Price controls always do the opposite of what they intend to do. Ministers must learn to let them go

During Muhammad’s exile in Medina, there was a famine – a fairly common occurrence in 7th century Arabia. As food prices skyrocketed, community leaders approached the Prophet, asking him to order traders to make their products affordable. Mohammed refused, telling the delegation that the prices were in God’s hands. As a businessman, he understood what happens when prices are artificially lowered. First, there is a rush to buy; and then inevitably there is a worse shortage, because there is little incentive for people to market artificially cheap products.

I remember this episode for two reasons. First, because the free market traditions of Islam deserve greater recognition. Second, and more important, because people still have a hard time understanding Muhammad’s point.

Fourteen centuries after the Prophet’s wise refusal to intervene, and two and a half centuries after Adam Smith showed that price fixing is always and everywhere counterproductive, we continue to have difficulty with the idea of ​​an offer. and demand. Like suspicious medieval peasants (or Marxists), we cling to the idea that goods have an intrinsic price, and that increasing that price is a “profiteer”.

“Greed in times of crisis: how dare the fuel companies earn money with miseryWas a fairly common newspaper headline this week. “They see motorists as a cash cow and, frankly, they are a shame,” said a conservative MP not atypical.
In fact, by any normal measure, the fuel companies have not raised their prices enough. If they had increased their tariff to say £ 1.80 per liter, we would soon have seen who really needed fuel that day. Since the shortages were caused, not by a general lack of gasoline but by panic buying, the crisis would have passed, and prices would have come down.

So why haven’t the oil companies acted sensibly? Because they were afraid of the reaction of the press and, more seriously, of the political reaction. Our current national mood, as this column never tires of pointing out, is worryingly authoritarian. The newspapers reflect this, as do, of course, politicians and government officials.

In March of last year, as people scrambled (again, irrationally) to stock up on hand sanitizers and toilet paper, the Markets and Competition Authority threatened to take action against anyone who charged a “grossly inflated” price – including “members of the public if they resell goods, for example in online marketplaces”. This kind of interference is always popular in the short term, but always disastrous in the long term.

What, after all, pushed last week’s crisis? The epidemic obviously played a role. But in most areas of life the market has bypassed the disruption. No, the fuel crisis was the unintended consequences of a series of government interventions. A price cap aimed at keeping bills low for consumers eventually forced suppliers out of the market. Leave payments to keep businesses going during the lockdown have proven to be much more valuable for European drivers if they return to their home countries. Licensing regulations have prevented new entrants from entering the market quickly. And, of course, the general thrust of government policy was to move away from hydrocarbons.

Walter Williams, the great African-American economist who died last year, once said: “Most of the big problems we face are caused by politicians who create solutions to the problems they created in the first place. Sadly, his aphorism holds true through most ages and most nations.

For whatever reason, this argument is usually dismissed as “dogmatic” or “ideological”. People who oppose price controls, rent controls, and other forms of economic interventionism are presented as doctrinaire Thatcherites, more interested in the sanctity of the contract than in the welfare of the masses.

In fact, it is the other way around. Free traders have beliefs that seem counterintuitive but prove to be effective in practice. Most people new to it assume that lowering prices is a way to help the poor – or, at least, to ensure that resources are not monopolized by a few oligarchs. But the most cursory study in history shows the opposite to be true. Pricing causes shortages, making it worse for everyone, even though the rich are usually better at bending the rules.

The story of capitalism is the story of the gradual enrichment of ordinary people by falling prices. Specialization and competition mean that goods and services become cheaper, allowing people to live to a higher standard while working fewer hours. As the great economist Joseph Schumpeter observed in 1942, “The capitalist feat is generally not to provide more silk stockings to queens, but to make them available to factory girls in exchange for diminishing efforts. constant ”.

Most of us have experienced price deflation our entire lives. Cars, washing machines, televisions, toys, food, central heating – all are much cheaper than before. And not just cheaper. Your car is safer, less polluting and more fuel efficient. Your mobile phone hasn’t just replaced your desk phone; it also replaced your address book, your maps, your compass, your walkman, your encyclopedia and, as far as I know, your game of chess.

The fall in prices is most dramatic when we look at commodities rather than how they are delivered. We cannot exactly compare candle light, gas light, and electric light. But we can ask you how long you have to work to buy enough light to read. Matt Ridley does the math in his book How Innovation Works. In 1880, one minute of work bought you four minutes of artificial light; in 1950 it was seven o’clock; in 2000, it was five days.

Which brings us back clearly to the energy crisis. Growing regulations have stopped prices from falling. And not just in energy. Look at all the things that have defied the affordability trend – housing, education, childcare, medical treatment. What do they all have in common? They are all subject to various forms of rationing, quotas or state controls.
For example, the rules against building make houses more expensive. The government recognizes the problem, but instead of removing these rules, it is adding new ones, which mainly serve to make the problem worse: Help with purchases, eviction bans, rent controls.

Regulations, no matter how well-intentioned, usually do more harm than good. Europe’s highest caretaker-to-child ratio gives us the most expensive childcare. Fixed-price degrees distort the market and create armies of graduates who will never repay their debts. The NHS monopoly guarantees waiting lists.

There is a pattern here. Instead of letting go, ministers always feel the need to do something. And so, as Walter Williams observed, new problems are created in the name of solving old ones.

When it comes to regulating the private sector, the government proudly proclaims that it is against “all types of anti-competitive activity, including pricing and abuse of market dominance.” , the rail monopolies, the health monopoly, the BBC and pretty much everything DEFRA does.

We’ve had price and income policies before, of course: they led to the collapse of Edward Heath’s government in 1974. The main difference was that at that time, income policies were aimed at restricting what was considered excessive wage demands.

Today with inflation picks up again, ministers are curiously trying to push wages even further, by excluding foreign labor and raising the minimum wage faster than average wages. But while government interference is not new, its scale is. Never since World War II – in fact, arguably not even then – has the state exercised such powers as during shutdowns.

The question, as after 1945, is how quickly the state will relinquish the powers it had seized on a supposedly emergency basis. Will we be like postwar West Germany, which abolished price controls and other regulations in a big bang in 1948, ushering in three decades of miraculous growth? Or will we be like post-war Britain, which clung to many of its wartime economic controls in the 1970s, becoming the sick man of Europe?

The first signs are not encouraging. Rising taxes, tighter regulations and rising prices are a dire combination. Given the exceptional circumstances, a government could get away with one of the three. But not two – let alone all three at the same time. The problems of over-regulation will never be solved with more regulation. Forget it, ministers. Let it go.