There are several reasons why all direct control of prices by government is irreconcilable with a functioning free system, whether the government actually fixes prices or merely lays down rules by which the permissible prices are to be determined.
In the first place, it is impossible to fix prices according to long- term rules which will effectively guide production. Appropriate prices depend on circumstances which are constantly changing and must be continually adjusted to them.
On the other hand, prices which are not fixed outright but determined by some rule (such as that they must be in a certain relation to cost) will not be the same for all sellers and, for this reason, will prevent the market from functioning.
A still more important consideration is that, with prices different from those that would form on a free market, demand and supply will not be equal, and if the price control is to be effective, some method must be found for deciding who is to be allowed to buy or sell. This would necessarily be discretionary and must consist of ad hoc decisions that discriminate between persons on essentially arbitrary grounds.
As experience has amply confirmed, price controls can be made effective only by quantitative controls, by decisions on the part of authority as to how much particular persons or firms are to be allowed to buy or sell. And the exercise of all controls of quantities must, of necessity, be discretionary, determined not by rule but by the judgment of authority concerning the relative importance of particular ends.
It is thus not because the economic interests with which such measures interfere are more important than others that price and quantity controls must be altogether excluded in a free system, but because this kind of controls cannot be exercised according to rule but must in their very nature be discretionary and arbitrary. To grant such powers to authority means in effect to give it power arbitrarily to determine what is to be produced, by whom, and for whom.