Price Controls: When Will We Ever Learn?
A Swedish socialist economist, Assar Lindbeck concluded,
‘In many cases, rent control appears to be the most efficient way presently known to destroy a city – except for bombing’.
Rent Controls are just another form of price controls.
Price controls never work. They were tried in Roman times, they didn’t work then and they don’t work now, as explained below.
But politicians cannot resist the temptation to appease the public with some magical, painless way to control rents, or prices of any goods. New York City has rent controls - have they brought abundance to the housing market? Of course not. Many cities have tried them, not once have they worked for the public good. A few may benefit that are the lucky ones who get a controlled price apartment, while the entire market suffers. And now, our national political leaders have even suggested national controls. Just sprinkle a little fairy dust and all is ok. Sorry folks, no fairies are coming to work their magic.
As noted contemporary economist Thomas Sowell so brilliantly observed:
“THE FIRST LESSON IN ECONOMICS IS SCARCITY, THERE ISN’T ENOUGH OF ANYTHING TO SATISFY ALL THOSE WHO WANT IT; THE FIRST LESSON OF POLITICS IS TO DISREGARD THE FIRST LESSON OF ECONOMICS.”
I cannot improve on that observation, and nothing has changed today - nevertheless the populist politicians continue to ‘appease’ the public with simplistic solutions that just do not work. Sounds good; Feels bad. How about trying good economic policy for a change.
Why don’t price controls work? The marketplace is the only means by which scarce resources can be properly allocated. In a freely traded market, market price balances supply and demand. It is not a static price, it fluctuates constantly as supply and demand factors change - but it reaches an equilibrium price where supply and demand are balanced. When we limit the price for anything below the market clearing price, there is automatically an imbalance: there will be more demand at a ‘below market’ price than there is supply. This always results in a shortage in the market.
If the price is set too low, it will magnify the shortage as producers will just stop producing. Producers only supply when there is an incentive to do so. If they are losing money on a product, guess what happens? It is not hard to figure that out - they stop producing. However, if the market is allowed to work, and a price for any item rises enough, more producers will be incentivized to come into the market and add to the supply. If there is more supply, the market will work to bring the price back down.
So what happens when there is a shortage of anything? Either demand will go unfilled or an illegal black market will pop up outside of the price controlled market - which is what normally happens when governments have imposed price controls.
If you are not familiar with supply and demand charts and how they work, take a look at this primer from my website.
BOTTOM LINE
When will we ever learn? This is not rocket science, it is basic economics 101.
The laws of economics are real and immutable, and they do not change because a politician wants to get elected. So we need to understand that and stop listening to those who promote a fantasy as if it were real. It is not.
The marketplace works just fine, if we will just leave it alone.
LEARN ECONOMICS, THEN VOTE SMART
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