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Wednesday, August 15, 2012

Economics in One Lesson by Henry Hazlitt

“Parity” Prices

Dismissing all these considerations, let us return to the central fallacy that specially concerns us here. This is the argument that if the farmer gets higher prices for his products he can buy more goods from industry and so make industry prosperous and bring full employment. It does not matter to this argument, of course, whether or not the farmer gets specifically so-called parity prices.

Everything, however, depends on how these higher prices are brought about. If they are the result of a general revival, if they follow from increased prosperity of business, increased industrial production and increased purchasing power of city workers (not brought about by inflation), then they can indeed mean increased prosperity and production not only for the farmers, but for everyone. But what we are discussing is a rise in farm prices brought about by government intervention. This can be done in several ways. The higher price can be forced by mere edict, which is the least workable method. It can be brought about by the government’s standing ready to buy all the farm products offered to it at the parity price. It can be brought about by the government’s lending to farmers enough money on their crops to enable them to hold the crops off the market until parity or a higher price is realized. It can be brought about by the government’s enforcing restrictions in the size of crops. It can be brought about, as it often is in practice, by a combination of these methods. For the moment we shall simply assume that, by whatever method, it is in any case brought about.

What is the result? The farmers get higher prices for their crops. In spite of reduced production, say, their “purchasing power is thereby increased. They are for the time being more prosperous themselves, and they buy more of the products of industry. All this is what is seen by those who look merely at the immediate consequences of policies to the groups directly involved.

But there is another consequence, no less inevitable. Suppose the wheat which would otherwise sell at $2.50 a bushel is pushed up by this policy to $3. 50. The farmer gets $1 a bushel more for wheat. But the city worker, by precisely the same change, pays $1 a bushel more for wheat in an increased price of bread. The same thing is true of any other farm product. If the farmer then has $1 more purchasing power to buy industrial products, the city worker has precisely that much less purchasing power to buy industrial products. On net balance industry in general has gained nothing. It loses in city sales precisely as much as it gains in rural sales.
There is of course a change in the incidence of these sales. No doubt the agricultural-implement makers and the mail-order houses do a better business. But the city department stores do a smaller business.
The matter, however, does not end there. The policy results not merely in no net gain, but in a net loss. For it does not mean merely a transfer of purchasing power to the farmer from city consumers, or from the general taxpayer, or from both. It also frequently means a forced cut in the production of farm commodities to bring up the price. This means a destruction of wealth. It means that there is less food to be consumed. How this destruction of wealth is brought about will depend upon the particular method pursued to bring prices up. It may mean the actual physical destruction of what has already been produced, as in the burning of coffee in Brazil. It may mean a forced restriction of acreage, as in the American AAA plan, or its revival. We shall examine the effect of some of these methods when we come to the broader discussion of government commodity controls.
But here it may be pointed out that when the farmer reduces the production of wheat to get parity, he may indeed get a higher price for each bushel, but he produces and sells fewer bushels. The result is that his income does not go up in proportion to his prices. Even some of the advocates of parity prices recognize this, and use it as an argument to go on to insist upon parity income for farmers. But this can only be achieved by a subsidy at the direct expense of taxpayers. To help the farmers, in other words, it merely reduces the purchasing power of city workers and other groups still more.

Economics in One Lesson

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