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
12 comments:
Regarding "Marking to what the market will bear": If retailers DON'T do that then scalpers will buy the product that is in high demand and low supply and "reallocate" it to those who ARE willing and able to pay higher prices.
High prices do not passively disappear if/when one link in the delivery chain is artificially forced to lower their prices.
Also, links in the chain will simply stop producing/delivering products they lose money on. If forced to lower the price of corn flakes below the cost to produce/deliver, they will produce foo-foo, organic granola with much higher margins and cash-strapped consumers will STILL not be able to afford breakfast cereal.
Another idiocy about price controls is the idea that grocery stores rip off customers. They operate on a such small profits that it frankly blows my mind. We're talking 1 to 2%.
The eggs at $4.09 bring this to mind. The eggs we usually buy went up in price quite a bit when the inflation first hit (along with some supply side problems I don't remember) but the price came back down as the problems cleared. They're still more expensive than before inflation, but when the grocery chain could have kept the high price, they dropped the price to that tiny profit margin over their cost.
"...a lot of the electorate are economic ignoramii too, and they'll vote for him ,"
because they want the products gratis
it's (become) their right!
e.g.: medical care should/must be free; it's a right!
Of course in a competitive free market economy, 'What the Market Will Bear' protects against so-called Price Gouging because if you over-charge for your product someone else who can/will produce the item (or an acceptable alternative) faster/better/cheaper will eat your lunch.
Liberal economic "theory" seems to have two main components. 1) Companies can afford to sell everything at a loss, essentially making themselves charities, because they have too much money and 2) Scrooge McDuck's vault full of gold coins isn't merely a cartoon, but a literal reality. The government must possess such a limitless storehouse of wealth, since they can run up any amount of debt without repercussions.
Unfortunately there's also a complementary problem, namely the price fixing when the prices are fixed much higher than a free market would offer by cartels. The best example is what big pharma is doing with drug prices...
But I don't think that they do have those vaults of gold anymore. The vaults are still there (@ Ft Knox), but the gold may be gone.
A friend who lives outside the gate there.once mentioned that on a Friday, all the vaults guards and staff were fired, and new staff brought in Monday, and that over the weekend , a stream of trucks came and went from the depository.
That "hold" may now be plated tungsten. The diamonds and morphine may still be there, as those inventories are not publicly reported.
This also ignores the question of whether the .gov gold has been re-hypothicated, where one ounce is used as the security for the loan of a kilo or more of gold.
John in Indy
As AFAIK it always has in the past when the idiots tried it, the problem *will* solve itself. But it will take time, and a lot of pain. And no lesson will be learned.
A perfect example of What Joe speaks of is the Ford 2N tractor. It is nothing more than an "upgraded" version of the 9N. The price controls during the war kept Ford from raising the prices on an existing model, so they updated it.....
Circa 2021, I had met a man who had already started his project of building a boat. It was a catamaran sailing vessel built of fiberglass.
He had already paid in full for an order of resin and fiberglass cloth. Long story short, prices had risen so quickly and so high that the shipper would not release its cargo until the receiver had paid the increase.
That is, in the time to ship from Asia to the U.S., the costs had risen higher than the margin the shipper would 'eat'.
(Fluctuations in cost over time are typical. So a margin is built into a shipping contract.)
But the shipping costs rose so swiftly that in the time to ship, the cost exceeded the margin. This resulted in my friend paying just over 2x the original contract price.
He said that if he had been less further along into the project, he would likely have quit. Meaning absorbing not only the costs already in the project but the fees for breaking his lease for the building space.
IIRC, he paid $26k for what had been $11k. Just for shipping. Truck delivery had also risen. Rising costs are like a snowball rolling downhill.
Govt policy which sets it in motion. Well, any proponent of that should be in prison for life.
Wait. So you mean communism failing this time is because it isn't the Right People™ in charge?
A large part of this is due to a lack of competition. For instance, I live in Columbus, OH and if I want a reliable high speed Internet connection, I have one choice - Spectrum. There are two or three alternatives, but they aren't as good. Now then, if the fiber optic cable were owned by the local government, like roads, bridges, and parks, I'd have a dozen or more suppliers to choose from.
And, admittedly, the same problems I have with roads, bridges, and parks - which is to say certain areas with potholes, very stable bridges, and rabid crotch goblins running wild along with their trash dropping parents.
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