Without price controls, the market economy leads to chaos

There is something about the term “price control” that scares some people, mostly economists. But history shows that a market economy can rarely go long without any kind of price controls, especially in times of crisis.

Source: Jacobin Mag, Uwe Fuhrmann.
Translated by Lauren Balhorn and readers of Les Crises

A shopper walks through the dairy section of a grocery store in Washington DC, February 19, 2022 (Stephanie Reynolds/AFP via Getty Images).

When it comes to economic policy, certain terms tend to elicit a particularly strong reaction. One such term is “expropriation”. Expropriation is a well-established fact in coal mining and highway construction—often referred to in the United States as “property”—but when, as was recently in Berlin, a popular referendum proposes targeted expropriation as a tool to keep rents out of control, the debate quickly become irrational and people start throwing comparisons with the Soviet Union. It would seem that the point here is not in the practice itself, but in the degree of public support that it enjoys.

More recently, international disputes have shown that the term “price controls” evokes the same reaction.

Can politics actively influence prices? And what does it mean?

East Germany or Venezuela are often the first countries mentioned when price controls are mentioned, but they are not the only ones to implement them. In December 2020, at the height of the second wave of COVID-19, rapid antigen tests were in short supply in Germany. In response, the Federal Ministry of Health issued a decree limiting the wholesaler’s mark-up to forty cents per test. This is standard operating procedure in the German healthcare sector. Without these measures, there was a real danger that a sharp increase in the rate of profit on the way to the consumer could lead to a significant increase in prices – while the costs of production remained the same.

It is this undesirable development that is happening today on a much larger scale, with supply chains being torn apart in the face of the pandemic, causing supply to fall while demand remains stable or even increases. In full accordance with market principles, this situation is now used to maximize profits, which leads to a significant increase in prices. The inflation we are currently experiencing, as Isabella Weber recently argued in The Guardian, is fueled in part by the profit-making mechanism. In this situation, temporary price controls can help slow down some of the drivers of inflation and buy time until supply chains recover and become operational.

However, instead of reasoned arguments, Weber’s detailed and restrained proposal caused a storm of international controversy. Paul Krugman spoke in such a condescending tone that he ended up apologizing to Weber and his 4.6 million Twitter followers. The Süddeutsche Zeitung, for its part, headlined—grossly inappropriately—“Left Nixon,” calling the respected and internationally recognized economics professor an “outsider” whose “real” experience is limited to the Chinese economy.

Why are they so evil?

The words “price control” evoke a sharp defensive reflex, as Adam Tooze recently admitted: although he expressed some openness to concrete measures, the term “price control” itself was rejected, considering it “provocative”. »

This is significant: the use of the term “price control” has called into question the central pillar of mainstream economic theory (and by women, too). Namely, the belief that only the market mechanism can solve problems. However, this teaching is not really “truth”, but only a bitter consequence of our time. Her name ? neoliberalism.

It is high time to remember that “natural prices” do not exist at all. Whether through taxes, infrastructure, or property relations, all the conditions under which a commodity is produced, exchanged, and sold are socially and politically determined and therefore subject to change. In fact, it is impossible not to influence prices.

In turn, market prices are also not “natural prices”, but simply market prices – and they tend to be quite cruel, especially during a crisis. More than once it has proved very useful not to blindly trust these open market prices. Weber proved this in his award-winning book on China. And my research on the history of West Germany after the war comes to the same conclusion.

The term “price controls” highlights the long history of inefficient markets, which also partly explains why the debate is so unnerving for many economists. The most important legitimate argument against price controls is the “signaling function” of prices, which guarantees an efficient allocation of resources over the medium term. This is not very useful in a crisis, but I will still offer a compromise: instead of controlling prices, why not limit profits?

Surprisingly instructive in this regard is the history of the emergence of the social market economy in Germany. After World War II, West Germany suffered from strict pricing, scarcity and rationing rules. The then Economics Minister Ludwig Erhard planned to end these conditions through a “free market economy” and complete price deregulation. With the permission of the American occupiers, he took the first step in this direction, starting on June 20, 1948, the monetary reform.

But Erhard’s assumption about the imminent “stabilization” of prices turned out to be wrong. Instead, rapidly rising prices led to despair, followed by angry protests. The solution is promised in the form of the “STEG program”: excess military equipment must be redistributed to large-scale civilian use and brought to the market. However, prices remain high and trading profits continue to rise.

The situation changed only as a result of administrative measures contrary to Erhard’s beliefs: on September 6, 1948, the authorities set binding “maximum prices for final consumers” and capped the profit margin at 20 percent. It wasn’t until this combination of price controls and revenue cuts that prices, including those of competing “free” goods, finally came down. The successful program ended in 1953, and Ludwig Erhard became – absurdly enough – a symbol of successful economic policy.

As you can see, not all ways of price regulation lead to Venezuela. But if the idea of ​​”price control” still excites you, then welcome to the “margin cap” team!

about the author

Uwe Fuhrmann is a historian who lives in Berlin and studies the history of the social market economy and the German trade union movement.

Source: Jacobin Mag, Uwe Fuhrmann, February 25, 2022

Translated by Lauren Balhorn and readers of Les Crises

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