Halting Signals
Alexander Marriott 3/23/2004

In a constitutional history class that I’m taking I recently heard an interesting idea. The class was studying the way the US Supreme Court changed its stance on economic interventionism during the years of the Great Depression. The case in point was Nebbia v. New York in which Mr. Nebbia was prosecuted for selling milk at a price below the state imposed minimum price. One student opined that the law was passed to allow dairy farmers earn enough money to “survive” and, thus, what’s so bad with that?

One problem is that the “invisible hand” that Adam Smith referred to is effectually blocked by such laws. What Smith was talking about was prices. Prices are signals in the marketplace that allow for the allocation of resources. Capitalism, which has no role for the government in the economy (aside from contract enforcement and protection of individual rights), relies solely on the signals of prices for allocation of labor, natural resources, intermediate goods, in effect everything involved in the mutually beneficial transactions of the free marketplace.

In the case of Mr. Nebbia, one sees that the state imposed a price floor that was above the market price which, while possibly helping dairy farmers, hurt sellers like Nebbia. He chose to sell below the price floor, in a mutually beneficial transaction and was arrested for it. The Supreme Court was no help to him, finding that it was a perfectly legitimate use of the state “police power” to regulate the price of milk, given the severity of the depression.

The economic consequences, let alone the moral abhorrence of state bureaucrats deciding on prices, of this kind of legislation are as follows. The price of milk dropped to levels that couldn’t sustain some dairy farmers because the supply of milk outpaced demand. Clearly those dairy farmers who could no longer operate and produce milk efficiently would be better off seeing this market signal and move on to devote their labor resources to other endeavors. However, dairy farmers (probably the ones producing the most milk) decided to use a state legislature, willing to exercise more power, to gain an artificially high price along with the enforcement power of that state to force compliance at the point of a gun.

Consumers and sellers who would otherwise have traded money for milk at the lower market price were prevented from doing so through state coercion. A few citizens were helped while the milk consumers were clearly hurt and the state was able to expand its authority and realm of available powers, which in the long run helped no one.

All of this was in itself a signal that the American Revolution and the ideology of freedom that had caused it was dead in American politics, though the Nebbia case was merely foreshadowing of the trampling the founders and their ideas were to take under Franklin Roosevelt’s impotent legs, but more importantly, his impotent mind.