In recent decades the prevailing economic policy has been the free market, but is it really free? The existence of price controls casts doubt on this, however, it may also point to certain flaws in the system.
Hello leofinance friends, I hope you are doing very well, if like me you have libertarian ideological leanings, but at some point in your life you have found yourself faced with exaggerated price increases on certain goods or services without being able to avoid saying 'The government should do something to regulate this madness' then you will understand that price controls are a complex subject to say the least, today what are they, how do they work, and hopefully explain why it is such a difficult ambiguous subject.
What are price controls
Price controls are regulations imposed by governments to limit the minimum or maximum price of a good or service, either to protect consumers or pre-producers.
Price controls are generally aimed at protecting consumers by limiting the maximum price at which a good or service can be sold, thus preventing speculative practices by monopolies or the taking advantage of special circumstances by companies or traders to raise prices unjustifiably.
Minimum price controls are generally used to protect producers and guarantee the profitability of their businesses. One sector that is often subject to such controls is agricultural production, where a minimum price limit is placed on the price at which products such as grain can be bought/sold so that producers are guaranteed a profit and thus ensure the supply of food to the population.
Are they good?
Usually from the point of view of the ordinary citizen like you or me, who are consumers price controls may seem like a good thing, as they ensure that our wages can continue to allow us a certain standard of living, when a group of foods or medicines rises in price rapidly and becomes prohibitively expensive it is normal for many people to clamor for price controls, and around the world constantly politicians use the promise of price controls as a campaign slogan to gain popular support.
Large corporations such as Pfizer or Monsanto are notorious for trying to sell their products at exorbitant profits by raising prices, in such cases price controls are a reasonable thing to do.
Are they bad?
Most economists argue against price controls because such artificial market manipulation with good intentions can have catastrophic consequences. For example.
When the price of a product is regulated and the profits that can be made from it are limited, it discourages production or trade in that product, which also limits innovation in that area, since an investor is less willing to invest in an area where his money will receive limited returns than in one where the potential is infinite without controls beyond the law of supply and demand.
The reduction of production due to a price control can lead to a shortage of the same, if there is demand but the traditional supply does not cover it, there may be the emergence of black markets, smuggling and corruption, all practices that end up making the price of the product reaches the final consumer much higher than it would have been in a deregulated market, and at the same time would benefit with large profits to the same economic actors and unscrupulous politicians who wanted to limit with price controls.
How they have worked in the world
Price controls are not something new, they have existed since the existence of the economy and governments, excessive prices of food or health are a breeding ground for social unrest, and therefore a threat to the stability of governments, likewise, safeguarding the food sovereignty of the nation is a vital strategic necessity for the survival in time of the same, therefore since the time of ancient Rome where the Emperor Diocletian promulgated the edict of maximum prices in order to control prices in certain areas that were out of control. Although historical records are unclear, the edict was accompanied by major monetary reforms which on the whole were initially successful, but then had to be modified due to pressure from commercial actors.
https://en.wikipedia.org/wiki/Edict_on_Maximum_Prices
The French Revolution is another period that serves as an example of what can happen with price controls, especially the negative consequences, in this turbulent time in France, the scarcity and inflation resulting from the continuous wars led to inflame the population that was on edge with high prices, The government enacted the General Maximun law limiting food prices, which led to widespread shortages and famine as producers refused to produce or sell, how many were confronted by the army and their goods confiscated, the famine in Paris was partially solved, but it spread to the rest of the country, the law was eventually abolished.
Attempts to control evils such as inflation using tools such as price controls are disastrous, it is like trying to repair a table by hammering nails with a microscope, it will not work well and will end up generating much greater losses in the long run.
An example that has become a classic of modern economic study is that of my country, the destruction of the country's productivity, excessive government spending, corruption and incompetence led to a scenario of inflation that was attempted to be remedied with strict price controls, the result, the companies stopped their production lines, and many left the country, more shortages and famine, and now less employment, the government tried to remedy this by expropriating these companies, but incompetence and corruption ensured that these companies never produced a fraction of what they did in private hands.
But there are examples of successful price controls.
In the 1970s in the U.S. the Reagan administration froze wages and prices for 6 months to curb inflation and buy time to stabilize the currency, although commodities such as fuel became scarce, the controls were abandoned on schedule and the economy began to recover.
Another would be Japan today. Where there is a maximum ceiling on drug prices to ensure medical treatment for the entire population, and contrary to the predictions of many economists, Japan is a pioneer in medical research. https://www.pharmexec.com/view/huge-sellers-herald-changes-japan-drug-pricing
Price controls used in a timely and conscious manner, to control temporary special circumstances or to prevent large corporations from forming monopolies that exploit the population can be successful and in some cases are necessary.
Because they are so difficult to explain
The problem with understanding and explaining price controls is that as with some controversial items such as firearms, the discussion about them is multi-layered and subject to various cognitive factors. A price control is a tool of economic intervention, it is not inherently good or bad, the problem is that, from the consumer's point of view it can look good, as there is a cognitive bias in the minds of all of us.
It is always easier to understand something if it apparently benefits us, therefore it is easier to accept that a government enacts price controls, instead of ceasing to issue inorganic currency and decreeing economic austerity to control inflation, since the population will more easily accept that supposedly businessmen and traders are being punished, than to accept the fact that they will be affected by economic austerity. Although a price control, if not properly implemented, may in the long run hurt the population much more than any reduction in public spending.
The existence of this bias is well known and its effect on the understanding of price controls is documented, but the inability of economists to form a narrative that manages to break this bias is also influential, not only with respect to price controls, but on economics in general. In our societies there is worryingly little talk about the economic mechanics of what is important for us the public to be able to make informed decisions, and this is partly the fault of economists who have failed to bring their science to the masses.
A great economist once said 'it takes a very good economist to create a plausible economic theory, but it takes an equally good professional to explain it to the public in an understandable way.'
Conclusion
Finally, we can say that the existence of price controls are a necessary evil, a product of the existence of an imperfect economic system. Price controls, and any form of state intervention in the economy should not be done, but almost all economies in the world already have a high level of state intervention, which sometimes ends up creating the conditions where price controls become necessary.
However, even if an economy without state intervention were possible, price controls are a tool that should still be at hand, since in a totally free economy there is the danger of unfair and counterproductive prices for the majority, Monopolies, opportunism in times of public calamity, and crime, are things that will exist regardless of whether there is a state or not, and price controls can be one of the tools to control them.
However, as with weapons, price controls are a tool that must be used without passions, not only with good intentions [the road to hell is paved with them], but with pressure, and much, much caution, for a mistake in a price control can lead to starvation and death for millions of people.
Recommended Bibliographic Reference
[1] PRICE CONTROL"