TLDR: Price controls are bad, and don’t exist in Utopia.
Prerequisites: None
In microeconomics, there is an understanding that the price that something trades at will naturally gravitate towards a function of supply and demand. We think about these quantities by lumping all buyers into one pool and all sellers into another, and ask how many trades each pool tries to make as a function of some set of input variables, the most common of which is price.
For instance, if we consider the market for bread, we can model all the people who buy bread as creating a “demand function”. We can then ask, at the current price, how many loaves of bread these people try to buy per unit of time.
To answer this question we look at how many loaves of bread are sold, and check whether there is anyone who tried to buy bread, but failed because there wasn’t enough. This second quantity — loaves of bread that would have been purchased if there had been more bread for sale — is called a “shortage”.
More speculatively, we can ask how the demand would change if the price were higher or lower. We can’t really know the answer to this in practice, but in almost all cases it’s probably a downward sloping curve; as the price increases, the quantity that consumers want to buy goes down. (The rare exceptions are things where price becomes a signal of quality, and encourages people to buy, compared to if the product were cheap.)
Likewise, sellers of bread (bakeries, etc) create a “supply function”. At the current price, how many loaves of bread do they try to sell per unit of time? Supply is easier to calculate than demand, as we can simply count the loaves of bread that were sold and add the loaves that were on sale, but later thrown out because they couldn’t be sold. The number of thrown-out loaves of bread is the “surplus”.
We can also speculate on what the supply of bread would be if the price (or some other variable) were to change. This is in some ways even trickier to consider than counterfactual demand, as we’d need to consider how the bakers would need to buy more ingredients, work longer hours, or potentially hire more staff. But, like with demand, we can guess at the shape of the curve: as the price increases, sellers will try to sell more of their product.
In an ideal market it’s impossible to have both a shortage and a surplus at the same time. If someone wants to buy a loaf of bread, and another wants to sell one, they’ll trade. But in reality mistakes will be made, and some viable trades will fail to take place. In fact, the whole microeconomic model of “a market for bread” is a bit fake – different bakeries have different qualities to their breads and different prices to go with them.
But the theory here is often quite good; it explains a lot, even if it’s an approximation, and the predictions the model makes are fairly accurate. For instance, in wealthy countries there is a default surplus for items like bread – most grocery stores will get rid of unsold bread on an average week. Our model predicts there won’t be anyone who tries to buy bread and fails, and indeed that is extremely rare (this doesn’t count people who wish they could buy bread, but can’t!).
The microeconomic model also says that in a competitive, free market, the price that a product is sold for will gravitate over time to an equilibrium point where there is neither surplus nor shortage. Every time someone in this ideal market tries to buy a loaf of bread they succeed, and every time someone tries to sell a loaf they succeed – there is zero waste. This is sometimes talked about as “the intersection between the supply and demand curves” because if one draws out the speculative supply and demand functions for counterfactual prices, the only price point with no waste will be the intersection.
In the model, whenever there’s a surplus, sellers will compete with each other to be the most attractive option (and thus the one that actually gets chosen), including by lowering their prices. On the flip side, when there’s a shortage, buyers will compete with each other (such as during an auction) by offering larger amounts of money for the products that are being sold, with a hope that they get chosen by the seller.
Some complementary mechanisms also exist by which shortages and surpluses can be reduced. An obvious one is productive capacity. If a seller is actively producing a good that isn’t sold, they’ll often scale-back on production. And likewise, if there’s been a shortage for a while, producers may increase the quantity produced to allow for more trades. But producers can also change quality to eliminate waste: if there’s an ongoing bread shortage, bakers might use inferior ingredients to cut costs. Inferior bread, during a shortage, can still be purchased out of desperation, allowing the bakers of that inferior bread to thrive even when prices are kept low.
Which of these variables (price, productive capacity, and quality) are most likely to change, when there is a shortage or surplus? Which is the best one to change, to eliminate waste?
The Law of Maximum
During the French Revolution this very situation occurred: due to general turmoil in the late 18th century the quantity of food reaching Paris was dwindling and the prices were rising sharply, partially due to rampant printing of paper money to help fund the revolution. The price of wheat tripled in the spring of 1793. Meat cost four times what it used to. Rioting erupted in the capital.
The largest political force demanding action were the sans-culottes, working class revolutionaries with that made up the backbone of the army.
To quote Alpha History:
“People are suffering”, said a petition to the Convention in September 1793. “Nobility is crushed but it breathes still in a new elite, merchants and food speculators (the two words are synonymous). Why should the sans culottes give their blood for the fatherland while the rich get richer? Why should they not rise up and cut off the heads of the rich, as they have done to the courtiers of the king? This will happen unless you fix the maximum.”
Days later the Law of General Maximum was passed, setting price ceilings on food and other goods. The result… was disastrous.
Instead of providing more food to eat, the artificially low prices imposed meant that it stopped being profitable to ship food in from the countryside. And with food supplies dwindling, many began hoarding so they wouldn’t starve, further reducing supply. Foods for the poor (like raw meat) were price-capped, but foods for the rich (like cooked dishes) were not, resulting in what food there was being siphoned towards the upper-classes. And in many places the law was simply ignored, with organized criminals popping up to fill the needs of those who could pay.
Quality certainly declined, however: “The butcher in weighing meats added more scraps than before réjouissances [(celebrations)] these were called with delicate irony. … Other shopkeepers sold second rate goods at the maximum. Manufacturers made an inferior article and sold it under the same name. … The common people complained that they were buying pear juice for wine, the oil of poppies for olive oil, ashes for pepper, and starch for sugar.”
The increasingly violent French government sent troops into the countryside to arrest farmers and seize their crops. Merchants and traders were brutally punished. The people starved.
The day before Christmas, 1794, the Maximum was repealed as the Reign of Terror ended. Rampant increases to the money supply along with other economic chaos (like repealing the Maximum) caused economic collapse. That, combined with a poor harvest in 1794 resulted in wide-spread hunger and rioting in 1795.
The recovery of the French economy is harder to see than its collapse. What was destroyed in a climatic instant may take years to regrow. Writers for those years tend to focus on the rise of Napoleon, but a savvy reader can notice that while there is wide-spread hunger in ‘95 and rationing in ‘96, there is not much mention of starvation in the latter part of the decade or at the dawn of the next century.
More General Trends
History is complicated and messy, but in connecting events we begin to see trends. The Law of Maximum during the French Revolution is only one of many instances of price-controls exacerbating (or causing) starvation and general scarcity.
The Roman emperor Diocletian was criticized by the 3rd century author Lactantius: “By various taxes, he had made all things exceedingly expensive, attempted by a law to limit their prices. Then much blood [of merchants] was shed for trifles, men were afraid to offer anything for sale, and the scarcity became more excessive and grievous than ever. Until, in the end, the [price limit] law, after having proved destructive to many people, was from mere necessity abolished."
Price controls have been linked to the fall of ancient Egypt and Babylon, to the wide-spread famines in the USSR and communist China, to the Bengal famine of 1770, the US energy crisis of the 1970s and dozens of other disasters. As Milton Friedman said: “We economists don't know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can't sell tomatoes for more than two cents per pound. Instantly you'll have a tomato shortage. It's the same with oil or gas.”
In fact, nearly all experts agree that price controls are a terrible idea.
The key underlying these dynamics is that price is not cost. The cost of a loaf of bread is what must be given up to have that bread: the space, time, labor, and attention needed to grow the grain and yeast, gather the water, prepare the flour, knead the dough, build the fire, cook the bread, and deliver it to the hungry consumer. The price is simply how those costs are divided between the consumer and the producer. Price ceilings don’t make it any less costly to make bread – they only shift the burden of those costs onto the producer.
High prices are an incentive for the producer to create more. By shifting costs to the consumer, they encourage production. And, almost magically, as production scales up certain costs (fixed costs, or those removed from new technologies) disappear, making it easier to create and allowing prices to drop along with those costs.
Or rather, high prices are an incentive right up until there is a surplus. At that point the consumer will bear none of the burden of additional production. Whenever a price is set by a government above or below the free-market competitive equilibrium it creates a deadweight loss that creates waste and discourages production.
But then what’s going on with grocery stores that tend to throw away food? It’s not because of government intervention. It’s because consumers don’t like when the store they’re shopping at doesn’t have what they want. Our theoretical models meet a messy reality, and as a result the grocery store buys more food than it expects to sell, as a way of making customers happier. The added (small) costs are then passed on to consumers in a way that’s hard to notice.
Utopian Prices
As I see it, all educated people in Utopia understand basic economics. There is an corresponding consensus (especially in government) that trying to force the price of almost anything higher or lower than the market equilibrium is collectively bad for society.
Thus, Utopia has no price controls. This means there are no laws against price-gouging during a shortage, no minimum wage, and no rent-control.
Instead, poor people are largely helped in Utopia by the means of direct money transfers. For instance, in Utopia one of the main forms of charity is giving money to people who are hurt by natural disasters. Thanks to better technological standards this kind of charitable giving is fast, meaning that needy people often have enough to pay for the high prices that accompany unexpected disasters. And these gifts are predictable enough that even when the communications infrastructure fails, cutting people off from monetary relief, they can often find short-term loans (sometimes from merchants themselves).
For how Utopia reduces the burden on workers through supporting collective bargaining and subsidizing education, reduces the burden on renters by encouraging homes to be built and heavily taxing land, and reduces the burden on the general poor through universal basic income, we’ll have to wait for future posts. In the end, however, the real punchline is basically to just give poor people more money. Direct redistribution is the simplest, easiest way of helping the poor without ruining the dynamics that help markets efficiently allocate goods.
