Few proposals in economic policy have been as seductive—and destructive—as the practice of price controls. Supporters, like Kamala Harris, of these policies often explain that capping the price of certain goods will enable governments to shield consumers from ‘greedy’ market forces. But any cursory history examination shows that price controls do not solve economic problems—they aggravate them. The unintended effects of price controls showcase an extreme ignorance about how markets work.
With the state’s power, price controls circumvent supply and demand signals. Prices in a free market are the most efficient signaling system of resource allocation in recorded history. They indicate abundant goods and services, sending powerful signals to producers and consumers. Those signals cause prices to rise when demand increases and to drop when demand falls, promoting efficient allocation and encouraging new supply and demand. Capping prices without regard for their informational role sends the wrong signals. This is why price controls cause distortions across an economy.
Take rent control – a policy that caps rent prices to make housing cheaper. In cities with long histories of rent control, such as New York and San Francisco, the policy has had the exact opposite effect. The idea was to make housing affordable. The result has been housing scarcity. With little incentive to build new housing, the supply of available apartments has just about ground to a halt. At the same time, landlords have little incentive to maintain rental properties, so many fall into disrepair. Housing becomes scarcer, worse, and more expensive.
Historical examples go far beyond housing. In the Roman Empire, Emperor Diocletian, in 301 AD, issued the Edict on Maximum Prices in an attempt to curtail rampant inflation. But within a few months, prices had soared. Merchants removed goods from the market as they could no longer sell them for the maximum prices stipulated by the mandate. This, in turn, resulted in widespread shortages as people could no longer find the items they needed. It also led to black markets where merchants sold the goods at higher prices. The law was unenforceable and eventually abandoned, but not before wreaking havoc on the economy.
Likewise, during the Second World War, the US government instituted price controls to avoid inflation as the country mobilized for war. The controls worked, at least in the short run. But they also caused widespread shortages, especially in food and other consumer goods. Black markets increased as people tried to get around the rules and were rationed. After the war, the controls were taken away, and the market snapped back (though not altogether cleanly because there is no such thing as an economy, leading to the hangover of years of distortion).
The Soviet experience offers another illustration. In a planned economy, where prices are set by fiat, not the market, inefficiencies are rife. When the price signal – the price – lacks directional clarity, production and consumption become uncoordinated. Shortages and surpluses become endemic, as does waste. Bread queues and empty store shelves are not evidence of a society living beyond its means. They are also not a consequence of scarcity. Instead, they result from gross misallocations occasioned by the simple absence of market-based price signals.
To sum up, price controls, however well-intentioned, are bound to fail because they work against the crucial role of prices in the market system. Prices are not just a method for making profits – they are the indispensable mechanism through which the intentions of a myriad of individuals can be coordinated in an economy. Any attempts by the government to override that mechanism are guaranteed to cause more damage than good. The history of economic policy bears witness yet again and again to the fact that if we wish to maintain an economy that efficiently and benevolently allocates resources, we must allow the price mechanism to operate freely and honestly to reflect the conditions of supply and demand. Anyone who espouses this type of policy should never be allowed near the levers of economic power.