No To Price Controls! No To Despotism!

Here’s a letter I sent to the editor in chief of the Inquirer7.net.

It’s a modified version of my earlier blog post: Price Freeze Policies Will Hurt Consumers

While I don’t expect to have my longish letter published, my intent is to nudge mainstream media of government’s creeping attempt to utilize today’s calamity via the declaration of the State of Calamity as an opportunity to expand despotism.

Mainstream media's fear appears misdirected, it is less likely about having to "raise funds for next year’s general election". But the worst possible risk is to use today's calamity as an opportunity to extend their political tenure.

Ergo, the right question that needs to be asked is: could the Presidential 2010 elections be in jeopardy?

Permit me to express my disenchantment over our government’s thrust to resolve today’s crisis in the face of Typhoon Ondoy’s calamity via the repeatedly failed age-old political tool of price controls. As an old saw goes, ``the road to hell is paved with good intentions.”

In mainstream media, entrepreneurs or business entities have been predominantly depicted as generally "greedy" while government portrayed as “equitable”.

This isn’t generally true; some indiscreetness by capitalists doesn’t apply to all. Beside, consumers are inherently empowered to render discipline to errant entrepreneurs via competition.

In contrast our government had been ranked as one of the worst in corruption in Asia, which would make our government relatively “greedier”.

Yet the important difference largely unappreciated by the public is that given the police power derived monopolistic function of governments, greedy entrepreneurs would have less of an impact to undermine society than a greedy official…unless the entrepreneur have been mandated by government privileges via state capitalism.

Next, officials try to make the public believe that they can subvert the natural laws of economics and allocate resources better than the marketplace.

They refuse to admit that governments are the least effective way to direct resources for its optimal use. They should learn from the recent lessons of Cuba's failed collective agricultural policies or from forty centuries history on price controls.

Price controls or "anti price gouging regulations" in contrast to popular wisdom worsens, and does not enhance, society's predicament.

How?

One, these regulations are likely to serve as disincentive for producers or providers of goods and services to sell. Probably, they would rather hoard their stuff instead.

Two, it prevents pricing signals to spur production or supply side responses to changes in demand. This would lead to more shortages.

Three, when prices of goods or services are legally constrained to sell below market levels, the tendency is to induce significant increases in demand.

As Henry Hazlitt explains in Economics in One Lesson,

``Now we cannot hold the price of any commodity below its market level without in time bringing about two consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are both tempted to buy, and can afford to buy, more of it. The second consequence is to reduce the supply of that commodity. Because people buy more, the accumulated supply is more quickly taken from the shelves of merchants. But in addition to this, production of that commodity is discouraged. Profit margins are reduced or wiped out. The marginal producers are driven out of business. Even the most efficient producers may be called upon to turn out their product at a loss.

``If we did nothing else, therefore, the consequence of fixing a maximum price for a particular commodity would be to bring about a shortage of that commodity. But this is precisely the opposite of what the government regulators originally wanted to do. For it is the very commodities selected for maximum price-fixing that the regulators most want to keep in abundant supply."

Fourth, since demand and supply balance can’t respond through pricing signals, black markets are likely to emerge out of the shortages.

Fifth, more regulations will breed more corruption. Some officials will probably keep a blind eye on entities selling at "high" prices but with a "take", or by themselves undertake such actions, directly or indirectly.

Lastly, restrictions in the marketplace will even lead to further restrictions, distortions and shortages in the economy.

This means that a feedback loop mechanism will arise from existing price controls as the shortages exacerbates.

And this would lead to expanding more government controls over production, via rationing, subsidies, cost-controls and or universal price fixing, all at the expense of entrepreneurs and capitalists, the latter of which understands how resources should be better allocated from their “local knowledge” through the marketplace.

Importantly, all these economic distortions will compound to translate to inflation, a concealed tax to the population.

Now when governments own and control the factors of production this is known as socialism.

It is unfortunate that while we would like to believe that our society operates under the political process known as “democracy”, we seem to deceive ourselves into believing that economic freedom function disparately from our political “democratic” process.

Worst, the raft of economic controls signifies our incremental retrogression into the morass of despotism, placing our fragile democracy at heightened risk. What’s next, martial law?

Lastly, such knee jerk regulatory responses may not even be targeted at attaining the enhancement of our economic weal, but as political advertisement for the coming elections.

In analyzing government policies, noble motives must always be matched with economic reality, failing to do so, we should go for reality.

I say NO to Price controls.

Benson J. Te

Update: Email address to the editor I sent has expired.