The Economics of Price Controls

The Law and Economics of Hoarding (pdf)

Before I start ranting about price controls, I feel the need to offer the following quote from the article.

If one has confidence in markets as a general matter, it is difficult to object to hoarding.

I strongly object! I have no confidence! What was the question again? Should I be allowed to hoard? Seriously? Oops. What I meant to say is that I have the utmost confidence in the markets. Never been stronger actually. Please ignore what's in my pantry. It's just that I eat more canned goods and rice than most it would seem. It's certainly not hoarding. Of that you can be sure!

Okay, now on to price controls.

However, when a market is not clearing for some reason, such as when there is a state-mandated price ceiling on the relevant commodity, a queue or some other form of non-price rationing inevitably develops. In such a market, suppliers of the good simply receive the subcompetitive cash price. Buyers of the good, on the other hand, pay the cash price but also incur an “effort” cost waiting in the queue. To defray some of this effort cost, buyers will elect to purchase larger quantities of the good in each transaction and, in the process, incur a “storage” cost in the time they hold the commodity prior to its consumption. The actual price that buyers “see” in a shortage economy is thus the cash price plus effort and storage costs. In other words, while the seller sees a subcompetitive price, the buyer in effect sees a higher price “as if” the market were clearing.

That section and what follows it is very thought provoking. It does a fantastic job explaining why state-mandated price controls cannot create the desired effect. It is the intent to remove costs, but in reality costs are actually added. It is not efficient to stand in line and people will factor that in. Hopefully we won't revisit the failed policies of the 1970s again. What are the odds of that though? Surely we've learned our lesson.

Accounting magic: Suspend one rule and watch banking woes disappear

"Suspending mark-to-market accounting could fix major problems at no cost," they wrote, later adding, "In the 1980s and 1990s, there were at least as many, and probably more, bad loans in the banking system as a share of the economy. The difference was that there was no mark-to-market accounting."

Let's replace mark-to-market accounting with state-mandated prices. All houses are worth a billion dollars. That should instantly clear up all those bad loans. Problem solved. While we are at it let's fix the price of gasoline at 5 cents per gallon and the value of all stocks at $100,000 per share. Imagine how prosperous we would be!

It's amazing the problems we can solve at no cost if we simply ignore current prices. It is similarly amazing the problems we can solve at essentially no cost if we use monetary printing presses. It's certainly done wonders so far!

Buffett Addresses Mark-to-Market

Berkshire Hathaway chairman Warren Buffett said in his annual letter to shareholders that he endorses mark-to-market accounting, even though it helped produce the worst financial results for his company in the 44 years he has been running it.