Historic Failure of Price Controls

As inflation steadily undermines the American family’s ability to afford basic necessities like food, housing, transportation, the specter of an antiquated, discredited policy idea is re-emerging 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 have consistently demonstrated, such price controls are doomed to fail from the very start.

Despite this, some policymakers and activists, buoyed by favorable polling and seemingly advantageous political conditions, are reviving the discredited idea of price controls. Moreover, one headline from the radical progressive outlet, The Atlantic earlier this month just 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 the complexity of this process is presented in the classic essay, “I Pencil” by Leonard Read. In this essay, Read 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 is impossible for a central planner in government to execute.

The classic definition of inflation in economic terms 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 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 a humble 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. If prices are too high, consumers will take their business elsewhere, next door or online. Even with an oversimplified example like this, price and profitability are determined by many complicated factors.

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 it has been proven wrong, countless times throughout history.

As 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 President Richard Nixon’s ill-fated attempt to freeze prices and wages in the early 1970s, which led to shortages, empty supermarket shelves, and gas lines. Admirably, Nixon later acknowledged these controls as a policy error.

History unequivocally demonstrates that price controls are ineffective. Yet, as philosopher Russell Kirk aptly observed, “surely we learn from history that we learn nothing from history.”

Despite claims that price controls are essential to curb alleged price gouging, 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 is political silly season when far too many proposals are based on their political value vs their actual value. However, the great Ronald Reagan pointed out the key to cutting through the spin to address inflation when 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 commonsensical insight serves as a reminder that addressing the root causes of inflation is crucial. Thus, as the economic policy debate unfolds, 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.

(Jonathan Williams is Vice President and Chief Economist at the American Legislative Exchange Council.)