Economic Nonsense: 2. Some prices should be legally capped


Prices do more than tell us how much we have to pay for things; they also convey important information that motivates people to act.  When prices rise for things in short supply, they tempt producers to bring more supply onto the market, alleviating the shortage.  Prices motivate people to put investment into particular sectors of the market, raising future supply there. Governments since that of Hammurabi over 4,000 years ago have at times sought to fix prices, often in response to political pressures: the Adam Smith Institute's Director, Dr. Eamonn Butler, examined the history of this kind of price fixing in Forty Centuries of Wage and Price Controls.  When prices are fixed, however, their role as conveyors of information is lost, and their ability to motivate people to act is compromised.

If energy prices, for example, were fixed, it would make energy less attractive as an investment, reducing the future supply of it and perhaps leading to blackouts.

Fixing the price of rents is popular with current tenants, but it will limit the future supply of rental property.  Rents set artificially below market rates leads to poor maintenance as landlords no longer have the same incentive to maintain and renovate properties.  Fixed rents attract fewer people to rent out property, and encourage landlords to take properties off the rental market.  The Swedish economist, Assar Lindbeck, famously said  "next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities."  It could be argued that it is more effective, since bombing takes out demand as well as supply.

The market has many self-correcting mechanisms that price controls prevent coming into play.  The high prices caused by shortages tell more producers to enter the market; the low prices caused by gluts lead them to direct their resources elsewhere.  This activity depends on the flow of information that prices generate, a flow that is stopped when prices are fixed by law.