Forty Centuries of Wage and Price Controls

by | Oct 17, 2001

Even the Department of Energy’s study found that price caps — which, let’s not forget, are what got California into this mess in the first place — won’t improve the energy situation. In fact, they’ll likely make it worse. The study concluded that a $150 “hard cap” on electricity bills — like the one proposed […]

Even the Department of Energy’s study found that price caps — which, let’s not forget, are what got California into this mess in the first place — won’t improve the energy situation. In fact, they’ll likely make it worse.

The study concluded that a $150 “hard cap” on electricity bills — like the one proposed by California Gov. Gray Davis — will make it much more costly to produce power, leading some companies to shut down. This could wipe out as much as 3,600 megawatts of generating capacity in the state. That’s enough power to keep the lights burning in more than 300,000 homes.

And the most popular alternate price-fixing scheme — a “Cost-Plus-$25” proposal — would discourage “only” 1,300 megawatts from being added to the state’s capacity. Reasonable people may disagree on how to solve California’s crisis, but surely no one would argue for less capacity.

Price caps also “could double the number of rolling blackouts from 113 to 235 hours and increase the number of households in the dark to about 1.575 million,” the study says.

Mere guesswork, critics may respond. Fine, but they can’t shrug off what history teaches us about price caps. It’s all laid out in a book published more than 20 years ago by The Heritage Foundation titled “Forty Centuries of Wage and Price Controls: How Not to Fight Inflation,” by Robert Schuettinger and Eamonn Butler.

The book outlines the unqualified failure of price controls from ancient Egypt forward. Consider what happened when the Pharaohs, under the guise of preventing famine, tried to control the wheat supply. Over time, control gave way to direction and direction to outright government ownership. Farmers, with no profit motive left, produced less and less wheat until — surprise! — famine set in. The economy collapsed, workers abandoned the cities and, finally, in about 3000 B.C., the reign of the Pharaohs ended.

Hammurabi’s legacy to the world is that he authored the first-ever formal written law codes. But his legacy to the Babylonian empire is the extensive wage and price controls he included in that first code. They weakened the economy so much they eventually brought down the empire itself.

The Roman emperor Diocletian tried wage and price controls in an effort to right the market after earlier price controls had failed. In the fourth century B.C., the Roman government bought corn and, in times of shortage, re-sold it at a low fixed price. In 58 B.C., it went further and granted every citizen free wheat. Farmers began streaming into Rome because they could live and eat without working. By the time of Julius Ceasar, one in three Romans was receiving government wheat.

The government tried to fix things by coining more money. But that just added skyrocketing inflation to the mix. Diocletian imposed wage and price controls and ordered that anyone who violated the controls or withheld goods from the market be killed.

The result, in the words of one historian: “The people brought provisions no more to market, since they could not get a reasonable price for them, and this increased the dearth so much that

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Charli Coon is senior policy analyst for energy and the environment for The Heritage Foundation, a Washington-based public policy research institute.

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