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Why price controls will not solve inflation

Why price controls will not solve inflation

February 27, 2023

Editor's Note: This article was originally published in Spanish on infobae. It has been machine-translated to English and posted with the author's permission.

Before the government interfered, milk was already expensive, but people could buy it. Now there is only an insufficient amount of milk available. Therefore, total milk consumption falls. The next measure the government can resort to is rationing, but this only means that certain people get milk while other people get no milk at all. These were the exact words of Ludwig von Mises in his 1959 book Economic Policy .

But let's start with the concepts. Price control is a type of intervention by a government in the market in order to set certain values ​​for goods and services according to the opinion that the rulers have about them. This control is usually created with the supposed objective of "avoiding inflation", assuming that the increase in prices is due to speculation and that they can be controlled and stabilized through such a mechanism. With this, some politicians and economists expose their ignorance about how the economy works. Inflation is controlled by stopping issuing money and with responsible governments, not with arrogant patches

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Let us also remember that this price control measure is not a novel proposal. In the book Forty Centuries of Wage and Price Controls , published in 1979, Robert Schuettinger and Eamonn Butler reviewed the extensive history of this interventionist measure that even goes back to the period of Diocletian in the Roman Empire, between the years 284 and 305, when he established a long list of controlled prices. It is a pity that after thousands of years we have not understood that this policy always ends up failing. It is not for nothing that price control is the basis of the Cuban or Venezuelan economic regime (and there is no need to explain how things are there).

FA Hayek already said it in The use of knowledge in society(1945), when he remarked that the price system is a social development that results from evolution and not from the deliberate design of someone specific, and it is said system that allows all the information to be detected and transmitted in economic terms that is dispersed and divided among millions of individuals. It is the interaction of two parties that gives rise to a market price. Free prices are the key tool to bring supply closer to demand, since when prices different from those that reflect the supply and demand of a product are set or controlled, scarcity or overproduction of goods arise, which are tied at prices that do not reflect their abundance or scarcity. Scarcity does not mean the absolute lack of a good,

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In a free economy, prices are never in equilibrium, since this would only happen in a market with the same demanders and suppliers, and with the same quantities supplied and demanded; then there is definitely no possible price variation.

Prices are signals. This is the most important thing for us to understand. When a government decides to apply this control measure, that is, to decide how much each thing should cost in the market instead of you doing it, producers lose the signals and information that prices represent and no longer know for whom or what to produce. . In short, a controlled price is not a price: it is the whim of a state official who makes arbitrary decisions behind a desk, believing that he knows everything.

It's simple: a good is worth what the market is willing to pay for it. In a free economy, prices are the result of countless exchanges of property rights that arise between individuals who value goods or factors of production in different ways.

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On the other hand, and once the price is set by the bureaucrat, the money that the producer receives in exchange for the good that he produces does not justify the hours spent or the effort that it costs him to produce said good. In other words, when the price of a certain product is set by decree of a politician, what is done next is to force the producer to sell his product at a price below the costs involved in its production. .

What's going to happen next? The producer will produce less, stop producing or disappear from the market to go elsewhere where he can receive correct signals without interference. The following consequence will have to be suffered by the consumer when he has to suffer from a shortage of products , in this case the Argentines, when we run out of several cuts of roast, again, because of a government full of arrogants.

Antonella Marty
About the author:
Antonella Marty

Antonella Marty is an author and international speaker from Argentina. She has authored several books, including Liberty: Antidote to Poverty (2019), The Liberal Handbook (2021), All You Need to Know (2022), Objetivismo: Preguntas y Respuestas (2023), and Ideologies (2024).

Economics / Business / Finance
Regulation and Taxation