The complete and utter stupidity of price controls

 

I note that some economically illiterate candidates for political office are (yet again) proposing price controls as a "solution" to the problem of rising prices.  It's been tried before, many times, over not just centuries, but millennia, and it's never worked yet.  The reason is simple.

Any business - one-man, family, franchise, corporation, multinational, whatever - has to recover what it has to spend on making its product(s), then add a profit margin to pay the owner(s)/investor(s) in that business and provide for future operating expenses.  Adding those elements together gives the minimum price at which it can afford to sell the product.  Many businesses try to charge more than that minimum, of course;  hence the expression "charge what the market will bear".  (There are some moral problems with that old saying [if poor people can't afford to buy food, they're going to starve;  therefore, is it moral to try to make ever higher profits at their expense, regardless of their suffering?], but that's for another discussion.)

The problem with price controls is that they're set according to some arbitrary set of rules, defined by the person(s) setting the price rather than market conditions.  "You charged $2.99 for that just six months ago, but now you're charging $4.99.  You're clearly profiteering!  I'm ordering you to set the price at no more than $3.99!"  That sounds fair, until one looks at the input costs for that product.  If the cost to the manufacturer and/or distributor and/or retailer have risen by excessive amounts, they have no choice but to recover those costs from their customers, otherwise they'll go bankrupt and there'll be no products at all.

A good example is transport.  If fuel costs double, the transport firms have to recover that cost, so they increase charges to move goods to and fro.  There may be shortages of packing materials, or containers, or ships to move cargo across oceans, or whatever.  Transport arteries may be clogged with other goods.  Put all those elements together and they can add a huge amount to the cost of a given product.  (I know one company where a friend of mine worked as a purchasing manager.  He told me back in 2022 that their costs to bring in products from China had risen by over 250% in a matter of six months, forcing radical cuts in local costs [including laying off American workers] to offset increased costs elsewhere.  Even that wasn't enough to avoid doubling the price they had to charge for their product - so many of their customers stopped buying them, because they could no longer afford it.  The company went out of business six months later.)

If a politician says he's going to force companies to stop "price-gouging", he may be a complete ignoramus, economically speaking;  but a lot of the electorate are economic ignoramii too, and they'll vote for him because they want lower prices, and don't care what it costs others so long as they get them.  Needless to say, no company in the world can afford to sell products at less than what they cost to produce;  so they'll simply stop making them.  At least a factory standing idle doesn't lose money on what it's not making!  Those who worked there are now out of a job, and probably dependent on government subsidies (unemployment benefits, welfare, etc.) to survive, meaning that government intervention in the price structure has ultimately cost taxpayers a lot more money - but don't expect the politicians to ever admit that.  That would be bad for their image as inflation-busters.

Matt Bracken summed it up with this meme:

True dat.

Peter