4,000 Years of Failed Price Control Policies, But Chavez Thinks It Will Work This Time

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For the past forty centuries or more, countless civilizations have attempted to feed people by fixing prices and each time it has produced catastrophic consequences.  Whether they are democratic governments, dictators, or socialist reformers these “central planners”, as economists call them, have profound negative effects on the market when they attempt to hijack supply and demand.  Manufacturers cannot consistently produce goods under increasing debt and so close shop.  Farmers stop farming because they start losing money. They cannot afford to feed themselves if they sold at the fixed prices. Over and over again, the result is a starving populace.

The Code of Hammurabi was essentially a great tabulation of price controls.

Such laws “smothered economic progress in the empire for many centuries,” as the historical record describes. Once these laws were laid down “there was a remarkable change in the fortunes of the people.”

In 301 AD, Emperor Diocletian sought to curb inflation and to help feed the people whose money was rapidly becoming useless. He injected more coinage into the system (an economic no-no in times of inflation) and fixed prices on several goods. And to ensure such rules were followed he decreed that disobeying them would have the penalty of death. It was death, death, and more death (link):

The penalty for exceeding the prices of the Edict was severe: death. Not satisfied to execute just the seller, Diocletian decreed that the buyer was to be executed as well. As a final measure, if a seller refused to sell his goods at the stated price, the penalty was death.

Despite such harsh punishment, the merchants “stopped producing goods, sold their goods illegally, or used barter” to avoid the price controls (link).

Around the same time as Diocletian, Egypt was experimenting with fixed prices. They had armies of inspectors to enforce the rule of law, but still:

Egyptian farmers became so infuriated with the price control inspectors that many of them simply left their farms. By the end of the century the “Egyptian economy collapsed as did her political stability.”

Coming closer to modernity, George Washington’s troops nearly starved to death during the revolution thanks to price controls the early colonial governments had instituted. It was sadly ironic that Pennsylvania had specifically imposed controls on “those commodities needed for use by the army,” thus creating disastrous shortages of everything needed by the army.

The Continental Congress wisely adopted an anti-price-control resolution on June 4, 1778 that read: “Whereas it hath been found by experience that limitations upon the prices of commodities are not only ineffectual for the purpose proposed, but likewise productive of very evil consequences–resolved, that it be recommended to the several states to repeal or suspend all laws limiting, regulating or restraining the Price of any Article.” And, write Schuettinger and Butler, “By the fall of 1778 the army was fairly well provided for as a direct result of this change in policy.”

Apparently after the French Revolution, the new politicians tried to avoid disastrous famines for certain by (guess what?) controlling the market price of goods.

Predictably, “in some [French] towns, the people were so badly fed that they were collapsing in the streets from lack of nourishment.” A delegation from various provinces wrote to the government in Paris that before the new price control law, “our markets were supplied, but as soon as we fixed the price of wheat and rye we saw no more of those grains. The other kinds not subject to the maximum were the only ones brought in.” The French government was forced to abolish its evil price control law after it had literally killed thousands.

Is it beginning to get repetitive? How about just one more example for the road? This one is especially interesting because it is perpetrated by Americans and under the familiar circumstances of run-away inflation. Maybe it was some governmental version of post-traumatic stress disorder that made the US forget the lessons learned during the Revolution War. In any case, for whatever reason, we tried to establish price and salary controls in post-World War II Germany:

The notorious Nazi Hermann Goering even lectured the American war correspondent Henry Taylor about it! As recounted by Schuettinger and Butler, Goering said:

Your America is doing many things in the economic field which we found out caused us so much trouble. You are trying to control peoples’ wages and prices — peoples’ work. If you do that you must control peoples’ lives. And no country can do that part way. I tried and it failed. Nor can any country do it all the way either. I tried that too and it failed. You are no better planners than we. I should think your economists would read what happened here.

There is account of disaster after disaster, and yet, and yet…Venezuela’s President Hugo Chavez thinks that this time his plan will be different. It will succeed where so many have failed before. In the face of declining revenues from oil, he has legislated price controls in order to, hypothetically, keep food freely available during the economic turmoil.

The result is that Chavez is nationalizing industry after industry because they will not produce in the controlled market. Mostly recently, he seized a factory unit of American food giant Cargill after accusing them of skirting his price controls and failing to produce enough cheap rice. He had said, “Prepare the decree, we are going to expropriate Cargill. We are not going to tolerate this” (link). For sure, we shall see how he and his country’s people tolerate a total decline in food production. History predicts that it will not end prettily.

With the wave of a hand, or the flash of a legislative pen, they promise to make everything cheaper. And for more than four thousand years the results have been exactly the same: shortages, sometimes of catastrophic consequence; deterioration of product quality; the proliferation of black markets on which prices are actually higher and bribery is rampant; destruction of a nation’s productive capacity in the industries where prices are controlled; gross distortions of markets; the creation of oppressive and tyrannical price control bureaucracies; and a dangerous concentration of political power in the hands of the price controllers.*

*Except where otherwise noted, the extended quotes come from Thomas J. DiLorenzo’s post entitled Four Thousand Years of Price Control.  This is in its majority a review of the book Forty Centuries of Wage and Price Controls by Robert Schuettinger and Eamon Butler.

April 20, 2009  Tags: , , , , ,   Posted in: Politics, Science & Technology

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