Price Controls And Alcoholism – The Buzz First, The Hangover Later

Authored by Raushan Gross via The Mises Institute,

Just ignore the economists, says a recent article in The Atlantic.

Well, what about listening to economists concerning the devastating effects of price controls? If we ignore economists, then it would be easy to ignore market interventionists’ uncontrollable and intoxicating need to impose price floors and ceilings in marketplaces and the effects of these controls on society at large. What economists know that The Atlantic author does not know is that there are finite resources in this world, and everyone is out to get their share.

You want a car; I want a car; while this could be a zero-sum game, if car producers decide not to produce cars anymore, if they produce less, supply goes down, and prices rise. Simple enough. Scarcity, the first law of economics, is apparent in everyday life—goods are finite. The increased prices signal to entrepreneurs to make more goods. Finite jobs are also available. The problem is that those who see price controls as the right thing to do are misleading everyone else because they are under the allure of their good effects.

Price controls are akin to alcoholism. When drinking, it is easy to drink too much. Price controls and other interventions can similarly feel good at the beginning too.

For them, there is always the temptation to control prices, so they continue to control more prices in every sector of the economy. The control does not end with wage floors, price ceilings, interventions responding to shortages, and so on. Interventionists only perceive the good effects of imposing price controls, but little do they know that bad effects will result from later price controls and ani-price gouging policies.

Folks lamenting “price gouging” do not consider this simple economic law: with artificially-low prices, shortages occur; businesses may not survive selling products and or services at artificially-imposed price controls.

Less is supplied overall. As a result, producers no longer produce those products and services, and consumers go elsewhere.

The cure, however, is leaving market prices alone, which is difficult because the bad effects come first, and the good ones come later. The problem is that interventionists are intoxicated with the perceived good effects of policies related to price gouging, price floors, and price ceilings. Price intervention leads to more price intervention. However, price controllers—like alcoholics—tend to overdo the control of market pricing policies and want more good effects. But, as we know, the good effects of price ceilings and floors lead to scarcity, market inefficiency, decline in innovation, entrepreneurial scarcity, and scarcity of goods.

Historically, we have seen the cause and effect of price controls on food and many other economic goods. We know price controls have led to utter disasters in places such as Soviet Russia after the Bolshevik Revolution and the French Revolution. With long lines waiting for food, famine resulted from price ceilings and floors. For example, manufacturers in Soviet Russia could not produce enough nails to construct new homes because of price control interventionists.

Keep in mind that unhampered market prices reflect what is supplied, what is demanded, and how sellers and buyers respond to market adjustments. While a casual shopper might be outraged by higher grocery prices, these price hikes signal to the buyer that other people are bidding for the same goods and/or that there might have been a decline in supply. It should be clear that there are never enough goods to satisfy all alternative wants, which natural prices reflect until controllers impose upon them. The only way for everyone to get what they want is for natural prices to emerge in the voluntary marketplace, a reliable and efficient system for resource allocation. This emphasis on natural prices should reassure us about the effectiveness of the market system in allocating resources.

The Atlantic and the rest of their ilk must be unaware of the simple fact that entrepreneurs cannot “set prices” at whatever rate they want, whenever they want; consumers do that, either by buying or not buying at a certain price point. Business owners establish prices based on consumer demand—consumers bidding for the same economic goods—and the market competitive pressure from other suppliers. Therefore, price controls are unpopular amongst economists because, while they legally control the price of a good, they do not add to the supply nor do the laws require anyone to supply any good. Price controls contribute to shortages. And, the fewer products or services available, the higher the price tends to rise. Also, producers and entrepreneurs alike may move out of price-controlled industries and go into others, further reducing supply.

Since there is no money helicopter that can equally spread money to everyone simultaneously, then control how that money is spent and when (which would only worsen the situation anyway), it should be obvious as to why price control policies do not work. When price controls are in effect, they force the business to sell goods at artificially-low prices, thus forcing products to be purchased below market value. Naturally, rising prices are understandably unpopular, but prices reflect real-time market realities.

If prices of goods rise unhampered, it signals the buyer to practice a bit of self-control, while a decline in price signals the buyer to buy more. However, let us put this logic on the back burner and assume economic goods are under price control. The logic of price controls rests upon the illusory magic of infinite amounts of goods for everyone to consume at the same time. Operating under this falsehood is destructive

Further, it is a tall order for an economy to keep inflation and wage rates up and force prices downward through the hand of price controls. So, The Atlantic says not to listen to economists, however, in the words of Ludwig von Mises on price controls:

If it fixes prices of all goods and services of all orders and obliges all people to continue producing and working at these prices and wage rates, it eliminates the market altogether. Then the planned economy, socialism of the German Zwangswirtschaft pattern, is substituted for the market economy.

No one wants to encounter the bad effects of a “hangover,” so the cure never happens. Price controls have a long history and have been shown to bring disastrous effects to the market economy that only show up later. Artificially-imposed price controls lead to entrepreneurial decline. Selling goods at artificially-low or -high prices sends mixed messages to the producers.

What is the cure? Should economists be listened to or not? In other words, do we keep drinking to feel the good effects and avoid the hangover, or deal with the hangover by bringing about the bad effects?