied. This means that average standards of living will fall.

This lesson becomes clear when you think about the past. It would have been wasteful to save the horse-and-buggy industry with bailouts funds that would have been used to propel the automobile industry, but that is essentially what occurs when poorly managed firms are saved with taxpayer money.  

As a final note, no economic implosion would occur in the absence of bailouts. No physical capital good or natural resource disappears when a firm goes bankrupt, the only thing that happens is that entrepreneurs that have effectively used resources in the past may bid for more resources, with ownership titles exchanging hands. This further increases efficiency and eliminates the moral hazard inherent to the too big to fail mentality — the “heads I win, tails you lose” poison that government creates amongst existing industry leaders.