Price Controls

Given the state of the economy it is possible that our government may try once again to imp-lement price controls. I wanted to take a brief moment to discuss the dangers of price controls when practiced in a Free Market. Price controls are usually the result of high prices on goods or services amidst a large volume of consumer complaints. The goal of price controls is typically to lower the price of a good or service and therefore increase the sale amount of that particular item and in turn boosting the economy. The idea of price controls is in and of itself a noble theory, however, when put into practice the outcome is actually the opposite of what was desired. The book "The Making of America" by W. Cleon Skousen provides us with a specific and real example of what happened when Americans tried to use price controls to fix the high price of potatoes. During a time when the potato crop was limited and prices were very high it was difficult for many people to afford the price of potatoes. The government tried to increase the sale of potatoes by lowering the price.

Now, before I go any further I want to side track briefly and mention that a "profit" is whatever makes a good or service worthwhile.

Here is where we run into the problem with price controls. When the government lowers the price of a good or service it is no longer profitable for the provider of that good or service. Within a few weeks of the lowerprices being forced upon potatoes the whole supply disappeared! Now instead of being able to purchase potatoes at a higher price, potatoes couldn't be bought for any price. Price controls had done the exact opposite of what the government hoped they would do. Because the lower prices eliminated the profit made by farmers and suppliers the desire and ability to continue producing potatoes rapidly disappeared.

According to Dr. Skousen, had the government allowed the prices of potatoes to remain the same, the high costs would have continued to make potatoes profitable for farmers and would have eventually allowed them to produce an abundance of potatoes. In turn, once again lowering the cost for the consumer.

In our second example, when the government implemented price controls on steel in the 1970's the same problem occurred as did with the potatoes. Bailing wire disappeared because it was no longer a profitable good. When the farmers' cry for bailing wire went out and the government failed to respond the black mart was standing close by. Now the farmers had the wire they needed but at a cost much higher than they were paying before. Furthermore, in order to avoid a high tariff the wire had to be smuggled which lead to chains of organized crime.

Despite the good intentions of price controls, it is obvious that tempering with the price of goods or services leads to four problems.

1. Profit is destroyed
2. Production becomes scarce (destroying jobs, hurting the economy)
3. Black market is developed
4. Organized crime and corruption spreads as a result of the black market.