Organized Crime

Supply and demand have generally been allowed to work in energy markets, resulting in ups and downs in gasoline prices. Whenever gasoline prices go up to any significant degree, the industry is inevitably threatened by Congress with price controls, euphemistically referred to as “anti-price gouging legislation” or some other synonym.

The case against price controls—no matter how they are labeled by politicians—has been well known for hundreds of years. By artificially stimulating demand while taking some or all of the profitability out of supply, price controls inevitably create shortages. They also induce suppliers to skimp on quality, to the extent that they can, and often lead to bizarre government-imposed rationing schemes that only make things worse.

The case against price controls is not merely an academic exercise, however, restricted to economics textbooks. There is a four-thousand year historical record of economic catastrophe after catastrophe caused by price controls. The record is nicely documented in the book, Forty Centuries of Wage and Price Controls by Robert Schuettinger and Eamon Butler, first published in 1979.

The authors begin by quoting Jean-Philippe Levy, author of The Economic Life of the Ancient World, as noting that in Egypt during the third century B.C. “there was a real omnipresence of the state” in regulating grain production and distribution. “[A]ll prices were fixed by fiat at all levels.” This “control took on frightening proportions as there was a whole army of inspectors.” Egyptian farmers became so infuriated with the price control police that many of them simply left their farms. By the end of the century “the Egyptian economy collapsed as did her political stability.”

In Babylon some four thousand years ago the Code of Hammurabi was in reality a maze of price control regulations. “If a man hire a field-labourer, he shall give him eight gur of corn per annum,” the state dictated. “If a man hire a herdsman, he shall give him six gur of corn per annum”; and “If a man hire a sixty-ton boat, he shall give a sixth part of a shekel of silver per diem for her hire.” And on and on. Such laws “smothered economic progress in the empire for many centuries,” as the historical record describes. Once these laws were abolished, “there was a remarkable change in the fortunes of the people” for the better.

Ancient Greece also imposed price controls on grain and established “an army of grain inspectors appointed for the purpose of setting the price of grain at a level the Athenian government thought to be just.” Greek price controls inevitably led to grain shortages, but ancient entrepreneurs saved thousands from starvation by evading these unjust laws with black markets. Despite the imposition of the death penalty for evading the Greek price control laws, the laws “were almost impossible to enforce.” The shortages created by the Greek price control laws created black market opportunities to the great benefit of the public.

In 284 A.D. the Roman emperor Diocletian created inflation by placing too much money in circulation, and then “fixed the maximum prices at which beef, grain, eggs, clothing and other articles could be sold, and prescribed the penalty of death for anyone who disposed of his wares at a higher figure.” The results, as Schuettinger and Butler explain, quoting an ancient historian, were that “the people brought provisions no more to markets, since they could not get a reasonable price for them and this increased the dearth so much, that at last after many had died by it, the law itself was set aside.”

Moving closer to modern times, George Washington’s revolutionary army nearly starved to death thanks to price controls on food that were imposed by Pennsylvania and other colonial governments. Pennsylvania specifically imposed price controls on “those commodities needed for the use by the army,” creating disastrous shortages of almost everything needed by the army. The Continental Congress wisely adopted an anti-price control resolution on June 4, 1778 that read:

Whereas it hath been found by experience that limitations upon the prices of commodities are not only ineffectual for the purpose proposed, but likewise productive of very evil consequences—resolved, that it be recommended to the several states to repeal or suspend all laws limiting, regulating or restraining the price of any Article.

And, write Scheuttinger and Butler, “By the fall of 1778 the army was fairly well provided for as a direct result of this change in policy.”

French politicians repeated the same mistakes after their revolution, putting into place the “Law of the Maximum” in 1793, which first imposed price controls on grain, and then on a long list of other items. Predictably, “in some [French] towns, the people were so badly fed that they were collapsing in the streets from lack of nourishment.” A delegation from various provinces wrote to the government in Paris that before the new price control law “our markets were supplied, but as soon as we fixed the price of wheat and rye we saw no more of those grains. The other kinds not subject to the maximum were the only ones brought in.” The French government was forced to abolish its disastrous price control law after it had literally killed thousands. When Robespierre was being carried through the streets of Paris on the way to his execution the crowd shouted, “There goes the dirty Maximum!”

At the end of World War II American central planners were apparently just as totalitarian-minded as the Nazis were when it came to economic policy. During the post-war occupation of Germany American planners rather liked the Nazi economic controls, including price controls, and so they were kept in place after the war ended. The notorious Nazi Hermann Goering even lectured the American war correspondent Henry Taylor about the stupidity of such a policy! As recounted by Schuettinger and Butler, Goering said:

Your America is doing many things in the economic field which we found out caused us so much trouble. You are trying to control peoples’ wages and prices—peoples’ work. If you do that you must control peoples’ lives. And no country can do that part way. I tried and it failed. Nor can any country do it all the way either. I tried that too and it failed. You are no better planners than we. I should think your economists would read what happened here.

Price controls were finally ended in Germany by Economic Minister Ludwig Erhard in 1948, on a Sunday, when the American occupation authorities would be out of their offices and unable to stop him. This spawned the “German economic miracle” which of course was no miracle but only a return to common sense by allowing markets and not politicians to set prices.

Price controls were the cause of the energy crisis in the U.S. in the 1970s and of the California energy crisis of the 1990s. For more than four thousand years, dictators, kings, despots, and politicians of every variety have viewed price controls as the ultimate “something for nothing “promise to the public. And for more than four thousand years the results have been the same: shortages, deterioration of product quality, the proliferation of black markets operated by criminals, bribery, destruction of a nation’s productive capacity, economic chaos, the creation of massive price control bureaucracies and police states, and a dangerous concentration of power in the hands of the price controllers.