Against Price Controls
If at first you don’t succeed, try, try again?
Since becoming the consensus Democratic nominee for president a bit less than a month ago, Kamala Harris has done a lot: picked Minnesota governor Tim Walz as her running mate, studiously ignored the media, and read vibes-based pablum from a teleprompter at multiple highly-attended rallies. The ticket has emphasized nebulous feelings and the fact that it is no longer headed by a mentally-infirm octogenarian, so far to good effect. Words like “joy” and “weird” have defined the Harris/Walz campaign in the brief span since its inception, backed by a fully in-the-tank media establishment. And the vice president’s polling numbers relative to Donald Trump have only risen in the past weeks. What she hasn’t done is speak seriously about policy or her plans if elected in November – that is, until now.
Just this week, Harris – through campaign surrogates and intermediaries – released a policy snapshot she claims will tackle one of the primary issues faced by the average American family: inflation and affordability. Since 2021, the price of basic goods has risen significantly, even as the inflation rate itself has fallen in the past year. As inflation is a cumulative phenomenon, this remains a serious problem for most Americans, especially those in the hotly-politically-contested working class. The centerpiece of the Harris/Walz economic policy is a federal ban on so-called “price gouging” among consumer staple businesses like grocery stores. The plan is noticeably light on specifics, including key aspects like the definition of “price gouging” and the mechanisms by which the federal government could regulate these prices.
In effect, this proposal would result in something akin to a national command economy with price controls impacting nearly every sector and household. And it is an absolutely awful idea. The policy is egregious for two primary reasons – both of which I am intimately familiar in a professional capacity – accounting and history.[1] From the theoretical to the practical, price controls are an utter failure.
Let’s begin with the theory side of it and explore the economic purpose of prices, a key foundation to the discipline of accounting. In a properly functioning market economy, prices are not simply arbitrary figures chosen by greedy companies to fleece consumers. Prices are, in a word, information. The price of a product incorporates all the information about that product: the cost of its inputs, including labor, fixed costs, and raw materials, the cost of bringing it to the consumer, the taxes levied at each stage of production, the supply of inputs and of the product itself, and the demand for the product, both present and forecast into the future. And that is just the beginning, as prices include factors like economic risk, legal liability, the availability of loans and investment, and the cost of capital. Pricing for services is even more complex and dynamic. In markets for stocks, options, and futures, prices are essentially a prediction of other prices of underlying goods at a later date. Clearly, pricing is a highly ornate and complicated process that does not equate to a company seeing what their product costs to make and slapping an arbitrary margin atop it. Which is why price controls are so bad.
By removing the informational aspect of prices, even if only for a few particular goods or sectors, the whole of the free-market economy is skewed. Pricing decisions are not made in a vacuum, as they often include other prices in their process. Removing the informational aspect of some prices has a much broader area of effect, creating an entirely different set of incentives for producers and consumers. Price changes signal to producers to produce more or less of a product and help consumers make buying and other financial decisions. Artificially altering prices distorts these incentives and leads to shortages or surpluses, depending on the type of control, ceiling or floor, respectively. All of this is unnecessary inefficiency inserted into an already-efficient market process, necessarily making both producers and consumers far worse off. Markets operate on the basis of shared information and individual choices based on that information; price controls ruin those market mechanisms and create perverse incentives for each side of the commercial transaction.
You don’t need to buy my depiction of the economic theory behind pricing to understand that it simply does not work to cure the ill that it is intended to fix – we have thousands of years of history to back that contention up. The written records of mankind attest to the centrality of commerce to human civilization; many of our earliest extant writings are trade-related, including receipts, contracts, and dispute records. Humans have been pricing goods and services for millennia and governments have been intervening in that market process for nearly as long. Price controls can be found everywhere from the Code of Hammurabi (1772 BC) and the Edict of Diocletian on Maximum Prices (301 AD) to the Talmud (6th century BC) and the English Assizes on Bread (circa 1170 AD). In these and other past cases, the top-down proclamations failed to achieve lasting success as producers and consumers adjusted their behavior accordingly and skewed the natural market mechanisms of efficient distribution.
We also have more recent and American examples of price controls as disastrous interventions into the economy in an attempt to assert government power over the commercial system. Price controls were adopted during both World Wars and the Korean War, but these were temporary measures during conflict. Still, they often significantly altered incentives for the worse and would have become economic albatrosses had they continued beyond the immediate crisis period. Rent control is common in several large, progressive American cities, artificially limiting housing by undermining market incentives to build additional profitable units.
For the most compelling comparison to the Harris price control proposal, we have to go back to economic debacle that was the 1970s. The Nixon administration inaugurated widespread price and wage controls in 1971, intended to curtail the inflation that was simmering under the surface of the American economy. In actuality, it backfired enormously, causing shortages, hoarding, unemployment, and, ironically enough, high levels of inflation. The solution to the inflation caused by government largesse is an ending of government largesse and a series of harsh moves needed to reset the economy. President Reagan and his Federal Reserve Chairman Paul Volcker forced through this difficult and politically-painful approach, stopping inflation cold and bringing about the economic success of the 1980s.
It is eminently clear from both a theoretical and a practical perspective that price controls are a terrible, no good, very bad policy that have failed pretty much every time they have been tried. That anyone still defends this idea after literally thousands of years of documented disaster is absurd. It speaks not only to historical illiteracy but also to economic illiteracy. That Kamala Harris is centering her economic platform around such a fatally flawed concept is a testament to the radicalism of her campaign. To the Harris team, real price controls have never been tried. But sometimes, if at first you don’t succeed, you should probably stop trying.
[1] (I have graduate degrees in each.)