Prices control is useless against inflation

All over the world, prices are rising. Inflation has returned. Just as calls for price controls have resurfaced. Fearing protests against rising energy costs, the French government has set maximum prices for gas and electricity.

Turkey has been hit hard by inflation. In this case, one reason is that even the semblance of independence of the Turkish central bank has been removed - President Erdogan determines how high-interest rates can be (and interest rates are nothing more than the price of money). With inflation out of control, the Turkish state is trying to combat it through price controls, but making the situation worse.

In Germany, the new government has declared that energy prices must increase to protect the environment. However, as soon as they rise, the government is being asked to give money to the economically disadvantaged to ease the financial burden of higher prices. Rents in Germany were capped because they were rising. Wage levels were a debated issue in the election campaign, and Olaf Scholz came to the chancellery with a promise to raise the minimum wage to €12. Energy prices, wages, rents: everything is increasingly determined by politicians, not the market.

And the higher inflation rises, the stronger government intervention becomes, as the extreme case of Venezuela, which had been suffering from hyperinflation for years, shows. Inflation in Venezuela was higher than anywhere else in the world and was so high as to become almost incalculable. And because many goods had to be sold at extremely low prices - as determined by the government - people hoarded goods of all kinds and often stood in line for hours in front of stores in order to buy something, which they then resold at much higher prices on the black market. One example was toilet paper, which was very rare in stores. The reason it was so hard to find was that the companies that produced it were forced to sell it at a low price set by the state, while production costs continued to rise with skyrocketing inflation. Wherever toilet paper was available at prices kept artificially low by the government, it sold out in a flash. Many people quit their jobs because wages could not keep up with the rapidly rising prices and made much more money as black market traders, for example reselling toilet paper purchased at the low prices the government wanted, thus making a high profit on the large black market.

Venezuela provides a perfect example of what happens when a government begins to calm asset prices and is the very embodiment of the term "spiral of interventionism," which was coined by economist Ludwig von Mises.

Ludwig Heinrich Edler von Mises' book Economic Calculation in the Socialist Commonwealth (free text at https://mises.org/library/economic-calculation-socialist-commonwealth/html was first published in German exactly 100 years ago. In the book, after only five years that the Communists had taken power in Russia, Mises showed why socialism could not work. His thesis was as follows: socialist societies have no markets, and therefore no prices. Without prices, economic accounting is not possible, and efficient decisions about the use of scarce resources become increasingly difficult to make. According to Mises, prices are indicators of scarcity: without free price formation, it is impossible to measure the cost of anything.

Mises' intuition was confirmed by actual developments in socialist countries. Take housing policy, for example. Rents in East Germany were so low because the state simply prohibited increases.

But the price tenants had to pay was high: 99 percent of apartments in West Germany had a bathroom with a bathtub or shower, compared to only 80 percent in the GDR. And while 98 percent of apartments in West Germany had their own toilet, only 73 percent in the GDR did. What's more, East Germany's housing stock was increasingly decaying, with 40 percent of apartments considered severely damaged and 11 percent completely uninhabitable. All this was a consequence of rents set by the state.

The inefficiencies of the free market

Now back to the US. Not many days ago President Joe Biden claimed that small producers had been marginalized by large producers and multinational companies that, in a sense, have abused their dominant position to eliminate competitors and create a quasi-monopoly market. The monopoly market is a market where only one producer controls the price of supply and market, this allows him to extract all the surplus from the demand and make extra profits compared to a market of free competition to the detriment of consumers. Now, in the USA we are far from seeing this, however, the same result can be obtained with cartels, that is with tacit or secret agreements of non-competition. This practice is banned, however, it is widespread in the US and the Federal Trade Commission, despite a lot of work, is unable to eliminate all consumer abuse. So what remedy? Price controls? Hefty fines?

History teaches us that price controls are not the solution to any problem: they exacerbate problems. When governments begin to lower the prices of goods, they adopt socialist practices (and we know that socialist policies have invariably failed over the last 100 years). Mises' predictions, made a century ago, have been proven correct.

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Photo relaeased free to use by Xavi Cabrera