In Part I of this series, Professor Don Boudreaux explained the folly of price controls, and Professor Antony Davies was featured in Part II.
Now let’s see some commentary from the late, great, Milton Friedman.
As Professor Friedman explained, the economics of price controls are very clear.
When politicians and bureaucrats suppress prices, you get shortages (as all students should learn in their introductory economics classes).
Sometimes that happens with price controls on specific sectors, such as rental housing in poorly governed cities.
Sometimes it happens because of economy-wide price controls, as we saw during Richard Nixon’s disastrous presidency.
In all cases, price controls are imposed by politicians who are stupid or evil. That’s blunt language, but it’s the only explanation.
Sadly, there will never be a shortage of those kinds of politicians, as can be seen from this column in the Wall Street Journal by Andy Kessler.
Here are some excerpts.
On the 2020 campaign trail, Joe Biden declared, “Milton Friedman isn’t running the show anymore.” Wrong! …Lo and behold, inflation is running at 7.9%, supply chains are tight, and many store shelves are empty. Friedman’s adage “Inflation is always and everywhere a monetary phenomenon” has stood the test of time. But what scares me most is the likely policy responses by the Biden administration that would pour salt into this self-inflicted wound. It feels as if price controls are coming. …Prices set by producers are signals, and consumers whisper feedback billions of times a day by buying or not buying products. Mess with prices and the economy has no guide. The Soviets instituted price controls on everything from subsidized “red bread” to meat, often resulting in empty shelves. President Franklin D. Roosevelt’s National Recovery Agency fixed prices, prolonging the Depression, all in the name of “fair competition.” …Price controls don’t work. Never have, never will. But we keep instituting them. Try finding a cheap apartment in rent-controlled New York City. …Sen. Elizabeth Warren, a leader among our economic illiterate, noted in February that high prices are caused in part by “giant corporations…”
He closes with a very succinct and sensible observation.
Want to whip inflation now? Forget all the Band-Aids and government controls. Instead, as Friedman suggests, stop printing money.
In other words, Mr. Kessler is suggesting that politicians do the opposite of Mitchell’s Law.
Instead of using one bad policy (inflation) as an excuse to impose a second bad policy (price controls), he wants them to undo the original mistake.
Will Joe Biden and Elizabeth Warren take his advice?
That’s doubtful, but I’m hoping there are more rational people in the rooms where these decisions get made.
Maybe some of them will have read this column from Professor Boudreaux.
Prices are among the visible results of the invisible hand’s successful operation, as well as the single most important source of this success. Each price objectively summarizes an inconceivably large number of details that must be taken account of if the economy is to perform even moderately well. Consider the price of a loaf of a particular kind and brand of bread. …The price at the supermarket of a loaf of bread, a straightforward $4.99, is the distillation of the economic results of the interaction of an unfathomably large number of details from around the globe about opportunities, trade-offs, and preferences. The invisible hand of the market causes these details to be visibly summarized not only in the price of bread, but in the prices of all other consumer goods and services, as well as in the prices of each of the inputs used in production. …These market prices also give investors and entrepreneurs guidance on how to deploy scarce resources in ways that produce that particular mix of goods and services that will today be of greatest benefit for consumers.
I have two comments.
First, Don obviously buys fancier bread than my $1.29-a-loaf store brand (used to be 99 cents, so thanks for nothing to the Federal Reserve).
Second, and far more important, he’s pointing out that market-based prices play an absolutely critical role in coordinating the desires of consumers and producers.
When politicians interfere with prices, it’s akin to throwing sand in the gears of a machine.
For more information on the role of prices, I strongly recommend these videos from Professors Russ Roberts, Howard Baetjer, and Alex Tabarrok.
———
Image credit: U.S. National Archives and Records Administration | Public Domain.
