Comments (27)

• Yancey Ward

  Murphy is correct, the vast majority of ordinary people don't seem to understand the connection between shortages and price controls. However, I have run across another subsegment, with whom I frequently debate, that deliberately fail to understand: because higher prices mean that even fewer of less well off will be able to obtain the product in question, the deliberately obtuse's egalitarianism demands that the misery be extended equally to all, and if a black market forms for the product (which is inevitable), these people are to be prosecuted ruthlessly. It is frustrating dealing with such stupidity.

  Published: February 6, 2006 10:46 AM

• John Powers

  There was a story some time back on NPR about US Soldiers tracking down (and stopping) black-market gasoline sales. So our troops are being sent to Iraq to be in harms way to protect Socialism. Go figue why we pay taxes to do these sorts of things.

  JBP

  Published: February 6, 2006 1:05 PM

• Paul Marks

  My standard question.

  Did you send a letter to the newspaper briefly explaining the matter?

  "But they will not print such letters".

  You should still try - and if they do not print the letter or reply, just never buy or read this newspaper again.
  

  Published: February 6, 2006 2:48 PM

• Luke Fitzhugh

  What with most Americans getting their news from television and radio, and most reporters being ignorant of basic economics, it is no wonder that people are confused about things that significantly affect their well being and make irrational choices/decisions. Notice how much a 20-point drop in the Dow Jones causes reporters on television and radio to think that something worth reporting has happened and some even suggest that the economy might be nearing a depression as a result of that 20 point drop. Or notice how even educated people think that the government is protecting them from private competitive business. And they support government even though they know they are being stolen from. Oh no--I won't volunteer to buy $10 gallons of gas at the free market pump, but I will permit President so and so or Gov. so and so, or legislator so and so to take X% off the top and let me just have my beer and my Super Bowl game. Help us! We're doomed I think.

  Published: February 6, 2006 8:51 PM

• Marco

  They probably won't print your letter if you mention stuff like 'natural rights' and the like. But if you only argue about economics there's a good chance they'll print it. Last year I sent a letter to the British newspaper "The Business" with a point by point reply to their 'case for a flat tax' and they printed it the following week.

  Published: February 7, 2006 4:40 AM

• Caley McKibbin

  Trying to educate professionals who want to fabricate the image of infallibility and reliability is probably a waste of time compared to educating people one by one. You might chance the occasional rebel, but you should always ask yourself whether time could be spent in a comparatively advantageous way. If they fight it, forget it.

  Published: February 7, 2006 3:22 PM

• Paul Marks

  "The Business" is the best newspaper in Britain (much better than the supposedly leading conservative newspapers the "Daily Telegraph" and the "Sunday Telegraph").

  And, no, I do not have a financial interest in "The Business".

  On flat rate taxes I am broadly in favour - but, of course, the idea does miss the point that what we need is lower government spending and lower taxes.

  Getting rid of the higher rates of income tax would do some good (unless one is a tax lawyer by trade), but it does not deal with the real problem - which is (as we all know) big government.

  Published: February 8, 2006 2:14 PM

• Ken

  Er, there is no connection between price controls and shortages. If such a connection existed, then I would not have eaten my supper tonight.

  Mexico controls the price of the tortilla - they sell for about $4.50 a kilo. That works out at about 40 American cents or 20 British pence. The owners of the tortillerias - the small shops that make tortillas - are always complaining about the price cap. However they make just enough profit, by opening all the hours that God sends, to stay in business.

  What is true of tortillas is also true of sugar, rice, beans and certain types of loaf. All are price controlled and all are readily available.

  Come to think about it - in the 15 years that I have lived in this country I have never known the shelves NOT have these basic items on them.

  Published: February 10, 2006 12:38 AM

• No Preference

  It's true that when you put a cap on the price of a good, there will be a shortage. But the article doesn't address the political and social costs of allowing the price of gas to go to market levels in a country where incomes are very low, and many people depend on petroleum products to heat their homes and provide electricity during the winter.

  Interesting that I linked to this via Antiwar.com. This is a bit different than their usual stuff. Nice to see something new.

  Published: February 10, 2006 5:53 AM

• Yancey Ward

  No Preference,

  Those costs are ultimately irrelevant. Nothing, and I mean nothing, can be done about the social costs, and the political costs are borne by the politicians, as it should be.

  Published: February 10, 2006 8:21 AM

• Yancey Ward

  Ken,

  The Mexican government heavily subsidizes food production. Take away the subsidies for corn and wheat and its processing and you will find that the cap on tortillas will have to be raised, or you will stand in lines for tortillas. Such activity is the usual method of price caps used by governments. However, there is no such thing as a free taco with beans and rice. Somebody paid for that "cap".

  Published: February 10, 2006 8:32 AM

• No Preference

  Nothing, and I mean nothing, can be done about the social costs

  Do you mean that inherently nothing can be done, or that it's too difficult to do anything in this particular case?

  Published: February 10, 2006 11:17 AM

• Ken

  Yancy,

  As usual in Mexico, things are more complicated than that. The government forbids the importation of foreign corn and puts a minumim price at which farmers sell corn to the mills. However, most of the subsidies that you mentioned were scrapped some years ago.

  Neertheless, the basic thrust of this essay is that price controls cause shortages and that is just not the case.

  Published: February 10, 2006 12:23 PM

• Yancey Ward

  If the supply of oil, for example, at a given demand is causing social problems, then the government can proactively do nothing about it. Any meddling will simply make the supply lower, or the demand higher. What government tries to do is to move the costs from one group to another, but it never makes the total cost lower, and almost always makes the damage greater.

  Published: February 10, 2006 1:41 PM

• Yancey Ward

  Well, Ken, if "most" were done away with, then enlighten us with what was removed and what was retained?

  Published: February 10, 2006 1:43 PM

• Yancey Ward

  Ken,

  I ask because what you describe sounds like a price floor, not a price cap.

  Published: February 10, 2006 2:26 PM

• Ken

  Yancy,

  The retail price of the items previously enumerated have a maximum price on them for the consumer. For farmers who produce things like corn, there is a floor price set by the government. This floor price is higher than the market price, and keeps the peasant farmers alive. The government buys the produce and sells it on.

  What was removed from the canasta basica, or price cap, covered just about everything, including Coca-Cola. This country only got around to selling that drink in cans fairly recently. Prior to that Coke was sold in the old bottles, which were worth more than the bloody drink. Thus you bought a Coke, the seller put the liquid into a plastic bag for you and off you went, sucking out of a straw.

  By the by, there was never a Coke shortage in those days, either.

  Published: February 10, 2006 3:51 PM

• PR

  Ken, what you describe sounds like a shortage to me. Or at least a Coke-in-a-glass-bottle shortage. Consumers paid the maximum allowed price for an inferior substitute, Coke-in-a-plastic-bag. Presumably they would have been willing to pay more for bottled Coke but weren't allowed to.

  Published: February 10, 2006 6:46 PM

• Caley McKibbin

  Economic law isn't flawed. You just aren't able to apply it within the particulars of your own scenario. I don't have that problem. Your own explanation conveniently provided one answer: the government buys the produce. Government purchase is functionally equivalent to subsidy. As for the other goods, anyone can arbitrarily judge that there is or isn't a shortage merely by interpreting conditions as they please. You're saying that there's no shortage because YOU are pleased with supply. As PR noticed, you provide more evidence that contradicts your own conclusion. To top it off, regression with marginal utility theory tells us that Mexicans flooding into other countries to produce, then send back the earnings means that Mexico has a general comparative shortage versus the developed world.

  Published: February 12, 2006 3:23 AM

• Caley McKibbin

  "This floor price is higher than the market price, and keeps the peasant farmers alive."

  Floor price plus government purchase equates to pure wealth transfer from the public at large to farmers. The fact that the government ends up in possession of the produce is immaterial. Just going by what you've said, the punch line is that the government is also simultaneously doing the opposite by suppressing the lower order destination businesses that would buy produce. It reminds me of an essay that I wrote on environmentalism, where I explained how municipal governments have two virtually universal policies that create exactly opposite effects.

  Published: February 12, 2006 4:38 AM

• Glen

  Ken, are you saying that gravity does not exist?

  Published: February 13, 2006 2:21 PM

• Ken

  Yeah, Caley, but that is not the point at issue, is it? The only point I am making is that price controls do not cause shortages. How subisdies are provided, or not, and what Mexico's advantages and disadvantages may be, none of that is under discussion.

  PR, no, because coke was served up in glass bottles. It was that to take the bottle away you had to pay for it. Thus most people chose the plastic bag and straw option.

  Finally, the fact that someone is reduced to ad-hom' activities, suggests that this is all about theology, rather than rationality.

  Published: February 15, 2006 11:53 AM

• Glen

  Who has made 'ad hom' comments?

  Published: February 15, 2006 2:44 PM

• Yancey Ward

  Ken,

  Market prices are the mechanism by which supply and demand are balanced. If, in a free market, people suddenly have an increased demand for tortillas, then the market price will rise until the translation of this increased want into real demand is suppressed to the point of the previous supply, which may not be immediately increased. Without this price rise, the tortillas disappear from the shelves immediately since the demand at the present price has overtaken the immediate supply- this is the definition of a shortage.

  The same applies to the situation where the government enters the free market for tortillas and lowers and caps the price. The demand for tortillas will increase, but the too low price cap does not allow for the supply to increase, and, since the price cap is too low, the tortilla makers with the thinnest margins will be put out of business- the actual supply will shrink. Again, tortillas disappear from the shelves, and people cannot buy tortillas whenever they desire, only when the limited supply shows up.

  If I may interpret the situation you describe in Mexico, I would suggest that the government is subsidizing the tortilla production by its manipulation of the markets of the feedstocks (see the price floors and government buying of wheat and corn you described-the government sells these commodities at a loss for the taxpayers of Mexico). In effect, it is setting a price cap on the tortillas at the retail level, but subsidizing the supply to ameliorate this market distortion.

  Now one may honestly ask, so what? This benefits the poor by holding down the cost of tortillas without creating a shortage of tortillas and the corresponding queues. However, I would argue that the shortages have appeared elsewhere, in the foodstuffs and sundry other products whose production was forgone in order to supply the extra tortillas the government subsidized.

  Published: February 15, 2006 4:13 PM

• Ed Larmore

  It's really no wonder as economics is not a required course in either high school or college (though I think it ought to be). I never took a course in economics, but am now learning it through a textbook I bought on line out of curiosity.

  Published: August 11, 2006 4:04 PM

• Roger M

  "The single most frustrating thing about being an economist is that, 200+ years after its official birth, the field of economics hasn't convinced the rest of the world about even its most elementary propositions."

  Most economists aren't convinced of the elementary propositions! Most economists are Keynesian or Socialists. How can we convince the common man when the pros are still fighting?

  Published: August 11, 2006 4:42 PM

• guya

  Reading this article a year later and recalling the tortilla crisis in Mexico a few months ago.

  Published: September 18, 2007 12:15 AM