Global Economic News Digest

Price Controls Can Work, Sorry If This Offends

25 feb 2022
author: Uwe Fuhrmann, translation by Loren Balhorn
source: JACOBIN


Price Controls Can Work, Sorry If This Offends


There’s something about the phrase “price controls” that drives some people — mainly economists — around the bend. But history shows that market economies rarely go very long without needing some form of price control — especially in a crisis

When it comes to economic policy, certain terms tend to trigger particularly drastic reactions. One such term is “expropriation.” Expropriation is a widely accepted fact in coal mining and highway construction — in the United States it is often called eminent domain — but when, as was recently the case in Berlin, a popular referendum proposes targeted expropriations as a tool to stop rents from spiraling out of control, the debate quickly gets irrational and people start throwing around comparisons with the Soviet Union. It would appear that the practice itself is not the problem here, but rather the degree of public support for it.

More recently, an international controversy demonstrated that the term “price controls” triggers the same reaction.

Can Politics Actively Shape Prices? And What Does That Mean?

East Germany or Venezuela are often the first places that come up when discussing price controls, but they aren’t the only ones who’ve deployed them. Back in December 2020, in the middle of the second COVID-19 wave, rapid antigen tests were in short supply in Germany. In response, the Federal Ministry of Health issued a decree capping revenues for wholesalers at forty cents per test. That’s routine operating procedure in the German health care sector. Without these measures, there was a real danger that drastically increased profit rates on the way to the consumer could lead to significant price rises — while production costs stayed the same.

Precisely this sort of unwanted development is now playing out on a far larger scale as supply chains break down in the face of the pandemic, causing supply to decline while demand remains stable or even increases. Fully in line with market principles, this situation is now being exploited to maximize profits, resulting in sensitive price rises. The inflation we are currently experiencing, as Isabella Weber recently argued in the Guardian, is thus in part driven by the profit mechanism. In this situation, temporary price controls could help to slow down some drivers of inflation and buy time until supply chains are back in operation.

Rather than reasoned arguments, however, Weber’s nuanced and sober proposal was met with an international polemical firestorm. Paul Krugman adopted such a condescending tone that he ended up apologizing to Weber and his 4.6 million Twitter followers. The Süddeutsche Zeitung, for its part, ran the — quite inappropriate — headline, “Nixon from the left,” writing off the highly regarded and internationally known economics professor as an “outsider” whose “actual” expertise was limited to the Chinese economy.

Why Are They So Upset?

The words “price controls” trigger a sharp defensive reflex, as Adam Tooze recently admitted: though he expressed a degree of openness toward concrete measures, he rejected the term “price controls” as “provocative.”

This is telling: by using the term “price controls,” a central pillar of mainstream economics was called into question (and by a woman, for that matter). Namely, the belief that only the market mechanism can solve problems. Yet this doctrine is not really “the truth,” but just a bitter consequence of our era. Its name? Neoliberalism.

It’s high time we remembered that “natural prices” don’t exist at all. Whether via taxes, infrastructure, or relations of ownership: all of the conditions under which a commodity is produced, traded, and sold are socially and politically determined, and thus can be changed. In fact, it is impossible not to influence prices.

In turn, market prices aren’t “natural prices” either, but rather just market prices — and they tend to be quite brutal, especially in times of crisis. On more than one occasion, it has proven highly beneficial not to blindly trust in these free market prices. Weber proved as much in her award-winning book on China. And my research on West German postwar history comes to the same conclusion.

The term “price controls” points to the market mechanism’s long history of dysfunctionality, which also partially explains why the debate makes so many economists nervous. The most important legitimate argument against price controls is that of prices’ “signaling function,” which is said to ensure an efficient distribution of resources over the medium term. That isn’t very helpful in a crisis, but nevertheless, I’ll propose a compromise: rather than control prices, why don’t we limit profits?

The history of the emergence of Germany’s social market economy proves surprisingly instructive in this regard. After World War II, West Germany was plagued by strict pricing rules, shortages, and rationing. The minister of economics at the time, Ludwig Erhard, planned to bring these conditions to an end via means of a “free market economy” and comprehensive price deregulations. With permission from the American occupiers, he took the first step in this direction with a currency reform launched on June 20, 1948.

But Erhard’s assumption that prices would soon “level off” proved to be erroneous. Instead, rapid price rises led to desperation and were soon followed by angry protests. A solution was promised in the form of the so-called “StEG Program”: surplus military gear was to be repurposed for civilian use on a mass scale and introduced onto the market. Nevertheless, prices stayed high and trade profits continued to rise.

The situation only changed with administrative measures that contradicted Erhard’s beliefs: on September 6, 1948, the authorities established legally binding “maximum prices for end consumers” and capped profit margins at 20 percent. Only after this combination of price controls and revenue caps did prices finally go down — including those of competing “free” goods. The successful program was wound down in 1953, and Ludwig Erhard — quite absurdly — became a symbol of successful economic policy.

As we can see, not all price control roads lead to Venezuela. But if you still feel provoked by the idea of “price controls,” then welcome to team “revenue caps!”