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     Whether a market is black, gray, or white is a matter of politics, not economics.  In deciding where to draw the lines separating these market types, every society faces the same basic questions:  When should rules replace prices?  Who should hold decision-making power -- buyers and sellers or government officials?  Where should economics end and politics begin?

     For most of the twentieth century, governments took control of an increasing share of economic activity.  In many countries, government bureaus set prices for all kinds of things.  The gold price was fixed.  Airfares were fixed.  Long-distance phone rates were fixed.  Interest rates were fixed.  Not long ago, the French government was still setting prices for bicycle-tire repairs.  In thousands of cases, white markets had become gray markets.  Fluctuating market prices were replaced by inflexible government rules.

     But, in the late 1970s, this historic trend was reversed.  China's abandonment of farm price controls, and the subsequent doubling of its food output, was the single most dramatic instance of this shift.  The West also experienced a revival of free-market policies.  In the United States, prices were deregulated throughout transportation, energy, and financial sectors.  In Western Europe, the privatization of nationalized firms returned large chunks of the economy to the market sector.  And throughout the Third World, governments began abandoning "command-and-control" methods.  As political control of the economy receded, gray markets began turning white again.

     Oddly enough, this worldwide trend did not spring from any impassioned popular outcry for free markets.  Instead, the shift simply reflected the public's frustration with the massive waste caused by the "command-and-control" approach.  ... In rent-controlled cities, apartment construction slowed and housing stock deteriorated.  Protected industries failed to invest in new technology or reduce costs.  Again and again, those protected by "gray"-market price rules extracted their gains by causing damage elsewhere in the system.

     Responding to the distortions caused by a fixed price, the adjacent feedback loops spontaneously adjust the economic network to its next most efficient solution.  But the adjustment -- millions of pounds of U.S. government cheese stacked in warehouses, or apartment buildings abandoned by their owners -- never yields a net economic gain.  Rules cannot create value.  Value is simply transferred from taxpayers to dairy farmers or from the owners of rent-controlled buildings to their tenants.

     Of course, if the economy were machinelike, social engineers could write laws that always achieved desired results.  Unwanted side effects would be unknown.  But because an economy is a fabulously complex web of feedback loops, simpleminded "solutions" ricochet through the network in unpredictable ways. ... 
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