GMU Econ alum Erik Matson shares some lessons from history on price controls. A slice:
Two of the [American] founders, James Wilson and John Witherspoon, had argued from the beginning of the discussions surrounding the Providence Plan in 1777 that price controls were a fool’s errand. Witherspoon argued that “laws are not almighty,” and “it is beyond the power of despotic princes to regulate the price of goods.” Wilson claimed, “there are certain things…which Absolute power cannot do.”
Witherspoon and Wilson’s shared skepticism flowed perhaps from their Scottish origins. Both men studied in Edinburgh and were acquainted with the works of David Hume. Hume argued at some length in the second and third volumes of his History of England that price controls under Edward II and Henry VII predictably failed to alleviate the scarcity of commodities and made matters worse. They also studied the price theories of Samuel Pufendorf and Francis Hutcheson, both of whom emphasized prices as outcomes of a market process. Witherspoon drew deeply from the works of Hutcheson when he developed his own course in moral philosophy at Princeton.
These lines of thinking from the Scottish Enlightenment (and also from the modern natural law tradition) conceive of prices as symptomatic of underlying economic realities—the relative scarcity, the risks and toils required to bring a good to market, and so forth. Efforts to change the underlying economic realities that cause prices by regulating the prices themselves have as little a chance of succeeding as efforts to change a room’s temperature by simply altering the numbers displayed on one’s thermometer.
It was Witherspoon who made this case at the greatest length, in his 1786 Essay on Money as a Medium of Commerce and in a little-known open letter he drafted—but never published—to George Washington in 1778. In the Essay, he reiterated points he made in the meetings of the Continental Congress in 1777, namely that high prices facing the states had come from an excess quantity of money, which caused price inflation, and a scarcity of goods caused by wartime conditions. In the letter to Washington, he pushed the analysis further, evincing a sophisticated understanding of the market process.
Here’s insight from Mike Munger. A slice:
In a system of commerce, information is provided by prices, which are emergent phenomena indicating the relative scarcity of resources. That is, commerce generates information about the value of resources, information possessed by literally no individual or group in the absence of prices. Prices are an objective manifestation of subjective preferences, giving people an idea of how much other people — people you haven’t met, and don’t know — want to use the resource. Low prices say “no one else wants this, go ahead and use it!” High prices say, “Stop and think about this, because other folks also value this resource. Do you really need it?”
Politics, by contrast, generates information based on the expression of votes, or notions of what people want to be true. The question of the value of resources is then decided by what most people — if the rule is majoritarian — happen to want to be true about the resource.
Imagine that I have in mind two materials from which I might construct a roof: wood and gold. Wood doesn’t last all that long, and the seams between pieces of wood leak. Gold, on the other hand, can be pounded out quite thin and does not rust or rot. Gold is clearly the better roofing material.
In a commercial system, when I go to the hardware store to buy roofing materials, I see that I can put on a wood roof for about $1,000, but the cost of gold to make the roof is $1,000,000. What gives? The answer is that the commercial system is telling me that there are other, better uses for gold, and that I should take account of the needs of others. Now, do I know the other uses of gold, or the identities of the other people who have uses for gold? I do not, but then I don’t need that kind of specific knowledge. The price is enough. I buy the wood, and make the roof. The people who need gold are able to obtain it, and overall the society is better off.
Compare that to a political system. Remember, each of us believes — and, honestly, we’re right! — that gold is a better roofing material, simply on the merits. We vote, and gold wins by a vote of 95 percent over 5 percent who prefer wood. But then we all try to make our roofs out of gold, only to discover that there is not nearly enough available. We blame the greed of the people who are “hoarding” gold, and send out the police to find who is hiding all of this roofing material. They are enemies of the people, and must be found and punished!
And here’s more insight from Arnold Kling. A slice:
I believe that when we look at our thick culture, we are like primitive people looking at nature. We interpret phenomena by invoking “climate change” or “artificial intelligence” or “social media” or “the science,” much in the way our ancestors invoked spirits to explain drought or sickness.
Jeff Yass has a question for Janet Yellen:
Regarding Thomas Duesterberg’s op-ed “China’s Flag Is Red, Not Green” (April 8): The Biden administration is moving toward reimposing Trump-era tariffs because Treasury Secretary Janet Yellen is concerned about Chinese clean-energy subsidies. A question for Ms. Yellen: If $5 billion worth of solar panels washed up on our shores, would she destroy them to save U.S. jobs?
If a subsidy is bad, free stuff must be worse, according to her logic. But I thought climate change posed an existential risk to humanity?
Jeff Yass
Managing director and co-founder, Susquehanna International Group
Bala Cynwyd, Pa.
You mentioned that there are protectionists on the right like Trump and on the left like Sanders. Prior to Trump, Democrats were more associated with unions and protectionism while Republicans were associated with free trade, but since 2016 it seems Republicans have become more protectionist. Do you think protectionism will remain in the Republican Party going forward regardless of who wins the presidential election this year?
No question about it.
But keep in mind that Republicans historically have been the party of protection while Democrats were the party of free trade, going back to the early days of the Republican Party in the mid-19th century. And the Smoot-Hawley Tariff Act was signed in 1930 by Herbert Hoover, a Republican president.
That only started to change in the postwar period. By the way, Ronald Reagan talked a better game on trade than he played, due to political compromises. But certainly, from the 1970s through George W. Bush, the Republicans had a legitimate claim to be regarded as the party most favorable to free trade, and it was the Democrats, largely because of their union connections, who were the party of protection.
Now, unfortunately, one of those parties — the GOP — is returning to its protectionist roots, but the other is not returning to its free-trade roots. Historically, one party was the party for protectionism and the other was the party for free trade. Now, for the first time since at least the Civil War, both major parties are explicitly and enthusiastically for protectionism.
Kimberlee Josephson explains that antitrust is anti-consumer. A slice:
Business forecasting is a difficult task, and reality rarely goes according to plan, but the government seems confident that it can predict winners and losers in today’s marketplace. What the government seems to be forgetting, however, is that American firms compete on a global scale and their status is never guaranteed. In fact, Apple no longer has the top spot as the favored phone brand in China, and the adoption rate of Huawei’s smartphone globally will likely result in a ripple effect for downloads derived from Huawei’s AppGallery rather than the App Store. So much for Apple’s walled garden.
The Editorial Board of the Wall Street Journal reports that green ‘energy’ is costly. A slice:
The nearby chart shows the average change in electricity prices over the last decade. Electric rates remained relatively flat in the seven years before President Biden took office, rising 5%. Thank cheap natural gas. Yet since January 2021 electricity prices have soared 29.4%—about 50% more than overall inflation.
By our calculation, electricity prices have increased 13 times faster under Mr. Biden than across the previous seven years. His policies aren’t entirely to blame. But most of it is a result of the left’s climate agenda, and the price increases will get worse.
