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Supply and demand have been allowed
to work — at least in a limited way — in energy markets,
resulting in ups and downs in gasoline prices. Strong demand coupled with
regulatory supply restrictions that were worsened by several hurricanes
caused gasoline prices to go up. Then as hurricane-damaged refineries were
repaired, gas prices began to plummet.
There have been no significant
shortages, thanks to the absence of price controls, but Congress is working
diligently to put an end to that outcome. Urged on by an economically
ignorant public, Congress recently held one of its periodic Grand
Inquisitions of oil company executives to demand an answer to the question:
"How dare you profit from the American free enterprise system?"
Accusations of "price
gouging" — i.e. allowing market forces to set prices —
abound, as do calls for price controls. They aren't always called "price
controls," but some slick euphemism such as "anti-price-gouging legislation."
It's the same thing.
The case against price controls is
not merely an academic exercise, restricted to economics textbooks. There is
a four-thousand-year historical record of economic catastrophe after
catastrophe caused by price controls. This record is partly documented in an
excellent book entitled Forty Centuries of Wage and Price Controls by
Robert Schuettinger and Eamon
Butler, first published in 1979.
The authors begin by quoting
Jean-Philippe Levy, author of The Economic Life of the Ancient World,as
noting that in Egypt during the Third Century B.C. "there was a real
omnipresence of the state" in regulating grain production and
distribution. "[A]ll prices were fixed by fiat
at all levels." This "control took on frightening proportions.
There was a whole army of inspectors."
Egyptian farmers became so
infuriated with the price control inspectors that many of them simply left
their farms. By the end of the century the "Egyptian economy collapsed
as did her political stability."
In Babylon some 4,000 years ago the
Code of Hammurabi was a maze of price control regulations. "If a man
hire a field-labourer, he shall give him eight gur of corn per annum"; "If a man hire a
herdsman, he shall give him six gur of corn per
annum"; "If a man hire a sixty-ton boat, he shall give a sixth part
of a shekel of silver per diem for her hire." And on and on and on. Such
laws "smothered economic progress in the empire for many
centuries," as the historical record describes. Once these laws were
laid down "there was a remarkable change in the fortunes of the
people."
Ancient Greece also imposed price
controls on grain and established "an army of grain inspectors appointed
for the purpose of setting the price of grain at a level the Athenian
government thought to be just." Greek price controls inevitably led to
grain shortages, but ancient entrepreneurs saved thousands from starvation by
evading these unjust laws. Despite the imposition of the death penalty
for evading Greek price control laws, the laws "were almost impossible
to enforce." The shortages created by the price control laws created
black market profit opportunities, to the great benefit of the public.
In 284 A.D. the Roman emperor
Diocletian created inflation by placing too much money in circulation, and
then "fixed the maximum prices at which beef, grain, eggs, clothing and
other articles could be sold, and prescribed the penalty of death for anyone
who disposed of his wares at a higher figure." The results, as Schuettinger and Butler explain, quoting an ancient
historian, were that "the people brought provisions no more to markets,
since they could not get a reasonable price for them and this increased the
dearth so much, that at last after many had died by it, the law itself was
set aside."
Moving closer to modern times,
George Washington's revolutionary army nearly starved to death in the field
thanks to price controls on food that were imposed by Pennsylvania and other
colonial governments. Pennsylvania specifically imposed price controls on
"those commodities needed for use by the army," creating disastrous
shortages of everything needed by the army. The Continental Congress wisely
adopted an anti-price-control resolution on June 4, 1778 that read:
"Whereas it hath been found by experience that limitations upon the
prices of commodities are not only ineffectual for the purpose proposed, but
likewise productive of very evil consequences--resolved, that it be
recommended to the several states to repeal or suspend all laws limiting,
regulating or restraining the Price of any Article." And, write Schuettinger and Butler, "By the fall of 1778 the
army was fairly well provided for as a direct result of this change in
policy."
French politicians repeated the
same mistakes after their revolution, putting into place the "Law of the
Maximum" in 1793, which first imposed price controls on grain, and then
on a long list of other items. Predictably, "in some [French] towns, the
people were so badly fed that they were collapsing in the streets from lack
of nourishment." A delegation from various provinces wrote to the
government in Paris that before the new price control law, "our markets
were supplied, but as soon as we fixed the price of wheat and rye we saw no
more of those grains. The other kinds not subject to the maximum were the
only ones brought in." The French government was forced to abolish its
evil price control law after it had literally killed thousands. When
Robespierre was being carried through the streets of Paris on the way to his
execution the crowds shouted, "There goes the dirty Maximum!" If
only this were a lesson learned by contemporary politicians.
At the end of World War II American
central planners were even more totalitarian when it came to economic policy
than were the former Nazis. During the post-war occupation of Germany, American
"planners" rather liked the Nazi economic controls, including price
controls, that were in fact preventing economic
recovery. The notorious Nazi Hermann Goering even lectured the American war
correspondent Henry Taylor about it! As recounted by Schuettinger
and Butler, Goering said:
Your America is doing many things
in the economic field which we found out caused us so much trouble. You are
trying to control peoples' wages and prices — peoples' work. If you do
that you must control peoples' lives. And no country can do that part way. I
tried and it failed. Nor can any country do it all the way either. I tried
that too and it failed. You are no better planners than we. I should think
your economists would read what happened here.
Price controls were finally ended
in Germany by Economic Minister Ludwig Erhard in 1948, on a Sunday, when the
American occupation authorities would be out of their offices and unable to
stop him. This spawned the "German economic miracle."
Price controls were the cause of
the "energy crisis" of the 1970s and of the California energy
crisis of the 1990s (only the wholesale price of electricity was deregulated
there; controls were placed on retail prices). For more than four thousand
years, dictators, despots, and politicians of all stripes have viewed price
controls as the ultimate "something for nothing" promise to the
public.
With the wave of a hand, or the
flash of a legislative pen, they promise to make everything cheaper. And for
more than four thousand years the results have been exactly the same:
shortages, sometimes of catastrophic consequence; deterioration of product
quality; the proliferation of black markets on which prices are actually
higher and bribery is rampant; destruction of a nation's productive capacity
in the industries where prices are controlled; gross distortions of markets;
the creation of oppressive and tyrannical price control bureaucracies; and a
dangerous concentration of political power in the hands of the price controllers.
This is what the economically
ignorant among the American public is clamoring for Congress to do with
regard to today's energy industry. Let's hope that the recent
"hearings" in Congress on the topic of gasoline prices were just
another public relations charade.
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