Let’s say we all agree that hats are worth having, or even a necessity, and that all Americans have a right to them. We pass a law stating that the government will pay for everyone’s hats, through taxpayer dollars.What happens? First of all, hat sales skyrocket. I’m not particularly fond of hats, but if I can get them for free or below cost, why not?
Lesson One: there is no limit to demand, if those who get the product or use it, are not paying directly, or in some way they can see. This is unavoidable. The freeloaders will try to get all they can, and most of the rest of us will want something to show for our tax dollars.
If such a law passed, most hatmakers would be delirious with joy. Everyone wants hats! They expand their shops and produce as many hats as they can.What happens next? The average price of hats shoots through the roof. . . Why?There are two reasons. First, of the hats now being sold, the more expensive ones — the ones only a few people could afford before — will now be in much greater demand, since the individual hat-buyer no longer has to pay from his own limited resources. If the latest style is a platinum-plated beret, anyone who wants one will now get it. The other reason for the rising prices is competition: specifically, lack of it. New products, such as the first camcorders or the first compact disc players, are usually expensive. Prices drop because more people want to make money from a product: they try to come up with cheaper and more efficient ways of producing it, so they can sell the product more cheaply and grab some of the market. Our unlimited government funding of hats has completely cut out the need for competition. Any hat maker can stay in the business, no matter how high his prices.
Lesson Two: prices will skyrocket if there’s no limit to how much people can spend on a product. If anyone who wants the product can buy it, price no object, there is absolutely no reason for the manufacturer to try to cut his prices, and no reason for the buyer to control how much he spends. The government, and only the government, can give people virtually unlimited amounts to spend on a product. In short, it is not the greed of the manufacturer or the consumer, but the mere fact of the government funding of hats that is making hat prices exorbitant.
Next step: the government, and hence the taxpayers, are faced with enormous hat bills. Mrs. Smith may have confined herself to one hat, but Mr. Jones wanted five, and Mrs. Imelda wanted 52 Paris originals. The government knows it can’t continually raise taxes to pay for hats. Assuming it wants to keep the hat program intact, it has two choices: restrict the number of hats any one person can buy, or restrict the price of hats. In political jargon, that means rationing or price controls.From a politician’s point of view, stating limits on the price of hats is the obvious way to go. There are fewer hatmakers who vote than there are hat wearers, and it’s easy enough to paint the hatmakers as greedy exploiters of the hatless. So a new law is passed no hats may be sold for more than $15, even if the buyer is willing to use his own money. The immediate result will be that the best quality, most expensive hats become unavailable. No more Paris originals.
Lesson Three: You can’t make a silk purse out of a sow’s ear. Good materials and good workmanship cost money. Yes, competition among manufacturers in a free market will cut prices in the long run. However, legislating a lower price for a product is not a shortcut to cheapness. It merely makes those who were selling more expensive goods go bankrupt, before anyone has time to work on price reduction.
We could try some complicated and devious maneuvers to lessen the effect of price controls. For instance, we could slap a $5 tax on shoes and use the money for the hat program. Then we could have a maximum hat price of $15, but still pay the hatmakers $20 per hat. That would mean, of course, that some poorer people wouldn’t be able to afford shoes, and the government would end up subsidizing shoes, too. Even so, price controls on hats will have to be instituted in some form, because demand is so high.
Remember that it is government spending for hats that made the demand and the prices so high in the first place: nothing except removal of the government’s money will get the situation back under control. But let’s keep trying. . .We’ve now legislated a maximum price for hats. Nevertheless, Mrs. Imelda has bought another 35 hats, and the rest of us are still trying to get our taxes’ worth of hats. Not surprisingly, the amount that taxpayers are shelling out for hats hasn’t significantly decreased, despite our price controls. The next step? Well, of course, restrict the number of hats each person can buy: ration them.Now what happens? A lot of hatmakers go out of business. They can’t sell hats for more than the maximum price, and they can’t make up for the loss in income through selling more hats. Bureaucrats demand forms in triplicate and slap fines on them at every turn. The best hatmakers soon leave the field in disgust. We are now facing a decreasing supply of hats, if not an actual shortage, because there are far fewer manufacturers. But hats are a necessity, aren’t they?Now, we will have to pass a law forcing hatmakers to remain in business whether they can make a profit or not. However, even a government order can’t make a business run for long at a deficit, whether it’s a hatmaker, a child’s lemonade stand, or a bank. The hatmakers will go out of business, one by one.The government will have to step in and make hats. Given the quality of most government products, you can imagine what kind of hats we’ll get. And given the efficiency of most government manufacturing operations, we won’t be surprised if we’re told we can each have one hat, in our choice of four styles, every other year.
Lesson Four: What the government pays for, the government has to control. Government funding of hats led to government control of hat prices, hatmakers, and finally everyone who is even remotely connected to hats. The only cure would be to end government funding of hats.
What began as a seemingly praiseworthy law — to provide all Americans with hats — has ended up driving the hatmakers we know and trust out of business, and given us government-produced hats of considerably inferior quality and very limited numbers. This result is absolute, inevitable, and non-negotiable: none of the economic rules above can be avoided, and they can only be temporarily circumvented by allowing the government to interfere in yet more private business.
Comparing hats to medicine or to pharmaceuticals may seem even less appropriate than comparing apples to oranges, but the same economic principles apply.
For more information about government intervention in medicine, write to Objectivist Health Care Professionals Network, P.O. Box 4315, South Colby, WA 98384-0315.
