Some people are predicting wage and price controls in our future, because they think high inflation is inevitable, and govts always impose price controls when that happens.
So let’s stay one step ahead of the game, and explain right now why price controls spell nothing but disaster. And nobody does it better than the famous David Hume, in his History of England:
The kingdom of England was afflicted with a grievous famine during several years of this reign. Perpetual rains and cold weather, not only destroyed the harvest, but bred a mortality among the cattle, and raised every kind of food to an enormous price.
The parliament, in 1315, endeavoured to fix more moderate rates to commodities; not sensible that such an attempt was impracticable, and that, were it possible to reduce the price of provisions by any other expedient than by introducing plenty, nothing could be more pernicious and destructive to the public.
Where the produce of a year, for instance, falls so far short, as to afford full subsistance only for nine months, the only expedient for making it last all the twelve, is to raise the prices, to put the people by that means on short allowance, and oblige them to save their food, till a more plentiful season.
But in reality, the encrease of prices is a necessary consequence of
scarcity; and laws, instead of preventing it, only aggravate the evil, by cramping and restraining commerce. The parliament accordingly, in the ensuing year, repealed their ordinance, which they had found useless and burdensome.
So what lessons can we learn from that little story, with Hume’s explanation?
1. Nothing new under the sun. Govts have been imposing price controls for hundreds of years. I read that the Roman Empire tried it once, too. But they always seem to bring catastrophe in their wake, and Hume explains why.
2. If prices are high, that didn’t happen by itself, or because of greed. It’s because there is not enough to go round. How will a law that changes the price make more product magically appear? Will it bring back to life all the dead cattle?
3. Hume discusses a case of rising prices because natural catastrophe diminished the supply. Nowadays, there is another reason prices can rise, when the govt prints more money and starts using it. More money means increased ability to buy, obviously, which is another way of saying increased demand. Just as lower supply raises prices, so too higher demand raises prices.
And really we are talking about two versions of the same thing. When the cattle die, there is not enough cattle to satisfy all the potential buyers, so prices have to rise. When new money is printed, again, there is not enough cattle to satisfy all the potential buyers, because now there are more of them than there used to be. Forcing lower prices by law is not going to make more cattle magically sprout out of the ground.
4. Remember King Canute? Here is his story, from Wikipedia:
Cnut set his throne by the sea shore and commanded the tide to halt and not wet his feet and robes. Yet continuing to rise as usual [the tide] dashed over his feet and legs without respect to his royal person. Then the king leapt backwards, saying: “Let all men know how empty and worthless is the power of kings.”
This happened in 1028. Politicians have had almost a thousand years to ponder that story, but have learned nothing from it. They think they have the power to command the laws of economics to halt and not wet their feet and robes, little realizing that economic laws are just as powerful as the laws governing the tides.
Guys, you cannot mess with the laws of supply and demand.