Hazlitt’s “Economics in One Lesson – Chapter Thirteen: 'Parity Prices'”
This Classic Work was written by Henry Hazlitt.
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.
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.
There is one argument for parity prices that should be dealt with before we leave the subject. It is put forward by some of the more sophisticated defenders. ‘Yes,” they will freely admit, “the economic arguments for parity prices are unsound. Such prices are a special privilege. They are an imposition on the consumer. But isn’t the tariff an imposition on the farmer? Doesn’t he have to pay higher prices on industrial products because of it? It would do no good to place a compensating tariff on farm products because America is a net exporter of farm products. Now the parity-price system is the farmer’s equivalent of the tariff. It is the only fair way to even things up.
The farmers that asked for parity prices did have a legitimate complaint. The protective tariff injured them more than they knew. By reducing industrial imports it also reduced American farm exports, because it prevented foreign nations from getting the dollar exchange needed for taking our agricultural products. And it provoked retaliatory tariffs in other countries. Nonetheless, the argument we have just quoted will not stand examination. It is wrong even in its implied statement of the facts. There is no general tariff on all “industrial” products or on all nonfarm products. There are scores of domestic industries or of exporting industries that have no tariff protection. If the city worker has to pay a higher price for woolen blankets or overcoats because of a tariff, is he “compensated” by having to pay a higher price also for cotton clothing and for foodstuffs? Or is he merely being robbed twice?
Let us even it all out, say some, by giving equal “protection” to everybody. But that is insoluble and impossible. Even if we assume that the problem could be solved technically—a tariff for A, an industrialist subject to foreign competition; a subsidy for B, an industrialist who exports his product—it would be impossible to protect or to subsidize everybody “fairly” or equally. We should have to give everyone the same percentage (or should it be the same dollar amount?) of tariff protection or subsidy, and we could never be sure when we were duplicating payments to some groups or leaving gaps with others.
But suppose we could solve this fantastic problem? What would be the point? Who gains when everyone equally subsidizes everyone else? What is the profit when everyone loses in added taxes precisely what he gains by his subsidy or his protection? We should merely have added an army of needless bureaucrats to carry out the program, with all of them lost to production.
We could solve the matter simply, on the other hand, by ending both the parity-price system and the protective-tariff system. Meanwhile they do not, in combination, even out anything. The joint system means merely that Farmer A and Industrialist B both profit at the expense of Forgotten Man C.
So the alleged benefits of still another scheme evaporate as soon as we trace not only its immediate effects on a special group but its long-run effects on everyone.