BEWARE PRICE CONTROLS

Post #122

With inflation rising its ugly head across America (See Post # 97 What Causes Inflation?). The Guardian posted an article stating that “We have a powerful weapon to fight inflation: price controls.” Bad idea!! The government can help pro-growth policies with business-friendly regulations or a tax system that encourages people to save, take risks, and invest. Germany offers a compelling example of pro-growth policies under Gerhard Schröder in recent times and Ludwig Erhard in the 1940s. By 1948, the German people had lived under price controls for twelve years and rationing for nine years. Adolf Hitler had imposed price controls on the German people in 1936 so that his administration could get war materials at artificially low prices. Later, in 1939, the government imposed rationing on the nation. In 1945, the Allied Control Authority, formed by the United States, Britain, France, and the Soviet Union, agreed to support Hitler’s price controls. The artificially low food prices discouraged farmers from bringing their products to market, leading to food shortages and famine. Ludwig Erhard understood the harmful effects that inflation had on the economy. He illustrated that price controls and high tax rates lead to poverty and misery and that free-market policies enhance productivity gains and prosperity.

Price controls disrupt the price mechanism. (See post #90 Controlled Destruction). Price plays three roles in a free market: they convey information from the consumer to the producer of what the consumer wants, give incentive to the producer to satisfy the consumer’s wishes, and give the producer the financial ability to provide the consumer what the consumer wants. Price controls destroy this price mechanism of a free market economy. The federal government and the Federal Reserve have practiced price controls in the loanable funds market. (See post #38 The Federal Reserve). The Fed has mandated artificially low-interest rates by increasing the supply of money. Economists call this quantitative easing. The persons who benefit the most from this action are wealthy and privileged, central banks and speculators. (See Post #59 The Cantillion Effect).

This price-fixing of interest rates is unsustainable because we cannot have an economy that is half free and half fixed. A part of our supply-chain disruption is due to smaller companies not competing in the loanable funds market against larger companies. Under the dictate of the Federal Reserve, the American economy is an economy of central planning, which has led to a kleptocracy. A kleptocracy is a system whose corrupt leaders use political and economic power to appropriate the wealth of a nation. Public companies are recording some of the best financial results. Friedrich Hayek published a book in 1944 named The Road to Serfdom. He explains that the road to serfdom, the loss of all freedom, is central planning. 

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Published by Kenneth E. Long

Author, college professor of economics, swimming and tennis enthusiast

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