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Sunday, August 12, 2012

Economics in One Lesson by Henry Hazlitt

“Parity” Prices

SPECIAL INTERESTS, as the history of tariffs reminds us, can think of the most ingenious reasons why they should be the objects of special solicitude. Their spokesmen present a plan in their favor; and it seems at first so absurd that disinterested writers do not trouble to expose it. But the special interests keep on insisting on the scheme. Its enactment would make so much difference to their own immediate welfare that they can afford to hire trained economists and public relations experts to propagate it in their behalf. The public hears the argument so often repeated, and accompanied by such a wealth of imposing statistics, charts, curves and pie-slices, that it is soon taken in. When at last disinterested writers recognize that the danger of the scheme’s enactment is real, they are usually too late. They cannot in a few weeks acquaint themselves with the subject as thoroughly as the hired brains who have been devoting their full time to it for years; they are accused of being uninformed, and they have the air of men who presume to dispute axioms.
This general history will do as a history of the idea of “parity” prices for agricultural products. I forget the first day when it made its appearance in a legislative bill; but with the advent of the New Deal in 1933 it had become a definitely established principle, enacted into law; and as year succeeded year, and its absurd corollaries made themselves manifest, they were enacted too.
The argument for parity prices ran roughly like this. Agriculture is the most basic and important of all industries. It must be preserved at all costs. Moreover, the prosperity of everybody else depends upon the prosperity of the farmer. If he does not have the purchasing power to buy the products of industry, industry languishes. This was the cause of the 1929 collapse, or at least of our failure to recover from it. For the prices of farm products dropped violently, while the prices of industrial products dropped very little. The result was that the farmer could not buy industrial products; the city workers were laid off and could not buy farm products, and the depression spread in ever-widening vicious circles. There was only one cure, and it was simple. Bring back the prices of the farmer’s products to a parity with the prices of the things the farmer buys. This parity existed in the period from 1909 to 1914, when farmers were prosperous. That price relationship must be restored and preserved perpetually.
It would take too long, and carry us too far from our main point, to examine every absurdity concealed in this plausible statement. 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. Even if they were “normal” at the time, what reason is there to suppose that these same relationships should be preserved more than sixty years later in spite of the enormous changes in the conditions of production and demand that have taken place in the meantime? The period of 1909 to 1914, as the basis of parity, was not selected at random. In terms of relative prices it was one of the most favorable periods to agriculture in our entire history.
If there had been any sincerity or logic in the idea, it would have been universally extended. If the price relationships between agricultural and industrial products that prevailed from August 1909 to July 1914 ought to be preserved perpetually, why not preserve perpetually the price relationship of every commodity at that time to every other?
When the first edition of this book appeared in 1946, I used the following illustrations of the absurdities to which this would have led:
A Chevrolet six-cylinder touring car cost $2,150 in 1912; an incomparably improved six-cylinder Chevrolet sedan cost $907 in 1942; adjusted for “parity” on the same basis as farm products, however, it would have cost $3,270 in 1942. A pound of aluminum from 1909 to 1913 inclusive averaged 22.5 cents; its price early in 1946 was 14 cents; but at “parity” it would then have cost, instead, 41 cents.
It would be both difficult and debatable to try to bring these two particular comparisons down to date by adjusting not only for the serious inflation (consumer prices have more than tripled) between 1946 and 1978, but also for the qualitative differences in automobiles in the two periods. But this difficulty merely emphasizes the impracticability of the proposal.
After making, in the 1946 edition, the comparison quoted above, I went on to point out that the same type of increase in productivity had in part led also to the lower prices of farm products. “In the five year period 1955 through 1959 an average of 428 pounds of cotton was raised per acre in the United States as compared with an average of 260 pounds in the five-year period 1939 to 1943 and an average of only 188 pounds in the five year ‘base’ period 1909 to 1913. When these comparisons are brought down to date, they show that the increase in farm productivity has continued, though at a reduced rate. In the five-year period 1968 to 1972, an average of 467 pounds of cotton was raised per acre. Similarly, in the five years 1968 to 1972 an average of 84 bushels of corn per acre was raised compared with an average of only 26.1 bushels in 1935 to 1939, and an average of 31.3 bushels of wheat was raised per acre compared with an average of only 13.2 in the earlier period.
Costs of production have been substantially lowered for farm products by better application of chemical fertilizer, improved strains of seed and increasing mechanization. In the 1946 edition I made the following quotation:*
“On some large farms which have been completely mechanized and are operated along mass production lines, it requires only one-third to one-fifth the amount of labor to produce the same yields as it did a few years back.”
Yet all this is ignored by the apostles of “parity” prices.
The refusal to universalize the principle is not the only evidence that it is not a public-spirited economic plan but merely a device for subsidizing a special interest. Another evidence is that when agricultural prices go above parity, or are forced there by government policies, there is no demand on the part of the farm bloc in Congress that such prices be brought down to parity, or that the subsidy be to that extent repaid. It is a rule that works only one way.

Economics in One Lesson

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