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Price Controls Do Not Work

Here’s a letter to “Karl Marx” who says that he’s a student at Binghamton University:

Mr. “Marx”:

Thanks for sending to me the Washington Post op-ed (August 9th) by Princeton historian Meg Jacobs and UMass-Amherst economist Isabella Weber – an op-ed in which Jacobs and Weber argue that price controls are a useful tool for controlling inflation. I’m afraid that I don’t share your assessment of their argument as “compelling.”

Economist Ryan Bourne recently – and truly compellingly – revealed that Jacobs’s and Weber’s argument is infected with flaws, some that should be (but apparently aren’t) embarrassing to commit. At the top of this list is Jacobs’s and Weber’s use as a key piece of evidence that price controls were “a total success” at reducing inflation during WWII the fact that officially reported nominal prices were kept low when price controls were in place and then rose when these controls were lifted.

This fact, however, is no more evidence that price controls successfully control inflation than would a reading of 120lbs on a bathroom scale rigged to record no weight greater than 120lbs – and then reading 155lbs when the scale is de-rigged – be evidence that rigging a bathroom scale successfully controls body weight. As Milton Friedman and Anna Schwartz wrote about the experience with price controls during WWII,

The jump in the price index on the elimination of price control in 1946 did not involve any corresponding jump in “prices”; rather, it reflected largely the unveiling of price increases that had occurred earlier. Allowance for the defects in the price index as a measure of price change would undoubtedly yield a decidedly higher rate of price rise during the war and a decidedly lower rate after the war.*

Jacobs and Weber also err in asserting that during the war, with price controls in place, “the economy boomed.” The great economic historian Robert Higgs has painstakingly demonstrated that, while American industry did indeed – because of command-and-control – churn out lots of war materiel during WWII, the evidence shows that there was then no genuine economic boom. Higgs estimates that real U.S. GNP fell in 1942 and again in 1943. And although real GNP rose a bit in 1944 (the last full year of the war), it was in that year still 12 percent lower than it was in 1941. Real GNP rose a bit more in 1945, although still not to its level of 1941. But in 1946 real GNP skyrocketed. In that year in which price controls were eased real GNP finally for the first time surpassed its level in 1941.**

A final point bears emphasis. As Ryan Bourne notes in the article linked above – and as many other economists, including Friedman and Schwartz, and Robert Higgs, have observed – price controls cause the quality of goods and services to fall. One result of these declines in quality is rises in real prices, but rises that don’t show up in official statistics.

Jacobs’s and Weber’s apparent ignorance of this reality renders silly their attempt to use as evidence that price controls ‘work’ the increased consumption of meat by lower-income Americans near war’s end. As Bourne writes, “a recent NPR report documents how ‘meatpackers began filling sausages and hot dogs with soybeans, potatoes, or cracker meal,’ sold steaks with extra bone weight, or misrepresented the quality of cuts to circumvent price ceilings.”

I recommend , Mr. Marx, that you put aside works from the likes of Jacobs and Weber and instead study some sound economics. Here are some excellent resources.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867-1960 (Princeton: Princeton University Press, 1963), page 558.

** Robert Higgs, Depression, War, and Cold War (New York: Oxford University Press, 2006), page 69.