"..there is not a single episode where price controls have worked to stop inflation or cure shortages."
“Rishi Sunak will ask stores to cap basic food prices”
“It emerged last week that the government is seriously considering imposing price controls on basic foodstuffs. There has been immediate push-back from those who understand basic economics. Price controls invariably lead to shortages. Shortages of basic foodstuffs can lead to… You get the point. Bad idea.”
Woe to you, O land, whose king is a child. Not to be outdone by reports that the UK Prime Minister wanted to introduce price controls on food, the notional opposition party responded by ‘drawing up plans that would force landowners to sell plots for a fraction of their potential market price in an effort to cut home-building costs in England’ (source: The Financial Times).
We are being governed by economically vacuous cretins.
As Schuettinger and Butler point out in their history of wage and price controls, government- provoked inflation is nothing new. Nor are the proposed solutions, as they explain in Forty centuries of wage and price controls: how not to fight inflation (The Heritage Foundation, 1979):
“The co-authors began working on this book in 1974, just after the termination of President Nixon’s controls in the United States. Since that time, we have examined over one hundred cases of wage and price controls in thirty different nations from 2000 BC to AD 1978.
“We have concluded that, while there have been some cases in which controls have at least apparently curtailed the effects of inflation for a short time, they have always failed in the long run. The basic reason for this is that they have not addressed the real cause of inflation which is an increase in the money supply over and above the increase in productivity. Rulers from the earliest times sought to solve their financial problems by debasing the coinage or issuing almost worthless coins at high face values; through modern technology the governments of recent centuries have had printing presses at their disposal. When these measures resulted in inflation, the same rulers then turned to wage and price controls.”
The Roman Emperor Nero (AD 54-68) responded to growing economic problems by devaluing the currency. The devaluation started relatively modestly but accelerated under Marcus Aurelius (AD 161-180) when the weights of coins were reduced. “These manipulations were the probable cause of a rise in prices,” wrote historian Jean-Philippe Levy. The Emperor Commodus (AD 180-192) turned to price controls and decreed a series of maximum prices, but things deteriorated and the rise in prices became “headlong” under the Emperor Caracalla (AD 211-217).
Egypt was the imperial province most severely affected. During the fourth century, the value of the gold solidus changed from 4,000 to 180 million Egyptian drachmai. Levy also attributes the grotesque rise in prices which followed to the increase of the amount of money in circulation. The price of the same measure of wheat in Egypt rose from 6 drachmai in the first century to 200 in the third century; in AD 314, the price rose to 9,000 drachmai and in AD 334 to 78,000. Shortly after AD 344 the price had reached more than 2 million drachmai. Other provinces endured similar inflations.
“In monetary affairs, ineffectual regulations were decreed to combat [Gresham’s Law, that bad money drives out good] and domestic speculation in the different kinds of money. It was forbidden to buy or sell coins: they had to be used for payment only. It was even forbidden to hoard them ! It was forbidden to melt them down (to extract the small amount of silver alloyed with the bronze). The punishment for all these offences was death. Controls were set up along roads and at ports, where the police searched traders and travellers. Of course, all these efforts were to no purpose.”
Perhaps the most notorious attempt to control wages and prices took place under the Emperor Diocletian. Commodity prices and wages reached “unprecedented heights” shortly after he assumed the throne in AD 284. The Empire’s economic troubles have been attributed to a vast increase in the armed forces (to repel invasions by barbarian tribes); to a huge building programme of questionable value; to the consequent raising of taxes and the employment of ever more government officials; and to the use of forced labour to accomplish much of Diocletian’s public works programme. (Thank goodness the current UK government hasn’t squandered over £40 billion it doesn’t actually have on a high speed rail link of dubious utility.)
Diocletian, on the other hand, attributed the inflation entirely to the “avarice” of merchants and speculators. Plus ça change..
What is undeniable is that as taxes rose, the tax base shrank, and it became increasingly difficult to collect taxes, resulting in a vicious circle.
Probably the single biggest cause of Diocletian’s inflation was his debasement of the coinage. In the early Empire, the standard Roman coin was the silver denarius. Its value had gradually been reduced in the years leading up to his reign as emperors issued tin-plated copper coins which still kept the name “denarius”. Under Gresham’s Law, silver and gold coins were hoarded and left circulation.
During the 50 years ending in AD 268, the silver content of the denarius fell to one five- thousandth of its original level. Trade was reduced to barter and economic activity stagnated. The middle class was almost obliterated. To overcome the baleful influence of his bureaucracy, Diocletian introduced a system of taxes based on payments in kind, which had the effect of destroying the freedom of the lower classes and tying them to the land. Then came currency reform, and the Edict on prices and wages. Historian Roland Kent:
“Diocletian took the bull by the horns and issued a new denarius which was frankly of copper and made no pretence of being anything else; in doing this he established a new standard of value. The effect of this on prices needs no explanation; there was a readjustment upward, and very much upward.”
Diocletian had the option of either inflating – minting increasingly worthless denarii, or to deflate – in the form of cutting government expenditures. He chose to inflate. He also chose to fix the prices of goods and services and suspend the freedom of the people to decide what the currency was actually worth. He fixed the maximum prices at which beef, grain, eggs and clothing could be sold, and the wages that workers could receive, and prescribed the death penalty for anyone who disposed of his wares at a higher figure. Prices still went up.
Less than four years after the currency reform associated with the Edict, the price of gold in terms of the denarius had risen by 250%. By AD 305 the process of currency debasement began again. Levy:
“State intervention and a crushing fiscal policy made the whole empire groan under the yoke; more than once, both poor men and rich prayed that the barbarians would deliver them from it. In AD 378, the Balkan miners went over en masse to the Visigoth invaders, and just prior to AD 500 the priest Salvian expressed the universal resignation to barbarian domination.”
David Meiselman, in a foreword to Forty centuries… writes as follows:
“What, then, have price controls achieved in the recurrent struggle to restrain inflation and overcome shortages ? The historical record is a grimly uniform sequence of repeated failure. Indeed, there is not a single episode where price controls have worked to stop inflation or cure shortages. Instead of curbing inflation, price controls add other complications to the inflation disease, such as black markets and shortages that reflect the waste and misallocation of resources caused by the price controls themselves. Instead of eliminating shortages, price controls cause or worsen shortages. By giving producers and consumers the wrong signals because ‘low’ prices to producers limit supply and ‘low’ prices to consumers stimulate demand, price controls widen the gap between supply and demand.
“Despite the clear lessons of history, many governments and public officials still hold the erroneous belief that price controls can and do control inflation. They thereby pursue monetary and fiscal policies that cause inflation, convinced that the inevitable cannot happen.
“When the inevitable does happen, public policy fails and hopes are dashed. Blunders mount, and faith in governments and government officials whose policies caused the mess declines. Political and economic freedoms are impaired and general civility suffers.”
John Butler sees light at the end of the tunnel:
“Were Hayek still with us, he would have helped to explain it. High taxation, burdensome regulations and a generally elevated level of government intervention in the economy discourage investment in equipment, training, you name it. Less investment in physical and human capital eventually results in weaker productivity.
“However, in a twist of fortune, there is one area where UK investment is set to boom, and that is North Sea energy production. Geologists have long known that the North Sea’s resources are far from being fully exploited. Drilling technology is also much better than it was during the first North Sea boom in the 1970s and 1980s.
“If there is one thing that would help to bring general price inflation down, including food price inflation, it would be cheaper energy. Fertiliser, production, processing, transport… Ever since the introduction of mechanised agriculture during the Industrial Revolution, energy costs have been a primary input into food prices.
“That the UK is blessed with substantial low-hanging fossil energy fruit is well known. When things get to the point where the government is considering imposing food price controls, desperation has clearly set in. It might be politically awkward given the current government’s green credentials, but I believe that we are about to embark on a huge detour on the Road to Net Zero.
“I’ll take that over the Road to Serfdom any day, and I suspect a large part of the British public would too. As an investor, I’m also going to take advantage of the huge amount of investment I believe is heading towards the North Sea. Following years or drought, I expect a deluge.”
So it came as no surprise to hear last week that Keir Starmer wants to ban all new oil and gas developments in the North Sea.
What a truly world class Cnut.
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you, too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: firstname.lastname@example.org
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
|This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
|The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
|This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
|This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
|This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".