Sat | Sep 23, 2017

Martin Henry | Why price controls won't work

Published:Sunday | June 11, 2017 | 6:00 AM
Ian Allen/Photographer Tanya Mingle

Prices of perishable farm produce have gone up in the aftermath of the May flood rains. These are not even staple foods but only disposable supplements in the Jamaican diet. Despite the price increases, they are flying out of the markets faster than they can get in. Which suggests greater real demand than supply. Nevertheless, the authorities can hardly contain themselves from responding to the old itch to impose price controls.

Quite oddly, it is the Ministry of Agriculture which should be celebrating with farmers the uptick in farm prices after prices for things like cabbage recently crashed to record lows, that is "seeking to assure consumers that a mechanism is in place to prevent price gouging".

Permanent Secretary Donovan Stanberry told media that action will be taken if there are unfair price increases. What is fair price? What action?

None of the media people bothered to ask Mr PS just how he proposed to determine and set fair price and to get everybody in the market to comply, and largely an informal market at that.

With the hands of the Government tied from actually fixing farm prices and most other prices in the market economy it is trying to cultivate and with the IMF watching, Mr Stanberry is weakly proposing for action "constant monitoring by the Consumer Affairs Commission", with the results to be published so that consumers can make informed choices. What a massive effort for such a predictably little return!

Actually, a consumer affairs agency should be a non-governmental organisation financed by consumers themselves and not interfered with, much less directed by, Government. But in this age of the smartphone, consumers can better help themselves by trading real-time information on where to find lowest prices and highest quality.

 

CHEAPER IMPORTS

 

The Government could do two things to usefully assist consumers: allow cheaper imports and disallow collusion in price fixing.

The Government of Jamaica has previously joined the governments of the world in thousands of years of failed attempts at benefiting consumers by fiat price fixing. The Government of the 1970s, faced with a collapsing economy and shortages and escalating prices, boldly launched price-control efforts that generated a whole slew of problems, from hoarding, to marrying, to feeding a thriving black market, and only made matters worse. We have since retreated to a more open and competitive market system in which free price movement is allowed to adjust demand and supply. And nobody's starving.

I've come back to my ruminations on the damage inflicted by price control from hearing on the BBC that Kenya has just rejoined the family of nations that have imposed price controls over thousands of years with generally disastrous results. A little while back, I had read Forty Centuries of Wage and Price Controls: How Not To Fight Inflation, put out by the Heritage Foundation, and what Adam Smith had to say about the matter.

Collapsing socialist Venezuela is deep into price-fixing with everything scarce. The country has three foreign-exchange rates, two officially fixed ones, with a seventyfold difference between them, and the real rate, the black market rate, which is around 300 times the lower official rate.

Kenyans are highly dependent on maize flour as a dietary staple. This is not scallion, cabbage and tomato. In the face of a regional drought, the price of maize flour has increased by 31 per cent.

President Uhuru Kenyatta has dusted off a 2011 law that allows a return to price controls of any essential commodity after the practice was abandoned in the 1990s in favour of economic liberalisation.The law allows the finance minister to set maximum prices of gazetted essential commodities upon consultation with the relevant industry.

One shopper said she had turned up at the store at 5 a.m., but had not still not been served at 10 a.m. And never mind the threatened high fine and long prison sentence, already a black market has emerged with its own pricing. We who lived through the 1970s here could have told them. But governments don't listen.

Adam Smith was telling them from way back in 1776 in The Wealth of Nations. Using corn, no less, as his example, he wrote, it is the interest of the seller "to raise the price of his corn as high as the real scarcity of the season requires, and it can never be his interest to raise it any higher".

Raising the price has the effect of depressing consumption and so stretches supply over a bad patch like the drought in Kenya. If the merchant miscalculates and holds on to high prices when more corn is coming to market, and therefore prices should fall, he runs the risk of losing his investment with his high-priced corn spoiling on him.

 

EXPOSING PEOPLE TO SUFFER

 

Should the merchant not raise the price of corn high enough, he not only forgoes a higher profit "but he exposes the people to suffer before the end of the season, instead of the hardship of a dearth, the dreadful horrors of famine.

What is likely to happen in Kenya with fixing at suppressed levels the price of maize flour and other staple foods while importing cheaper grain under subsidy is that farmers will abandon the land wherever they can for more lucrative engagements. Like being black market sellers of the imported maize but at higher prices than the government sets!

This exodus will drive a downward movement in food production which will exert an upward pressure on food prices. The Government cannot win!

This is the fundamental lesson of Forty Centuries of Wage and Price Controls. In case after case from Hammurabi in Ancient Babylon, to the modern world up to the 1970s, the authors trace out the negative impact of price controls on economies. In ancient Rome at one stage, for example, a law was enacted which allowed every Roman citizen to buy a certain amount of wheat at an official price which was much lower than the prevailing market price.

In 58 BC, the law was 'improved' to allow every citizen an allocation of free wheat. The results surprised the caring government! Farmers abandoned the countryside to live in Rome without working. Slaves were freed by their masters so that by becoming citizens, the ex-slaves could be supported by the state. By 45 BC, Julius Caesar, as emperor, found that almost one citizen in three was receiving his wheat at government expense. Which, of course, could not be kept up.

Diocletian, 300 years later, imposed the death penalty for hoarding and for exceeding fixed prices on both seller and buyer. Prices rose nonetheless.

As the Foreword to Forty Centuries of Wage and Price Controls, baldly puts it, "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 skilfully 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."

- Martin Henry is a university administrator. Email feedback to columns@gleanerjm.com.