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The Case Against Price Controls

Summary:
“This is a great suppressed topic. It was absolutely mainstream from the start of World War II until the Reagan administration.” This is a quote from “Price Controls Set Off Heated Debate as History Gets a Second Look,” a January 13 New York Times article by Ben Casselman and Jeanne Smialek. The speaker quoted is James (Jamie) K. Galbraith, a left-wing economist at the University of Texas. The “this” in the quote refers price controls, which Galbraith appears to favor. He comes by it honestly. His father, the late John Kenneth Galbraith, was a high-level official in the Office of Price Administration during World War II, and he sometimes reflected fondly on the power that he exerted over the US economy. I disagree with Galbraith that the topic has been suppressed.

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The Case Against Price Controls

“This is a great suppressed topic. It was absolutely mainstream from the start of World War II until the Reagan administration.” This is a quote from “Price Controls Set Off Heated Debate as History Gets a Second Look,” a January 13 New York Times article by Ben Casselman and Jeanne Smialek. The speaker quoted is James (Jamie) K. Galbraith, a left-wing economist at the University of Texas. The “this” in the quote refers price controls, which Galbraith appears to favor. He comes by it honestly. His father, the late John Kenneth Galbraith, was a high-level official in the Office of Price Administration during World War II, and he sometimes reflected fondly on the power that he exerted over the US economy.

I disagree with Galbraith that the topic has been suppressed. We opponents of price controls have been quite willing to discuss why they’re a bad idea. If he were to be more accurate, Galbraith would have to say that the idea has been rejected. Indeed, the heartening point of the Times article is that the vast majority of economists, including left-wing economists such as Paul Krugman, reject the idea of comprehensive government controls on prices. But sometimes it’s hard for people who are losing a debate to admit that they’ve lost, not because the topic has been suppressed but because their idea has been analytically crushed. It’s worthwhile, therefore, to say why they are such a bad idea. Price controls cause shortages, waste people’s time in line, sometimes lead to favoritism by suppliers, and, as in the case of oil and gasoline in the 1970s, can lead to harmful regulation that lasts for decades.

This is from David R. Henderson, “Price Controls: Still a Bad Idea,” Defining Ideas, January 20, 2022.

The problem with the “smashed thermometer” analogy:

When University of Chicago economist Harold Demsetz gave a talk in the winter of 1970 at the University of Winnipeg, where I was an undergrad, he used an analogy that many critics of price controls still use. Demsetz told his audience that using price controls to reduce inflation is like responding to cold weather in Winnipeg by breaking the thermometer. His point was that just as thermometers respond to temperature, prices are an indicator of underlying economic phenomena, namely supply and demand. Breaking a thermometer doesn’t cause the temperature to rise; controlling prices doesn’t cause inflation to fall.

But it’s worse than that. When you break the thermometer, you don’t make the weather worse. But when a government controls prices, it makes the economy worse by causing shortages.

“Greed”

What’s wrong with attributing price increases to “corporate greed”? The problem with that explanation is not that corporations aren’t greedy. If we take “greed” to mean “wanting to make as high a profit as possible,” then yes, most corporations are greedy. But those same corporations often cut prices. Have you noticed that the prices of wide-screen televisions have fallen regularly over the past fifteen years? Does that mean that the corporations producing those TVs have steadily become less greedy? Unlikely. So greed is not a good explainer of price increases. A good rule for thinking, as Charles L. Hooper and I pointed out in our book, Making Great Decisions in Business and Life, is that to explain a change in one variable, you need to point to a change in another variable. Because greed (however defined) is relatively constant, it’s not a good way to explain a change.

Read the whole thing.

David Henderson
David R. Henderson (born November 21, 1950) is a Canadian-born American economist and author who moved to the United States in 1972 and became a U.S. citizen in 1986, serving on President Ronald Reagan's Council of Economic Advisers from 1982 to 1984.[1] A research fellow at Stanford University's Hoover Institution[2] since 1990, he took a teaching position with the Naval Postgraduate School in Monterey, California in 1984, and is now a full professor of economics.[3]

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