Are price controls defensible?

Are price controls defensible? John Kenneth Galbraith is the most competent, intelligent defender of price controls that I've come across. He was in charge of WWII price fixing— a scheme which most consider to have been a success. War is almost always inflationary. WWI certainly was. WWII much less so. In his book "Money: Whence It Came, Where It Went" Galbraith makes the heretical argument that peacetime governments should use price controls as a means of fighting inflation.

Such a proposal faces numerous challenges which Galbraith himself admits. Incompetent people tend to rise to power in government in general, and in the administration of monetary and fiscal policy in particular. Price controls work only when dealing with centralized corporations who have pricing power. They will not work when imposed on a broadly decentralized and highly competitive area of the market (such as groceries). There are two reasons such areas should be left alone. Competition naturally keeps margins low. Markets with many players— none of whom have pricing power— cannot be easily monitored and controlled. On the other hand, sectors with high pricing power— monopolistic, oligopolistic, and unionized areas of the economy— provide a large, convenient, manipulable target. There are fewer moving parts. There is a better paper trail. There is higher risk aversion. And because of pricing power, normal competitive market forces are either missing, ineffective, or greatly handicapped.

Such is my reduction of his argument.

Galbraith wrote during the mid seventies. His America still had strong unions. He wrote from the midst of spiraling inflation which worked something like this: a monopoly (let's say US Steel) raised its prices. The steel union wanted its cut, so it negotiated higher wages. Higher wages ate into profits, so the monopoly raised its prices again. The union wanted its cut, etc. Market forces did not soon arrest such a spiral. Inflation continued until the economy was wrecked and price increases could no longer be withstood.

In the 1970s, Galbraith noted, price controls already existed. They simply weren't government-imposed. Instead, the board of US Steel, or OPEC, or similarly monopolistic enterprises imposed their own— always bloated, often artificial— prices. Why not turn such power over to a government that could take macro economic health into consideration?

Modern economics is caught in an endless cycle of boom and bust. Inflation is fought only with a clumsy combination monetary and fiscal policy. Each cycle always ends in a painful period of high unemployment, civil unrest, and protracted recession or depression. In Galbraith's opinion, government-imposed price and wage controls could smooth the curves of such cycles thereby avoiding much of the massive economic pain associated with the deflationary side.

Such a system might bring other benefits. In WWII if a company was allowed to charge $20 per unit, it quickly found a way to produce that unit for less than $20. It also discovered how to produce and sold more units as a means to increase its net profit, if not its margins. A consequence was that production and productivity expanded massively.

My uninformed opinion

I am in no position to critique Galbraith. I'm an economically ignorant programmer who just so happens to have enjoyed reading his books. Thus what follows is a continuation of my lifelong habit of speaking overconfidently from a place of ignorance.

When it comes to peacetime price controls, I'm not as optimistic as Galbraith. Wartime controls had the necessary prerequisites of broad popular support and competent administrators. It is hard to imagine either of those prerequisites being found today.

To combat incompetence, Galbraith says that we must fire any administrators under whom economic policies fail. But such political will is unlikely to be found with any regularity. As always, we will end up with long tenured bureaucrats competent only at masking their incompetence with an obfuscating haze of sophisticated language.

Another problem with price controls is capital flight. In WWII, the best place to deploy your capital was the United States. Where else could you go? Europe with Hitler poised to seize your assets? Asia with the Japanese rampaging? The Soviet Union? Africa? Everywhere there was war, instability, and uncertainty. The only place to deploy capital with reasonable safety was United States. So, in WWII the US could impose a lot of economic restrictions on its corporations, and they just had to suck it up.

In peacetime, capital has a habit of fleeing restricted economies and finding freer ones. If you have some money to invest, and you're presented with two opportunities— both equal in every respect except that one has a government profit cap of 5%, and one has no such cap and a 10% expected return, where are you going to put your money? What holds for you holds in general. Capital will move towards profitable endeavors, even if that means overseas investment. The government will end up playing a game of whack-a-mole, plugging up holes in its price control schemes, restricting the ability for money to leave the country, etc. We've seen it in the Soviet Union. We've seen it in China. We've seen it in Turkey. We've seen it just about anywhere peacetime price controls have been implemented.

With all of that said, Galbraith is worth reading. He is thoughtful, intelligent, and witty. Everything I've read of his has given me both enjoyment and many long moments of reflection.