Willing buyer and willing seller. These five words form the very basis from which the system of capitalism is based on. You have something you want to sell and if I want to buy it then we either agree or disagree on a price. If we agree then I give you money, take the product, and walk away. And if we disagree then we move on with our days.
In his book, Basic Economics, Samford Professor Thomas Sowell described the role of prices in the economy as “conveying information about an underlying reality while at the same time providing incentives to respond to that reality. Prices, in a sense, can summarize the end results of a complex reality in a simple number.” Prices are determined in a decentralized manner based on the relationship between supply and demand. When a product is in high demand then the seller will usually be selling his products at the price he sets and when demand is low, then the seller must lower his price to one consumers agree to. In a true free market society, there are only two authorities when it comes to setting a price: the buyer and the seller.
Price controls are restrictions on prices created and enforced by the government. These are done with the virtuous incentive of protecting buyers and sellers from each other. A price ceiling prevents sellers from charging more for a product and service than the government dictates while a price floor prevents buyers from paying less than what the government determines to be fair. In many cases throughout history, the noble intentions of these policies to promote fairness and affordability usually result in shortages and black markets when confronted with reality.
Price controls fail because they do not have the flexibility to respond to the collective demands of the market in a quick fashion in the same way that prices do. A price is a subjective idea that only becomes true once a buyer and seller agree on it. Both parties involved in the transaction are the only real authority on what the price will be.
The recent $355 million-dollar civil law suit filed by the state of New York against former President Trump and his business empire goes against the concept of willing buyer and willing seller. The core argument the state is that Trump committed fraud because he inflated the value of his properties when using them as collateral to obtain loans. The claim is that he used false valuations because the state and judge believe these properties were worth less than what Trump valued them to be.
But the judge and the state’s Attorney General Leticia James were not the ones who were loaning Trump money. The sellers in these transactions were the banks. The state claims that they were cheated by Trump because if the valuations for his property were lower, then the loans would have been riskier than originally thought and higher interest rates would have been charged. Never mind that these big banks have departments of people who created their own valuations that in the end decided that it was okay to proceed with these values.
The banks were willing to sell their loans to the former president and Trump was willing to buy them. And in the end they were paid back. The terms of the contract were honored and everyone moved on.
New York State found out about these deals years later and decided to go after Trump because, officially, they disagreed with the values he assigned to his property, and they called that fraud. Keep in mind that they were not a party in this transaction and, if government has a role to enforce contracts, then this contract was fulfilled and did not require intervention. The banks did not call for help and did not see themselves as being victims. The $355 million is not being paid to the banks but is instead going to the state’s treasury.
But because the state disagreed with the values and therefore disagreed with the prices in the contract that everyone else was happy with, they went after Trump in court and were assigned a judge who openly agreed with them before the day in court even began.
Many are warning New York State based businesses that they should leave the state before becoming the next target of an overzealous government. Governor Kathy Hochul tried to play down these fears and claim that businesses who do not break the law and commit fraud should not have anything to worry about. But when she was asked about Trump’s case she said that the former president was punished for his “misrepresentation of assets.” But what was misrepresented? He put a price tag on what he valued his properties to be. The banks did their own due diligence and agreed.
What has happened in New York is worse than a price control because the government’s idea of fairness is entirely subjective and not transparent.
Using these criteria, a government agency can go after a small business by claiming they are committing fraud by asking for a higher price for their product or service than a bureaucrat is willing to personally pay. Or you could one day wake up to find your bank account frozen because the price you sold your old house for in 2021 is higher than its value in 2019 and you are accused of taking part in a “fraud” that drove up the value of homes while pricing others out of the market. When the rule of law is thrown away and all that matters is the mood and discretion of who is in charge, you will find yourself living in a tyranny.
Regardless of how you feel about former President Trump, the ruling against him in New York goes against the free-market principles that made America the economic powerhouse it is today. Price controls, central planning, and the law becoming opaque all have historical track records of failure. These concepts should be vigilantly discouraged if we want to continue having a thriving society.
