In Defence of Liberty

Driven by data; ridden with liberty.

A Lack of Energy II

The kernel of Ed Miliband’s latest energy policy is the idea that governments can edict price controls to raise living standards. This policy is part of Labour’s theme about the ‘Cost of Living Crisis’. This idea has little historical support. Michael Portillo said on BBC’s This Week:

I really do not understand how any of you can be arguing that people’s living standards rise when the government steps in and freezes prices. This is the kind of illiterate stuff that we got rid of in the 1970s.

Ed Miliband spoke eloquently without notes for over an hour, but how good were the ideas within? (Photo: Getty Images)

Ed Miliband spoke eloquently without notes for over an hour, but how good were the ideas within? [You can also see my friend Hadleigh Roberts, wearing a suit with a green tie.] (Photo: Getty Images)

During the French Revolution, the 1793 Loi du Maximum set price limits, deterred price gouging and continued flowing food into France. Government loans, bonds, tax increases and a rising tide of fiat currency were meant as economic stimulants, but caused havoc and inflation. The law stated:

The municipal police shall fine everyone who buys or sells merchandise for more than the Maximum… double the value of the item sold, payable to the person who denounced them; they will be recorded on the list of suspect persons and treated as such.

The Maximum worsened the food shortages, as farmers did not want to sell below their production costs, but widespread blame was pummelled upon hoarding, speculation and gouging. Whilst the law itself was written to attack big businesses supposedly enriched by French economic demise, The Maximum wrought small-time merchants, who profited least.

Ed Miliband has promised to freeze energy prices for 20 months, but will it work? (Photo: Telegraph)

Ed Miliband has promised to freeze energy prices for 20 months, but will it work? (Photo: Telegraph)

Seeking Re-Election

Richard Nixon, seeking re-election, became very concerned about living standards and burgeoning government spending, and the extinguishment of the gold standard’s last sparkle. The coverage was favourable to Nixon’s new policy, which was both popular and seen as necessary. There was a 90-day freeze of all prices and wages, overseen by the Cost of Living Council.

After prices were defrosted, inflationary pressures resumed, thanks to domestic factors, crop failures in the Soviet Union, and world oil price increases. Nixon, now staring into a dire political abyss over the Watergate scandal, refroze prices. The failure of price controls became eminent. Daniel Yergin and Joseph Stanislaw wrote in Commanding Heights that: “Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets”. Whilst most controls were abolished, price controls over oil and natural gas were maintained for several years, owing to suspicions of monopolistic behaviour.

After winning the 1975 election, the Liberals in Canada introduced price and wage controls. The Anti-Inflation Act had many unforeseen consequences and created more difficulties than the controls solved.

In Britain, Heath established the Prices Commission in January 1973, and by December 1973, energy shortages had led to the Three-Day Week. Labour’s 1974 “social contract” similarly failed to lock down inflation, peaking at 25% in 1975, as it broke through whatever new chains were designed.

Despite price controls, inflation peaked at 25% in the 1970s. (Photo: economicshelp)

Despite price controls, inflation peaked at 25% in the 1970s. (Photo: economicshelp)

Price controls have been tried many times, in many markets, in many countries. Its effects are invidious, deleterious and imperious. By barring sale prices from matching their market price, maximum prices degrades quality and service, and if production costs outstrip the maximum sale, creates outright shortages.

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This entry was posted on September 28, 2013 by in Economics and tagged , , , .
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