Price Controls

Government price controls. To many, this sort of policy is a good thing. But what is it and why do governments and government supporters implement them? What is the professed purpose of price controls compared to the actual effects?

Governments have been attempting to control prices since ancient times. In the medieval era, governments fixed the price of bread [1]. In modern times we have minimum wage laws. Wages are simply another price, the price of labor. In the United States there is also price controls implemented for gasoline and other such resources. But why would governments want to implement price controls in the first place?

In the case of minimum wage, many supporters of minimum wage laws argue that a “sustainable” and “livable” wage must be paid to workers regardless of their skills or what the free market dictates their experience and skills are worth. We must have “compassion” on those less fortunate and skilled than others.

As far as commodities like food and gas are concerned, advocates of price controls say that a price ceiling, or max price, must be used so that a particular resource important to life and comfort can remain accessible to all members of society no matter their financial standing.

Conversely, governments may find that a particular business or industry is “too big to fail” and the government will then set a minimum price a product or service can be sold at. No matter which way the price fix goes, price controls are arbitrary prices not dictated by the demands of the market [2, 3].

The real question here is whether or not these price controls work to benefit those they profess to help. Are the aims set by these lawmakers met?

The answer is a resounding no. So what happens when governments attempt to control prices?

The immensely intelligent economist Ludwig Von Mises said the following about price controls:

“It diverts production from those channels into which the consumers want to direct it into other lines. Under a market not manipulated by government interference there prevails a tendency to expand the production of each article to the point at which a further expansion would not pay because the price realized would not exceed costs. If the government fixes a maximum price for certain commodities below the level which the unhampered market would have determined for them and makes it illegal to sell at the potential market price, production involves a loss for the marginal producers. Those producing with the highest costs go out of the business and employ their production facilities for the production of other commodities, not affected by price ceilings [4].”

What is Mises saying here?

In a great bit if reading by Mises called “The Middle of the Road Policy Leads to Socialism”, Mises uses an example of milk to illustrate his point. The example begins with the government believing that the price of milk is too high. The benevolent bureaucrats in power desire to make milk more affordable to the poor through a price ceiling. They institute this price ceiling, setting a maximum price milk can be sold at. This affects marginal producers the most. Marginal producers are the producers creating milk at the highest cost meaning they have the smallest profit margin. They have the smallest profit margin prior to the price ceiling as well, so one can imagine how an artificial price ceiling instituted by government could negatively affect their business.

Seeing as milk is no longer a profitable product to produce for these marginal producers, they may seek to use their cows for the production of other items not affected by a price control. They may choose to sell meat, butter, ice cream, anything that is not milk. What does this mean? It means there are less producers making milk and with an arbitrarily low price on the product, shortages occur. There are less producers producing milk, but the price control does not allow the price to rise in relation to the demand. In the end, milk becomes scarce and we now have even less milk available to the poor than before the price control was introduced. This is the exact opposite of what was intended with original policy [5].

Unfortunately, this will always be the outcome with any price control. What about minimum wage?

Murray Rothbard, another genius economist had this to say about minimum wage laws:

“In truth, there is only one way to regard a minimum-wage law: it is compulsory unemployment, period. The law says, it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum-wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.”[6]

Laws do nothing to create jobs and those that have experience or skills deemed lower in value than the price control set by the minimum wage law must now seek work illegally or remain unemployed.

There may be undesirable moments within a free market but the consequences of price controls are guaranteed and always undesirable. Markets are organic entities composed of individuals all seeking to better their circumstances through voluntary trade and interaction and nothing a government law says can change that.

[1] http://www.econlib.org/library/Enc/PriceControls.html
[2] http://www.investopedia.com/terms/p/price-controls.asp
[3] http://thismatter.com/economics/price-controls.htm
[4] https://mises.org/library/inflation-and-price-control
[5] https://mises.org/library/middle-road-policy-leads-socialism
[6] Rothbard, Murray N. Making Economic Sense

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