Price controls a recipe for failure
August 3, 2011
Last week a letter writer stated, “If we had a compassionate president, he could freeze the price of gasoline, bread, butter, milk and other crucial food items … the price of health insurance premiums and … medical bills.”
It’s tempting when faced with rapidly rising prices to think this is a power a politician has, but the lessons of history tell us to think twice about such a belief. The president, or any human, can successfully “freeze” prices as well as he can declare a circle has four corners. Prices are information from the marketplace, and rapidly rising prices across the board in all sectors have followed from an increase in the money supply. Humanity has also been there, done that on price controls and the results are in.
Kings, pharaohs and dictators have routinely tried price controls in response to the panic of the people under a weak currency and every time have seen the exact same result, a rather uncompassionate one: shortages, starvation, and ruin.
Price controls are always people controls. In many lands and times, the penalty for selling above the price set by law was death, and yet, in all instances, the police found these laws almost impossible to enforce. In post-revolutionary France, for example, thousands starved under the “Law of the Maximum,” which “froze” the price on wheat and rye. A Paris delegation wrote to the government, “As soon as we fixed the price of wheat and rye we saw no more of those grains.”
When more money is injected into an economy, then each dollar doesn’t buy as much over time. The profit made on sales today won’t be enough to pay for inventory to be replaced, or for necessities such as transportation, machinery, wages, etc. for the next week, month, or even day. Business comes to a grinding halt and under price controls, simply obtaining what you need to survive becomes criminal activity and flows to the black market.
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In Germany’s hyperinflation money was debased to the point that prices rose so rapidly factories had to release workers early in the morning so they could do their shopping before the prices rose in the afternoons. Price controls only brought more shortages and the violence of black markets.
Few questions of history are so resoundingly answered. A search through human civilization shows there are no examples of price controls achieving any outcome except shortages and mass starvation. It’s true the poorest among us are the most vulnerable to the effects of both inflation and price controls, and clear that “freezing” prices through fiat is not an act of kindness or compassion. We would do well to understand before we call on our leaders to knock over the dominos of unintended consequences.