Brockway's Paradox

...A distress sale may be held, but seldom is an effort made to continue production by cutting price...

...Adam Smith seemed to halt this regress by making the value of labor equal to the goods workers must buy in order to keep themselves going: the simplest food, the cheapest clothing, the minimum shelter—the bare necessities of life...

...The regress continues...

...The bureaucracy can play off one set of constituents against the others, insuring that budgets rise much beyond plausible efficiency limits...

...In short, a balanced-budget amendment might make some kind of sense if offered in tandem with a maximum-income-and-wealth amendment...

...The professor is said to have come to his world-shattering notion as a result of studying economics at the University of Chicago, where he learned about Adam Smith and the invisible hand that produces results more socially desirable than those (if any) intended by profit-maximizing economic men...

...In the only way a regress can stop: It never actually gets started...

...The Dismal Science BROCKWAY'S PARADOX BY GEORGE P BROCKWAY Judging from newspaper reports, Professor James M. Buchanan of George Mason University won the Nobel Memorial Prize in Economics last October for discovering that politicians try to get re-elected, and that bureaucrats try to keep their jobs...

...Of course, when prices hit costs, there's no room left for profit, and the profit system turns out to be profitless...

...It stands to reason that it does, say traditional economists, because the best way to take business from your competitors is to underpricethem...

...But if the regress truly continued, all prices under competitive conditions would approach zero, and so would all costs and all incomes...

...But Brockway's Paradox calls your attention to the fact that perfectly altruistic producers would also set their prices at cost...

...The solution to the Paradox...

...On the negative side, "Re-election prospects tend to keep the self-interests of politicians within the reasonable range of the median voter, but there is nothing to channel outcomes toward the needs of non-median voting groups.'' (The professor is probably unaware of how ill the private producers of movies serve nonme-dian curmudgeons like me...

...Forthe moment, let's put to one side what every businessman knows, namely that a more effective way to take business is to out-advertise and out-merchandise the competition: Don't sell the steak, sell the sizzle...

...A firm's labor costs are its workers' prices (wages...

...To do this, it will stimulate competition among its suppliers, making them as cost-conscious as it is...

...There is another distinction to be made: that between elective and bureaucratic officials...

...It will also do what it can to buy its supplies—raw materials, partially finished goods, parts, whatever—at the lowest possible rates...

...consequently no determinate system of costs or prices or values...

...How we got along until now, Ican'timagine...

...There is thus no minimum or final or" natural" price for the goods laborers must buy...

...However, declares the professor, the self-seeking of economic man is good, while the self-seeking of political man is bad...

...It is an event in an actual, articulated world with a past and a future, not an imaginary world without time...

...In conclusion, let me reward your perseverance in reading this far by allowing you to be among the first to hear of Brockway's Paradox...

...A firm producing them can reduce its prices by controlling its costs in the same ways other firms do...

...It is determining, not determined...

...andhowour new knowledge will change us, I can't guess...

...Economics isn't about either selfishness or altruism...

...What Professor Buchanan says about politicians may well be true, yet it does not follow that the world of laissez-faire is free from questionable consequences...

...The system does not follow the pattern traditional economics says it does...

...When we say, "This is what I offer," "This is what I'll sell at that price," "This is what I'll buy at that price," we launch ourselves into the future: we progress, not regress...

...Oneman'scostisanother man's price...

...Farmers set their production level and take whatever the market will pay them...

...Like all acts, it is limited...

...Their capital investment is such that a flow of income is more important to them than a sporadic killing, and steady customers more valuable than casual bargain hunters...

...Whatever price you set has consequences...

...The most crucial point is that modem industrialists set their prices...

...and as the late Arthur Okun showed, firms also have a certain sales volume in mind...

...Yet these goods are produced, too, and produced exactly as other goods are...

...And so on...

...Prices are not forced down to costs, because firms, even when competing on the basis of price, do not set their prices in auction...

...A cost-conscious firm must try to get these costs down...

...Setting a price is an act of will...

...The elective is not all bad...

...It is reputed to be a powerful tool for prophesying, but it leaves me so breathless I haven't the strength to wield it...

...They set their prices in the hope of maintaining that flow into the future, and they strive to build a reliable clientele on the basis of their own reliability in observing the industry's customs—what Okun called the invisible handshake...

...Let's put this paradox to one side, too, and look more closely at costs...

...On the positive side, "Persons or parties that seek to represent the interests of voters compete for approval or favor much in the manner as do the sellers of products in imperfectly competitive markets for private goods and services...

...We have an infinite regress...

...The reason why Professor Buchanan favors the former and would be horrified at the latter is the doctrine that competition forces prices down...

...Itisafreeact...

...Somehow this bizarre situation never develops...

...In physics, you'd suspect an error in your observing or your reasoning if both freezing and heating caused water to boil...

...somehow the regress stops...

...it is about right and wrong...

...As for bureaucrats, they are all bad...

...Accepting—seeking, rather—the consequences of our action, we declare our membership in, and responsibility to, the real world...

...On the basis of this distinction, he joins (or leads a phalanx of) the radical Right that wants to do away with most government (except, perhaps, the Department of Defense), to deregulate everything, to requireabalanced budget by constitutional amendment, and all the rest...

...Politicians, too, know that this is the way to do it...

...Thus taking leave of the actual world, let's explore the world of traditional doctrine, where competition forces prices down and down, until they hit costs and can go no lower this side of bankruptcy...

...It is in the self-interest of surgeons to advise unnecessary surgery, and it is in the self-interest of brokers to form pools in which suckers can take a bath while losing their shirts...

...The decision to be a haberdasher instead of a bookseller is similarly willful...

...Thecost of labor cannot fall beyond the cost of these necessities, for then labor could not sustain itself...

...Price determination is not the only willful act in business...

...If the sales don't develop, production is cut...

...It is in the self-interest of a sharp fellow like the original Rockefeller to persuade suppliers to give him kickbacks, and it is in the self-interest of moneybags like the original Morgan to water stock...

...Manufacturing firms act in this fashion because they are ongoing organizations...

...It will squeeze its own labor force, and it will hope to find its own suppliers competing among themselves...

...Each cost-conscious supplier will then act as did the original firm...

...I fail to see the public good that flows from these self-interests, or the public harm that flows from their regulation...

...Manufacturers are price setters and quantity takers: They set their prices and take whatever sales they can wrest from the market...

...Professor Buchanan (to get back to him) thinks that perfectly selfish competitors drive prices down to cost...

...You cannot effectively price your wares at a tenth of the going price or at 10 times the going price...

...How does it stop...

...therefore their cost is the irreducible cost upon which the price system is based...

...As the late Sidney Weintraub showed, prices are set with a certain markup in mind...

...With willful acts we arrest the infinite regress...

...I also note that the few public servants with their hands in the till don't salt away as much in a lifetime as a corporate raider may in an afternoon...

...Determining the prices of shirts and ties is secondary and subordinate to deciding to be a haberdasher, and also to deciding what clientele one intends to attract, what kind of haberdasher one intends to be...

...On the other hand, in the happy case where sales are greater than expected, production is increased and profits pocketed, but price is not ordinarily altered...

...This, you will admit, is a very great discovery and something that had not occurred to anyone else,before...