Forty Centuries of Wage and Price Controls

Foreword

Attempts to control and fix prices and wages span most of recorded history. As Robert Schuettinger and Eamonn Butler record in such illuminating and interesting detail in this book, price and wage controls cover the times from Hammurabi and ancient Egypt 4,000 years ago to this morning’s newspaper accounts of rent controls in New York, Boston and other U.S. cities, the Carter Administration’s program of “voluntary” price controls, the mandatory price and wage controls in Norway, Denmark and Iran, and so forth.

The experience under price controls is as vast as essentially all of recorded history, which gives us an unparalleled opportunity to explore what price controls do and do not accomplish. I know of no other economic and public policy measure whose effects have been tested over such diverse historical experience in different times, places, peoples, modes of government and systems of economic organization—except perhaps for studies of the relationship between inflation and increases in the quantity of money.*

The results of this investigation would merit attention for the light it sheds on economic and political phenomena even if wage and price controls were no longer seriously considered as tools of economic policy. The fact that wage and price controls exist in many countries and markets and are being seriously considered by others, including the United States, compels attention to the historical record of wage and price controls this book presents.

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.

Many of the results of price controls, such as black and gray markets, are predictable and have the inevitability of mathematics and of many of the laws of the physical sciences. Nations that ignore them are no less periled than those that decree that two plus two must equal three, that the Pythagorean Theorem is false or promulgate laws that limit the temperature of steam to 40° (F or C).

First-hand experience of most of us with wage and price controls in our own lifetimes in addition to the lessons of history and of validated propositions in economics so skillfully catalogued in this book would seem to be more than sufficient to convince the public and government officials that price and wage controls simply do not work. However, the unpleasant reality is that, despite all the evidence and analyses, many of us still look to price controls to solve or to temper the problem of inflation. Repeated public opinion polls show that a majority of U.S. citizens would prefer to have mandatory controls. If the polls are correct, and I have no reason to doubt them, it must mean that many of us have not yet found out what forty centuries of history tell us about wage and price controls. Alternatively, it raises the unpleasant question, not why price controls do not work, but why, in spite of repeated failures, governments, with the apparent support of many of their citizens, keep trying.

This book makes a most valuable and timely contribution to our knowledge and to the ongoing discussion of important public policy issues. It is profoundly to be hoped that we can learn enough from forty centuries of wage and price controls to avoid dooming ourselves to repeating their certain and costly failures.

DAVID I. MEISELMAN

Virginia Polytechnic Institute

and State University

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* For an excellent summary, see Anna J. Schwartz, “Secular Price Change in Historical Perspective,” Universities-National Bureau Committee for Economic Research, Conference on Secular Inflation, supplement to Journal of Money, Credit and Banking, February 1973, p. 264.