Prices are exchange rates. When governments claim to regulate prices, what they are really doing is regulating, and sometimes prohibiting, mutually beneficial cooperative exchanges between people.
Ludwig Lachman once pointed out that it was a huge change in the history of mankind when prices were no longer made on the spot. “Over the centuries, all over the world, market transactions have taken place between “haggling and haggling” between buyers and sellers. (…) “Fixed prices” were then unknown”. Today’s prices, in most cases, result from the anonymous decision of some company officials to demand a certain amount of money and the acceptance of these conditions by thousands of buyers.
I suspect that this change in the nature of the exchange has led to, or at least contributed to, a public understanding of prices as being independent of any exchange itself. This means that today we generally think that a price is “set” by the company, say Walmart, where we go to buy a good. A price is thus considered independent of an exchange; rather, prices are seen as what we would have to pay to obtain a good.
But that’s not entirely true. Instead, a price is an exchange ratio or an exchange rate. “Price is the rate of exchange between two commodities expressed in terms of one of the commoditiesas Murray Rothbard said. A price can only be observed when two people exchange two things. For example, I continue Vinted and offers my old blue jeans, and Mary is interested and offers me her red hoodie in exchange. We both agree to the trade. And then, as we exchange, there is a price: an old blue jeans is the price of a red hoodie, and a red hoodie is the price of an old blue jeans.
In most cases today, we go to department stores and exchange our dollars for the products on offer. But we should not be confused by the fact that we are using indirect exchange with fixed prices: it is still an exchange, and the price is the exchange rate. Walmart gives me a bottle of milk and I give them a dollar. Therefore, the price of a bottle of milk is a dollar – and the price of a dollar is a bottle of milk. Of course, it may seem odd to say that the price of a dollar is a bottle of milk, but that’s just a peculiarity of indirect exchange. Also, just because I’m asking $1,000 for my old white t-shirt doesn’t mean that’s the price. It may be its price, but it’s just something I hope for. It becomes a prize if and only if I trade it to someone for $1,000 (although the odds seem slim in that case).
Understanding that prices are nothing more than exchange rates between two products is important when we think about price regulation. These government measures are very popular, but they are actually foreign exchange regulations. We simply call them, often incorrectly, price regulation.
What price regulation does is interfere with people’s social cooperation – after all, exchanging what I value most for something you value more is cooperation. If there is one minimum wage in my state that means I am not allowed to trade my labor for the contractor’s money unless he is willing or able to pay me what the minimum wage law decrees as minimum . When we talk about minimum wage legislation or rent control, what is really happening is that free trade is prohibited. Two people who would have cooperated for their respective benefit are not allowed to do so. Two people who would have voluntarily consented to an exchange are prevented from doing so.
Anonymous discourse on price regulation tends to obscure this fact. And I suspect it does so for the benefit of those who support price regulation. Critics of this type of intervention should instead point out that when governments regulate prices, they are in fact regulating or rather interfering with the way we trade peacefully with each other. This may not convince everyone of the inadequacy of these interventions; some may argue that our free trade is not “really” free or that we don’t know our “true” interests. But it may get some people thinking about what price regulations really do: regulate how two people can cooperate with each other.
Max Molden is a PhD student at the University of Hamburg. He has worked with European Students for Freedom and Prometheus – Das Freiheitsinstitut. He regularly publishes with Der Freydenker.