In a free market, the absence of physical force, compulsion, or coercion enables the price system to equilibrate supply and demand.  The price system relies solely on the concept of voluntary exchange: that buyers and sellers only participate in trade if each believes they benefit from doing so.  Prices, then, are the result of negotiations which establish mutual benefit.  Historically, the availability of supply and the degree of demand has driven negotiations in predictable ways.  Increased demand or reduced supply tends to increase cost, while reduced demand or increased supply tends to decrease cost.  In this way, prices in a free market force the system to equilibrium.

Price is important not only in establishing mutual benefit, but in transmitting information between producers and consumers. Products in low supply are more profitable to produce as a result of their high selling price, encouraging new producers to enter the market and existing producers to increase supply until the prices drop back down to match demand.  Likewise, the rising price of products in high demand provides negative feedback to sellers as sales drop off in response to excessive prices.  The same is true in reverse: products in high supply or low demand will experience a drop in selling price, transmitting the information to manufactures to curb or slow production.   Products in both high supply and low demand, such as candy the day after Halloween, experience a sharp drop in price and production until the existing product is cleared.  While products in short supply and high demand, such as ammunition during a war, experience a sharp increase in price and production until the system is once again in equilibrium.

Thus, prices communicate critical information between supply and demand.

It is important to note that supply and demand are not separate concepts as much as they are two sides of the same coin; for supply and demand are merely matters of perspective.  The grower of apples is typically considered the supplier because the majority of persons are consumers--and view the farmer as a supplier of their apples.  Yet the consumer often fails to realize that he himself is a supplier--of income--from the perspective of the farmer.

Prices then, are directly analogous to wages.  Where prices communicate the supply and demand for products and commodities, wages communicate the supply and demand for services or labor.  The above trends and relationships described for prices also hold for wages: if a laborer possesses a rare and useful skill, he will be able to command a high price for the service he provides―and others will eagerly seek training to obtain such skills--until the skill becomes commonplace.  As prices rise or fall across differing sectors in the marketplace, producers use this information to expand or contract supply.  Often, this corresponds to an expansion or contraction in the workforce; with incentives (high wages or benefits) being provided in times of rapid expansion and layoffs or salary cuts during times of rapid contraction.

Therefore, both prices and wages communicate critical information between supply and demand.  Prices and wages naturally drive supply and demand to a state of equilibrium where one perfectly balances the other.  The farther away one drifts from the other, the larger the force pushing it back to center.  The result is a natural stability in supply and demand, and a built-in protection against shortages or excesses.

What is the danger of regulation?

Perhaps the greatest potential for harm stems from the disconnect price and wage controls enforce on supply and demand.  When a price or wage is set to a static value or otherwise bounded at either the minimum or maximum, supply and demand are no longer allowed to communicate.  Producers no longer receive reliable information on what products to manufacture, or in what quantity.  Consumers, too, have a limited ability to communicate demand, or to provide the necessary incentives to mobilize production.  Price controls remove the built-in protection against shortages and excesses; and history can testify to the level of hardship experienced in the absence of such protection.

During the great depression, under the duress of severe food shortages and widespread famine, a method of price controls was implemented which sought to raise the price of crops―in order to help the livelihood of the farmers.  This plan, outlined in The Agricultural Adjustment Act of 1933, stipulated that prices were to be artificially raised above natural market values by reducing the supply.  This was done by destroying over 10 million acres of crops, slaughtering more than 6 million pigs, and leaving fruit to rot in the fields.  Rather than increasing supply, as a high demand would suggest, The Agricultural Adjustment Act of 1933 forcefully reduced supply, pushing the market even further away from equilibrium.  The result, of course, was even more widespread famine.

On the labor side, minimum wage laws have also been enacted which artificially set the price of wages higher than their natural market level.  At first glance, this seems positive, as the lowest paid workers will receive higher wages.  The reality, unfortunately, is much different.  Wages naturally rise in response to expansion of production, which is trigged by increased demand.  Minimum wage laws set the price of labor above natural market levels, in effect; they attempt to create demand out of thin air.

Manufacturers recognize this, and thus do not increase production―rather, two things happen:  First, they raise the prices of their goods, or suffer smaller a margin of profit which increases the risk of bankruptcy.  On average, an increased risk of bankruptcy reduces the availability (supply) of goods. Either way, the result is higher prices for everyone in the community, including the low-wage workers.  Second, as the price of labor has been artificially raised above natural levels, this presents a very difficult situation for workers with the lowest level of skill or education--often workers in the poorest or most dire situations.

Previously, the poorest workers had been paid with respect to their level of output, say $5 an hour.  But with minimum wage at, say $8 an hour, if they do not possess the skills to output labor at this higher price, they will be the first to lose their jobs―being replaced by higher skilled or better educated workers whose labor is worth $8 an hour.  Thus, the poorest individuals have gone from a meager, but respectable $5 an hour to unemployment and $0 an hour.

Before, low-skilled workers were free to work their way up to a salary of $8 an hour by receiving on-the-job training and work experience.  Under a system with minimum wage laws, they no longer have that option.  Instead of supporting themselves while gaining skills and education, they are forbidden from working altogether at their current skill level of $5 an hour.  With no income to pay for the necessary training or education, they are left out in the cold.  What started as a piece of legislation designed to help the poorest workers, has achieved the very opposite.  It has, in effect, stripped the people in the poorest and most dire situations of the right to exchange their labor for food and water--it has stripped them of their right to life, and forced upon them the life of a beggar.