A Losing Bet: Price Controls In Urban Survival Scenarios

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Pablo Edronkin

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People that have to survive in ill-managed economies often find themselves suffering the consequences of the very stupid idea that consists in thinking that you can control by law and decree what follows trends established by natural forces within any society.

Why was gold valuable in ancient Egypt, in Teotihuacan and the kingdom of Siam as much as It is valuable today, centuries- if not millenia - later? Its attractiveness and durability are two very good qualities of gold; it is not for nothing that it is known as a noble metal. But what gives gold is high value is scarcity; if golden nuggets were as common as grains of sand, doubtlessly it would have some value, but nowhere as near as what it sports today.

If some second-rate leader of a banana republic today would announce that the price of gold will be regulated by decree to the same level that the price of sand, would he be able to control it? Outside his jurisdiction obviously not, and this is important. So, in order to control inside his country he may use gangsters to start mobbing buyers and seller sin the gold market but, would he be able to really control the price of gold? Aside from a few victims of that bullying, gold operators will end up going undercover - that is, selling and buying in the black market -, will just stop operating and will keep their gold until prices become deregulated again, or will take their gold outside the country to sell it at international prices, those that the banana-loving leader cannot control. The more esoteric or inconvenient a new tax, control or prohibition is, the bigger and stronger will be the temptation to proceed then according to any of those three choices:

Diverting everything to the black market.

Waiting and speculating against the government.

Take the money or values out of the country.

When these things happen, banana leaders and their rather illiterate followers tend to explain the failure of their policies based on conspiracy theories and the presence of speculative elements. These indeed will appear, but only as a consequence of the dynamics of price controls: Pressures will mount because of the distortions imposed on the market, and some individuals will sooner or later begin to think that they would eventually make some very good business once the prices explode. The higher the expectations, the bigger the interest at stake and the possibilities of pressing the government either to change those policies or eventually, top the leaders down and impose somehow someone more keen to listening to the market pressures.

Within the framework of our urban survival study, this all means that establishing price controls guarantees the subsistence of commerce, but in the black instead of the white market, meaning that such prohibitions will only make it more expensive to get food and indispensable goods, but will not make it impossible. In other words, price controls are a nuisance created by people who understand very little about how things really work. Price controls punish merchants, manufacturers and shoppers in the open market, because by establishing limits to prices, they also lower quality, availability and added value in every possible form. Once the manufacturer of any sort of goods learns that prices will be controlled and thus his profits will be reduced to an uncertain amount, he will start cutting costs whenever and wherever possible.

Creating price controls generates a dynamic that ends up poisoning the rules and even the government that pretends to impose them. A losing bet without doubt, often rehearsed by leaders and politicians that have already lost all their bets with their own country.

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