The Historic Failure of Price Controls: Jonathan Williams on American Radio Journal
History unequivocally demonstrates that price controls are ineffective.
As inflation steadily undermines the American family’s ability to afford basic necessities like food, housing and transportation, the specter of an antiquated, discredited policy idea is reemerging with alarming frequency.
At first glance, government-imposed price controls may appear to be a simple fix. Yet, as economics 101 and millennia of economic history consistently demonstrated such price controls are doomed to fail from the very start.
Despite this, some policy makers and activists, buoyed by favorable polling and seemingly advantageous political conditions currently are reviving this discredited idea of price controls. Moreover, one headline from the radical progressive outlet the Atlantic, just earlier this month told us all that: Sometimes You Just Have to Ignore the Economists.
Well, back in the real world, prices are determined by buyers and sellers based on supply and demand. This market process is decentralized and dynamic, with prices constantly changing based on countless economic factors.
A compelling illustration of this complexity of the process is presented in the classic essay “I, Pencil” by Leonard Reid. In this essay, Reid explores the intricate web of voluntary actions required to produce even the simplest of products, such as a pencil, highlighting the vast and intricate network of knowledge and coordination necessary in a free market, but impossible for a central planner in government to execute. The classic definition of inflation in economic terms, of course, is too much money chasing too few goods, and we know trillions more in big government spending in Washington, DC has been a major driver of inflation.
However, proponents of price controls prefer to shift blame, and instead, they like to make the cynical argument that businesses are the cause due to alleged price gouging. However, over the long term, no single entity or company can unilaterally set prices and remain successful.
Consider, for instance, pricing for an apple at your local supermarket, the store owner must consider the cost of the apple, the price of transporting it to the store in a truck, and the time it takes store employees to stock it on the shelves. The grocer also considers the prices of similar products, like oranges, pears and bananas, and the store is competing with other retailers.
Of course, if prices are too high, consumers will take their business elsewhere, next door or online. Even with an oversimplified example like this, one price and profitability are determined by many complicated factors in the marketplace.
Price controls assume that government bureaucrats can replace all these complicated factors with the involvement of government central planning.
They naively assume some government bureaucrat can understand all the possible considerations and consequences without making a mistake or falling victim to corruption. Each time a government has thought it could outsmart the market and has been proven wrong countless times throughout history.
As my friend Dominic Pino recently noted in National Review, price controls are not a novel concept, but a practice with roots extending back to the Roman Empire and even nearly 2000 years earlier, to the Babylonians.
Each attempt throughout history has ended in failure, including in the United States, when President Richard Nixon had his ill-fated attempt to freeze prices and wages in the early 1970s which led, of course, to shortages, empty supermarket shelves, and gas lines. Admirably, President Nixon, later in life, acknowledged that these controls were a major policy error.
Recent research from the New York Federal Reserve indicates that the profits of manufacturers and retailers have not significantly impacted food prices. To be sure, it’s political silly season out there when far too many proposals are based on political value versus their actual value.
However, the great Ronald Reagan pointed out the key to cutting through the spin and address inflation properly. He said, “We don’t have inflation because the people are living too well. We have inflation because government is living too well.”
Reagan’s common sense insight serves as a reminder that addressing the root causes of inflation is crucial. As economic policy debates unfold, it is imperative to remember that the lessons of history are clear. Price controls are not the answer. Instead, we need a renewed focus to address federal overspending in Washington, DC.