The Problem with Price Controls

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Why the fight against ‘price gouging’ actually hurts individuals.

Prices of all assets, goods, and services have been rising for the past few decades. This rise has greatly accelerated in recent years due to the effects of lockdowns, excessive stimulus, and a breakdown in global trade. The working class, which historically does not get wage increases which match the pace of the money supply growth as measured by M2 or even CPI inflation, is now being squeezed by prices of rent, gas, food, and other necessities. It is very hard to tame inflation by killing consumer demand, as the Federal Reserve claims they want to, when many of the goods inflating have very inelastic demand.

Some very intelligent members of congress have started to float narratives and policies involving price controls. They claim that the inflation we see around us is simply a result of corporate greed, since apparently corporations had to wait until we thought there would be inflation to raise their prices. While I agree that corporations are greedy, for-profit monsters which often work against the best interest of the everyday consumer, this is a very poor analysis of what is going on fundamentally. Prices are measurement tools. The ruler we use to compare and discover the value of goods and services in our economy is the U.S. Dollar. And if you add more inches to a ruler, or more dollars to an economy, prices will naturally be bid up as there has been no change in the real wealth of the economy, or the value of what is being measured. If you made an equation, it would look something like this.

Money Supply / Real Economic Value = Aggregate Price of Goods/Services

When you increase the money supply without creating any more real economic value like building more houses, having a larger population, or producing goods more efficiently, the aggregate price of goods and services will naturally rise to start measuring with the new money supply in mind.

Price controls would be a disaster. Keynesian economics can be very flawed, but it certainly can do a good job of analyzing some economic situations. When the price of a good is artificially restricted below its fair market price, or the equilibrium where supply would normally meet demand, this destroys the signal that price normally sends to economic actors about the true cost or value of that good. People will buy more than they usually would have been able to under the same circumstances, and some suppliers which would have previously been making a profit now fall into a loss. These factors combined, the reduced profitability and incentive to provide the good along with the artificially high demand for it, start to create shortages of that good.

A graph displaying how a price ceiling functions in an economy

The path to hell is paved with good intentions. While it is easy to understand how one could come to the conclusion that legislative solutions to high prices are supposed to benefit the average worker, it could not be farther from the truth. Shortages would become the new biggest problem instead of high prices, and this would likely lead to hoarding and even more demand for the goods which are experiencing the problems. This creates a cycle of further shortages, until eventually legislation is passed on how much of a certain good you are allowed to own, and people start being arrested for trying to make sure they’ll have enough gas to run their stoves in the winter. Central planning of an economy has never been a very successful practice, and often ends up giving the government more authority over who can have what and when. And while that may seem all well and good when your party is in control, you quickly realize the danger of this power when it is someone you disagree with wielding it.

Let us hope our own government does not choose to go the direction of further authoritarianism, price controls, and manipulative monetary policy. The only way forward to create a stronger and more equitable society is to adopt sound money and a separation of state and monetary policy. Until then, the working class will continue to be looted of their time, energy, wealth and purchasing power.