Price controls failed for 4,000 years – and we still haven't learned our lesson

In 1793, French archaeologist Henri Pognon made a historic discovery to a few tens of kilometers northeast of Baghdad: a massive hill that housed the ruins of the ancient city-state of Esnuna (Eshnunna).

Although it was only excavated decades later by another archaeological team led by Dutch Egyptologist Henri Frankfort, the hill was one of the great discoveries of the century, revealing secrets of a Mesopotamian city that had been hidden for millennia.

Among the secrets discovered on cuneiform tablets was that Esnuna used price controls, a notable finding as it appears to be the oldest historical record of humans fixing prices. (I have tried to verify this fact with economic historians and will let you know if I get an answer.)

1 kor of barley is (priced) at [ana] 1 silver shekel;

3 qa of “best oil” are (priced) at 1 shekel of silver;

1 seah (and) 2 qa of sesame oil are (priced) at 1 shekel of silver (…) The hire of a cart along with its oxen and its driver is 1 massiktum (and) 4 seas of barley. If (paid in) silver, the rent is one-third of a shekel. He must drive it all day.

Esnuna’s price controls exceed by a few centuries the Code of Hammurabi (1768-1918 BC), a most famous record from ancient Babylon that was a “maze of price control regulations”, as historian Thomas DiLorenzo put it.

This may explain why the First Babylonian Empire failed nearly a thousand years before the Greek poet Homer told the story of the Trojan War. Price controls don’t work, and plenty of examples (as well as basic economics) prove it.

A brief history of price controls

The ancient Greeks may have given us Homer and his wonderful stories, but they suffered from the same economic ignorance as the rulers of Esnuna when it was about fixing prices.

In 1768 BC, grain prices in Athens were out of control – largely because Athenian rulers had an incredibly complex set of regulations on agricultural production and trade, which included “an army of grain inspectors appointed for the purpose of fixing the price of grain at a level which the Athenian government thought was fair.” The penalty for evading these price controls was death, and many grain traders soon found themselves on trial facing such punishment when it was discovered that they were “hoarding” grain during a (man-made) shortage.

The Athenian Empire was already history when Rome tried its own price control scheme seven hundred years later on a much larger scale. In 50 AD, Emperor Diocletian passed his Edict on Maximum Prices, which set a flat rate for everything , from eggs and grains to meat and clothing and beyond, as well as the wages of the workers who produced these items. The penalty for anyone caught violating these decrees was – you guessed it – death. Merchants responded exactly as one would expect to these regulations.

“People no longer brought provisions to the market, as they could not get a reasonable price for them,” wrote one historian. Not coincidentally, the empire of Rome soon followed the same path as that of the Athenians (although the eastern half survived another thousand years).

And then there is the British colony of Bengal, located in Northeast India. Few people today remember the Bengal Famine of 1768, which is surprising considering that around ten million people died, around one-third of its population. What is even more surprising is how little attention the event attracted at the time, at least in the London press. While many attributed the famine to the monsoons and droughts that ravaged the region in 1769 and

, Adam Smith, writing in ‘The Wealth of Nations’, correctly noted that it was the price controls that came later that likely turned food shortages into starvation. .

“The drought in Bengal a few years ago probably caused a great shortage. Some improper regulations, some ill-advised restrictions, imposed by the East India Company’s officials on the rice trade, perhaps contributed to turning that scarcity into famine.

When the government, to remedy the inconveniences of a shortage, orders all traders to sell their wheat at a price which it supposes reasonable, or prevents them from bringing it to market, which can sometimes cause hunger even early in the season; or, if they bring it there, it allows people and thus encourages them to consume it so fast that it necessarily produces hunger before the end of the season.”

And let’s not forget about the French Revolution, where in 1793 leaders stopped chopping heads to pass the Maximum General Act, a set of price controls passed to limit “price overkill”. (Henry Hazlitt was right when he called the law “a desperate attempt to offset the consequences of one’s reckless issuance of paper money [dos líderes]”.)

American historian Andrew Dickson White (1832-1918 ), co-founder of Cornell University, explained the consequences of the policy.

“The first result of the maxim [lei de preços] was that every means was used to avoid the fixed price imposed, and the farmers brought in as little produce as they could,” White wrote. “This increased scarcity, and people in big cities received a subsidy.”

Important market signals

Fortunately, today we have the advantage not only of history, but of the science of economics to show us that price controls don’t work.

Basic economics teaches that prices are important market signals. High prices can be an aggravating factor for consumers, but they signal a profit opportunity for producers, which leads to more production and investment. They also signal to consumers that the good is scarce, which encourages people to use less.

Gasoline, for example. When prices are $7,50 per gallon [nos EUA, o galão equivale a 3,8 litros], people drive less than if the price were $1, $3, or $5 a gallon. Meanwhile, the high price also signals a profit opportunity for producers, which encourages investment and production, which ultimately leads to lower gasoline prices. As economists will sometimes say, the solution to high prices is high prices.

Putting an artificially low price on gasoline sends the wrong signals to consumers and producers. The low price discourages producers from bringing fuel to market and also encourages consumers to use more fuel because it is artificially cheap – which is a recipe for scarcity.

This is precisely what happened in the 1970 decade, after President Nixon announced gasoline price controls, resulting in a nationwide shortage. and huge lines in front of gas stations. (Nixon knew price controls would be a disaster, but he passed it anyway because it would signal to voters that he was “meaning”.)

Price controls are back

Today, almost all economists agree that price controls are harmful – but that’s not prevented them from resurfacing once again during the current global economic turmoil.

As Axios recently reported, price controls are back and are no longer a relic of the years 70. Facing an energy crisis, the G-7 countries are looking to form a buyers’ cartel that would effectively put a price cap on Russian crude.

The scheme, like all price control schemes, is likely to backfire. A wealth of evidence shows that price fixing produces little other than scarcity, black markets and – in the worst case scenarios – death and starvation.

The people of ancient Esnuna can be forgiven for failing to understand why pricing a kor of barley in a shekel of silver was a harmful policy. Today’s policies, which have the benefit of history and the economy, have no excuse.

Copyright 2022 FEE Foundation for Economic Education. Published with permission. Original in English.

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