The war on economics has begun.
After four interest rate increase, and having failed to curtail inflation, China has started to impose price controls!
From the Financial Times, (bold highlights mine)
China has imposed strict price controls on basic consumer items and is expected to allow faster appreciation of its currency in the coming months after annual inflation in the country reached its highest level in nearly three years in March.
In a speech this week to the governing State Council, Chinese Premier Wen Jiabao said Beijing would, along with other policy measures, “further improve the yuan exchange rate mechanism and increase yuan exchange rate flexibility to eliminate inflationary monetary conditions”...
The price department of China’s powerful state planning agency – the National Development and Reform Commission – met earlier this month with 17 industry associations and ordered them to delay or cancel planned price increases.
The quasi-government industry associations included those overseeing agriculture, pharmaceuticals, fisheries, home appliances, cosmetics, meat, vegetables and many other basic consumer items.
In the past week or so the NDRC has also directly ordered flour and cooking oil producers to delay price increases, according to state media reports, and has even applied price controls to large global groups operating in China, such as Unilever
Price controls, which implies limits on production (yes, who will sell at a loss?, Who will work for free???), will only aggravate shortages rather than solve the problem.
From Wikipedia.org
As Wikipedia explains
Suppliers find they can't charge what they had been. As a result, some suppliers drop out of the market. This reduces supply. Meanwhile, consumers find they can now buy the product for less, so quantity demanded increases. These two actions cause quantity demanded to exceed quantity supplied, which causes a shortage—unless rationing or other consumption controls are enforced.
This serves as a politically convenient short-term approach but nonetheless a foolish one because it defies basic economics that comes nasty repercussions (rationing, long lines, more political instability).
The Romans tried it, US President Nixon tried it and many political authorities spanning 4 centuries tried it but all of them failed. Venezuela’s Hugo Chavez has also recently implemented this but has even worsened inflation and shortages.
And these have been so predictable.
First politicians create inflation by debasing the currency.
Next, politicians blame the market for self inflicted ills, thereby, superficially react to such imbalances by imposing price controls which eventually backfires.
As the great Ludwig von Mises wrote,
those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are masquerading their endeavors as a fight against inflation. While fighting the symptoms, they pretend to fight the root causes of the evil. And because they do not comprehend the causal relation between the increase in money in circulation and credit expansion on the one hand and the rise in prices on the other, they practically make things worse.
The policy of price control is where George Santayana’s damning admonition...“Those who cannot remember the past are condemned to repeat it”...reverberates.
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