The Case for Price Regulation

...It occurred whenever the supply of goods that could be turned out by the available productive capacity was smaller than the demand...

...As a result, they have to make substantial concessions from the list price to the customer, even though they cannot get the cars from the manufacturers at a lower price...

...e. inflation—combined with inadequate demand, unemployment and recession...

...Thus, the consumer is forced to pay for new plants or equipment though he does not share in the ownership or management of the new productive capacities...

...The automobile industry is turning out fewer cars than it is geared to produce...

...If at full-capacity operation the industry shows no profits, it could only mean that at some point in the past capacity had been over-extended and the weaker productive units would have had to be squeezed out sooner or later, anyhow...

...The economic power of very large manufacturers and distributors enables them to maintain and even raise prices in the face of inadequate demand...

...Though the "administered" prices may be so high that they meet consumer resistance, these industries are not compelled by effective competition to reduce prices in order to sell more goods...

...Competition cannot and, in effect, should not be relied on to set their rates...

...To meet the inflationary threat of administered prices, we need an effective way of restoring the beneficial effects of competition...

...Public utilities are natural monopolies...

...If that meant a reduction of profits even to the vanishing point, at least temporarily, it should nevertheless be done...

...But to make price control effective under the circumstances of war, the Government also had to allocate raw materials to industry and ration consumer goods...

...the demand is nowhere near that strong and potential supplies are ample...

...Inflation, today, seems largely due to the fact that a number of large corporations, which dominate a number of economically strategic industries, such as steel and automobile manufacturing, are able to "administer" prices—that is, to fix an arbitrary price level which does not reflect the fluctuations in demand...

...This was true, for example, during the two World Wars and the Korean War...

...This will reduce the supply and thereby force up prices...

...Yet today we have inflation at a time when demand is not even strong enough to keep our productive capacity anywhere near fully employed...

...At best, this was difficult administratively, and it paved the way to all sorts of gray markets, black markets, under-the-counter selling at illegally high prices and disrespect for the law...

...Producers abhor price control, and most consumers do not like it either...

...In the automobile industry, a great deal of the pressure is also passed on to the dealers...

...The steel industry is operating at 60 per cent below capacity...

...Price regulation," on the other hand, would be a better term for any effort to fix prices at a level which would tend to bring about full employment and full capacity output...

...Perhaps, as Professor Abba P. Lemer has suggested, the term "price control" should be applied only to an effort to fix prices at a level below that which free competition would set...

...But certainly rationing and allocation of materials would not be necessary...

...Attempts to get higher prices through black-market operations would not be likely to succeed...

...For monopoly or administered prices only serve the self-interest of the owners of a particular industry and are at the root of our current economic troubles...

...The only reasonable answer to this is some form of price regulation...

...Thus, a great deal of the squeeze, which would normally be reflected in lower prices, is passed on to the workers—in the form of unemployment...

...In industries where prices are not set by competition but are administered by fiat of a few companies, we should follow the example of the public utilities...

...If prices are too low to permit a reasonable profit, some producers will be forced out of business...

...Price regulation would restore the price flexibility essential to a free economy...

...But they would probably not sell so much of their products or services because marginal consumers would not or could not buy them...

...Yet the only power strong enough to effect a balance against the economic strength of mammoth industries is the Government...

...Price regulation of this type is already in operation as far as setting public utility rates and charges by Governmental agencies are concerned...

...Prices are not necessarily too high just because profits are high...

...By the classic method of tight money—i...

...A way out of the current recession-inflation dilemma THE CASE FOR PRICE REGULATION By Alfred Baker Lewis THE UNIQUE fact of our present economic situation is that we have, at the same time, both a recession and a high degree of inflation...

...When the Government stepped in during World War II, in a fairly successful effort to stop inflation, it set prices at a substantially lower level than would have resulted from a free play of the market...

...One of the principles by which they administer their private price control is to maintain a profit margin which will enable them to finance future plant expansion in large measure out of present profits...

...Such regulation would benefit the worker by providing greater employment...

...crisis, and the Administration's anti-inflationary measures had little or no effect...

...On the other hand, any industry operating substantially below capacity should reduce prices to provide more buyers and more employment...

...They merely brought on the current recession...

...Left to their own devices, public utilities would probably charge higher rates than they do now...

...The proper function of price movements in a free economy is to maximize production and employment while keeping profits on the whole at a reasonable level...

...And the inevitable conclusion is that we need Government price regulation...

...Thus, today we have high prices—i...

...The application of price regulation in monopolistic industries might not be easy, although it could follow principles which are fairly simple...

...And the owners of industry would get full use of their productive capacities...

...e. high interest rates and credit restrictions—it tried to cut down demand...

...Heretofore, inflation has been the result of excessive demand...

...Nearly all other major industries are currently operating at well below their capacity...

...It would probably tend right now to cause lower prices in many industries...

...This attitude is maintained even when it is pointed out that "administered" prices are, in effect, privately-controlled prices...

...Price raises, for instance, should not be allowed unless productive capacity is fully utilized at the existing prices...

...Their overhead costs per unit would go down and, if they wanted to, they could also curtail their selling costs, since, at a lower price, their goods would move more easily...

...Since they are economically and financially weaker than the manufacturers, they do feel the pressure of competition...

...Instead, when they find that they are unable to move the goods at the high fixed price, they cut down production, lay off some of their employes, and sell a smaller volume rather than cut prices...

...But excessive demand was not the cause of the present ALFRED BAKER LEWIS is President of the Union Casualty and Life Insurance Company of Mount Vernon, N.Y...

...But when prices are administered by producers strong enough to disregard competition, the function of prices in a competitive economy is disturbed...

...And, though a steadily increasing portion of our working population has been employed in servicing and selling rather than in producing goods, joblessness and part-time work have been rising constantly...

...To increase their sales, some producers—if there is genuine competition among them—will reduce their prices to the point where buyers are tempted back into the market, and thus the economy moves toward a fuller use of its industrial and manpower potential...

...If prices and profits are high due to a continuously strong demand for a product, new capital, attracted by the high profits, tends to flow into that industry to increase production capacity until the demand can be fully satisfied...

...The purpose of such price regulation would be to balance productive capacity and demand...

...If prices are too high, consumers buy less...

...Where productive capacities are fully employed, it would be reasonable to allow price increases...

...The Eisenhower Administration, naturally, tried to stop inflation after the recovery from the 1953-54 recession...

...Price regulation now, however, would establish prices at a point that would be the normal result of truly free competition...