Modern complex economies are remarkably characterized by the social division of labor. Individuals of varying abilities, personalities, and specialized technical knowledge in pursuing their self-interests integrate themselves into this social system by voluntarily participating in the various stages of production and exchange of goods and services.
Oftentimes this voluntary system of social cooperation called the “free market system” is met with a series of violent interventions which ultimately impede the maximal satisfaction of most urgent wants. Recall that individuals in order to maximize utility usually grade their wants according to an ordinal scale of importance and expect to satisfy their most urgent wants through the mechanism of a free market.
As Nigerians currently cry out in agony over higher prices of groceries and other essential commodities, various public appeals have been made to the presidency to promptly intervene in the markets and to curb the “excesses” of producers and sellers of these goods and services. Notable amongst these appeals are those of the members of the Nigerian parliament and the National Association of Nigerian Students urging a reinstitution of price control boards by the president, as well as human rights activist Femi Falana insisting on the control of prices of essential commodities. This goes to show the extent to which the average Nigerian looks to government intervention as panacea to his economic woes, while ignoring the teachings of economics on the implications of these interventionist measures.
Murray Rothbard, in pointing out a central task of praxeology in Man, Economy, and State, writes, “The major function of praxeology — of economics — is to bring to the world the knowledge of these indirect, these hidden, consequences of the different forms of human action.”
Austrian economic theory predicts that violent intervention in the free market — whether through statutory law, or prohibitive action by private individuals and social groups — always produces outcomes that are worse than the problems the intervention is stated to solve. To put it differently, the results of intervention are always judged unsatisfactory, even from the point of view of the initiators of these interventions.
Praxeology identifies two forms of effective price control — effective in the sense of influencing the actions of market participants. The first is maximum price control, and the second is minimum price control.
This article attempts to briefly show from a praxeological lens how violent intervention in the free market, in the form of a maximum price control law, must impinge the welfare-maximization goals of Nigerians and why the Misesian concept of the “rightly understood long-run interest” can set a better perspective for the actualization of Nigeria’s economic prosperity in both the short- and long-term.
Implications of government intervention
Maximum price control is the forceful establishment of the price of commodities below those at which the commodities would be traded in an unhampered market—that is, below the equilibrium price as established in a free market. In this case of maximum price control, prices are established by statutory law as opposed to its free establishment by market forces of demand and supply. This forceful enactment of prices, in total disregard of economic law and freedom, is what the aforementioned appeals to the presidency entail.
What precisely does the government aim at in establishing price maxima for essential commodities? Cheapness and affordability, from the point of view of those consumers who are currently not able to obtain these commodities at the free market price. To this group of potential consumers and the lawmakers, the free market price is high enough and must be replaced by the “more generous” price pronounced by the enlightened lawgiver. But what they tend to quickly forget is this: Prices in the free market are not arbitrary. They are the outcomes of a logical interrelation of various market data. Market prices are the outcomes of inviolable economic law.
When these free market prices are upset, economic consequences ensue. The most observable and acute of these economic consequences is the shortage of these commodities for which the maximum prices were enacted. Previously, the lawmaker and consumers were worried about affordability, but now they must also worry about availability — the goods are now in short supply and must now be obtained via obscure means. Even the consumers willing to buy at the current price can no longer find them in the market. It is now obvious that the utility-maximization goals of those Nigerian consumers looking to satisfy their most urgent wants with these goods must be frustrated.
But what causes this shortage in supply of the targeted commodities? A new condition has been created in the free market due to the violent intervention. First, the submarginal producers who could no longer operate profitably at the statutory price must stop production or pivot to a new line of business. The exit of these suppliers impinges total supply of the targeted commodities.
The second reason for reduced supply is attributed to the profit-maximizing goal of sellers. Certain sellers withdraw their goods from the market, speculatively holding their available stock in hopes of a future change in market conditions — most precisely a repeal of the statutory price. But then, the government having all the instruments of compulsion and coercion on its side must find it expedient to pursue its interventionist policy to their practical conclusion. It must fight against what it considers “hoarding.” The police and law enforcement agencies must be ordered to coerce trade. These sellers must be compelled to open up their shops for business at the statutory price. This inevitably causes a loss of utility on the part of the seller. To quote Rothbard in his book, Man, Economy, and State: “The man being coerced, therefore, always loses in utility as a result of the intervention, for his action has been forcibly changed by its impact.”
Why Nigerians must prioritize their long-run interests
The Misesian concept of “rightly understood long-run interest” offers an integrative perspective for actions geared toward want satisfaction in both the long- and short-term. If sustainable economic growth and overall improvement of welfare of every Nigerian is the goal, then policymakers must firmly grasp and prioritize the “rightly understood long-run interest” as opposed to short-term gains that carry hidden consequences in the long run.
As Ludwig von Mises clearly puts it in The Clash of Group Interests:
In the short run an individual or a group may profit from violating the interests of other groups or individuals. But in the long run, in indulging in such actions, they damage their own selfish interests no less than those of the people they have injured. The sacrifice that a man or a group makes in renouncing some short-run gains, lest they endanger the peaceful operation of the apparatus of social cooperation, is merely temporary. It amounts to an abandonment of a small immediate profit for the sake of incomparably greater advantages in the long run.
Once again, the choice is either statutory or economic law, but not both. Coercion or freedom, intervention or the free market system. We must always prefer knowing that our choices carry practical outcomes as always predicted by praxeology.
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