The economic consequence of government price control is economic disruption. A controlled price will still allocate resources, but not in accordance with supply and demand
When the British newspaper, The Manchester Guardian, was founded in 1821, it quickly earned a reputation for defending liberty and free markets against protectionism, cronyism, and big government. It was deeply and widely respected for more than a century.
Then as Britain lurched Left after World War II, so did the paper. By the time it changed its name in 1959 to The Guardian, it had become a reliable mouthpiece of the socialist Labour Party. When Venezuela’s dictator Hugo Chavez died in 2013, it pronounced him a “breath of fresh air.” What was “fresh” about nationalizing, expropriating, and bludgeoning a country into ruin remains, to be charitable, rather puzzling.
Today, you can espouse the most discredited, state-worshiping lunacy and be welcomed in The Guardian’s op-ed pages. The latest example, authored by Isabella Weber in the December 29, 2021 edition, was too much even for Paul Krugman of The New York Times, a former economist turned propagandist. The title was, “We have a powerful weapon to fight inflation: price controls. It’s time we consider it.” Krugman responded, “I am not a free-market zealot, but this is truly stupid.”
Isabella Weber should star in a TV commercial hawking snake-oil remedies. She could open it by saying, “I’m not an economist but I pretend to be one at the University of Massachusetts-Amherst.” That’s where she “teaches” economics. Rumor has it that the science department there is loaded with witches and warlocks, though I can’t confirm it.
Weber’s main argument for price controls is that some famous people eighty years ago endorsed them, from Harry Truman to John Kenneth Galbraith. What she fails to mention is that those people were wrong then and should have known better. To embrace their error today is nothing short of delusional, even anti-science if economics is a science at all. Every economist who deserves to keep his job knows that price controls are to inflation what drinking Clorox is to an upset stomach.
Now that the big government crowd has succeeded in stoking price inflation with their spending and money-printing sprees, we should prepare for other charlatans to echo Weber’s suggested solution. Let’s briefly recount the ancient error of price control.
The stupidity behind price controls
The belief that individuals are pawns to be pushed about by central planners is not new. Indeed,
socialism—the controlled and centrally planned society—has its roots in the actions of primitive man. When the first cave man clubbed his neighbor to expropriate the food his neighbor had gathered, he imparted blunt, physical expression to the essence of socialist society. Price controls are not voluntary requests, so they fit right into the socialist temperament.
The object of price control is not inanimate numbers and dollar signs. The penalties for violating price control edicts are levied on individuals. Jails and fines are made for people, not for prices. In Revolutionary France, those individuals who dared to trade at prices not in conformity with the “Law of the Maximum” paid a visit to the guillotine.
When government fixes price, coercion is substituted for voluntary exchange. Price is no longer determined peacefully in the marketplace of free and willing trade. Economic consequences must follow, and they are easily discernible considering the two functions of price.
One function is to allocate scarce resources. When anything is scarce, as all economic goods are, it must be rationed. Supply must somehow be equated with demand. If the marketplace be imagined as a huge auction, the problem becomes one of who shall get what quantity of the goods to be auctioned. Do we draw straws, or perhaps beat each other up until the number of survivors equals the number of goods? Would it make sense to line everyone up, fire a gun, and declare that the fastest runners shall receive the goods?
The economic way to ration scarce resources is through the price system. By way of the “market price,” supply and demand meet, the market is cleared, and scarce resources are allocated. In so doing, chronic shortages and surpluses are avoided, the productive process is left unharmed, and peaceful exchange becomes the reigning principle. It is a perfectly natural process; all that is required for it to take place is for men to be left alone to pursue their own desires and abilities.
Price also directs production, its second function. Businessmen are professional price-watchers. If consumer demand for a product increases, consumers are willing to pay more for that product. This puts pressure on price to rise, which raises profit margins. To take advantage of this profitable situation, businesspeople increase their production.
The process works in the other direction too: declining consumer demand will mean falling price and falling profit margins. In that case, price will “signal” producers to abandon that line of production and enter another where the demand is more urgent. In the free economy, it is not necessary for the government to issue an edict to the farmer, “Grow wheat; the people want bread.” It is not necessary for the government to instruct a manufacturer, “Make televisions; the people want entertainment.” The marvelous mechanism of price does the job far better than the noblest and wisest politician.
The economic consequence of government price control is economic disruption. A controlled price will still allocate resources, but not in accordance with supply and demand. Likewise, a controlled price will still direct production, but not in the same directions as consumers, by their voluntary purchases, would have dictated. The signals are falsified and distorted by fixed prices. The history of price control in America and everywhere else has been the history of shortages, queues, black markets, and popular disaffection.
A moral question is also involved. By what right does any party coercively dictate the terms of trade between others? By what twisted principle of justice is one penalized for trading with another at a mutually agreed upon price?
Inflation is always and everywhere a monetary matter. Rising prices no more cause inflation than wet streets cause rain. The monetary authorities inflate and then prices go up, in that order. Now that prices are rising at their fastest pace in 40 years, we should recall that in just the past two years, the monetary authorities expanded the money supply by more than 30 percent. There’s a direct connection there that price controls would do nothing about.
Rising prices are unpleasant for many. They are a message from the market that the money printers are misbehaving. Imposing price controls is killing the messenger when you don’t like the message.
Published at El American here...
