Price Caps Are Worse Than High Prices

People who write about metalworking, including me, sometimes fail to choose their words carefully. They often speak of a "shortage" of skilled machinists, when in fact the problem is one of reduced supply.

Columns From: 7/1/2001 Modern Machine Shop, ,

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Peter Zelinski

People who write about metalworking, including me, sometimes fail to choose their words carefully. They often speak of a "shortage" of skilled machinists, when in fact the problem is one of reduced supply. In a free market, there is no shortage. Luring good machinists from other employers, if not from other cities, may be expensive indeed. But any shop willing to pay a high price can still have all the machinists it wants.

Now imagine some well-meaning government trying to help shops avoid this cost by putting a cap on machinists' wages. (Very unlikely, but try to imagine it.) This cap wouldn't help the labor problem; it would make it worse. The shop that truly did want to attract more machinists by offering higher and higher wages would be powerless to do so. Now, the shop could not have all the machinists it wants.

This truly would be a shortage. Real shortages result whenever the price of a resource—be it labor, food, fuel, housing—is held below what the market says it should be.

Today, elected officials want to apply price caps to energy. Some want to cap utility rates in parts of the country where power is scarce. Others want to punish oil companies for daring to raise prices in response to restricted supply. In both cases, applying this "solution" would only make the problem worse by driving energy farther out of consumers' reach.

Failure to appreciate the destructive power of price caps has a long, long history. Ancient Rome didn't fall to barbarians the first time it was attacked; it fought them off for hundreds of years. But then its emperors, responding to inflation, enforced limits on the prices of various goods. Merchants who could no longer charge what their products were worth abandoned the city, and the resulting shortages drove much of the population to leave with them. Rome grew too weak to defend itself, and the ancient city was conquered and sacked.

No one likes high energy prices. But in a market where prices are left alone, citizens can at least have all the energy they can pay for. This is not so under price controls, where consumers are cut off because suppliers can't be assured of covering their costs.

That's why the price cap is ultimately a cap on consumers' freedom. The true meaning of price controls is that citizens are forbidden by law from giving producers the money needed for the products those citizens demand.

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