Price Controls
by the LFB Staff

Gas prices too high? Wages too low? Are rents outrageous? Whenever consumers or producers squeal about prices, politicians are only too happy to listen and vote for price controls. Of course they don't call them "price controls." No; politicians offer "price stability," "a living wage," "affordable housing," or lately, the prevention of "price gouging." But it doesn't matter how you slice it, it's still baloney.

It's not hard to see why price controls must fail always and everywhere. It's a simple matter of supply and demand. When the price is held below the market price (to benefit consumers) more of the good is demanded ("Hey, it's cheap--let's buy some more!") but less of the good is supplied ("Can't make money selling at this price. Skip it."). While if the price is held above the market price (to benefit producers) more of the good is supplied ("Make more, we'll get rich!") but less of the good is demanded ("Yikes! I can't afford to pay that."). And, of course, where the price level is set depends on who can muster the most votes or money, politicians being for sale to the highest bidder.

If you'd like to learn more about the history of price controls and their effects have a look at Forty Centuries of Wage & Price Controls, by Robert Schuettinger and Eamonn Butler. The book is a little old (1979) but the success rate of price controls over the last 4,000 years hasn't changed much (it's still zero).

The clearest, most common-sense examination of price controls is found in chapters 17 & 18 of Henry Hazlitt's Economics in One Lesson, and a more sophisticated examination can be found in chapter 17 of David Friedman's Hidden Order.

In the Austrian School of economics, the most thorough examination we have is in chapter 30 of Ludwig von Mises' Human Action (you can also find a discussion in von Mises' essay, "Inflation and Price Control," in Planning for Freedom). "The Political Economy of Price Controls," by E.C. Pasour, found in The Elgar Companion to Austrian Economics, is a balanced, dispassionate discussion of the types and implementation problems of various kinds of price controls. But the merriest romp of all is Murray Rothbard's brief, "Price Controls Are Back!" in Making Economic Sense.

If you understand why price controls don't work, you understand most of what is economically wrong with this country--and getting clear on this subject is effort well spent. Happy exploring!
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