The balance between consumption and production makes price. The market settles, and alone can settle, that price. Market is the meeting and conference of the consumer and producer, when they mutually discover each other’s wants … They who wish the destruction of that balance … directly lay their axe to the root of production itself.

—Edmund Burke. Thoughts and Details on Scarcity, 1795.

The price mechanism redeploys resources wherever they are needed most, relieving both shortages and gluts. Civil emergencies, war, or famine are no exceptions. It is precisely in dire times, when normal chains of supply have broken down, that it is most important to allow individuals, motivated by the desire for profit, to use their genius and energy to solve the most intractable problems. If food prices double in a flooded town, Doris the hairdresser complains about it to her mother who lives in another town, and her mother mentions it to her best friend who is overheard by her nephew. The nephew immediately takes unpaid leave from his job, gets his fishing boat out of storage, and begins ferrying groceries up river to Doris’ town. To maximize market share he undercuts existing suppliers by 20 percent, immediately pushing down food prices.

The French revolutionary government implemented the Law of the Maximum, prescribing the death penalty for merchants who increased food prices during hyperinflation. Many innocents were executed pursuant to this law, but all the murdering in the world cannot make a baker who bought his flour for two francs able to sell his bread for one franc.

High prices are analogous to an inflammation around an infected wound. They are unpleasant, but they signify an autonomous, highly sophisticated system repairing itself. If the wound is treated with anti-inflammatory steroids, the infection will rage out of control and become life-threatening. Likewise, if the government treats the symptom of high prices with price controls, it destroys the one thing that can heal the situation: free enterprise. Moreover, since people prefer to survive than to starve, price control laws will be widely ignored. This in turn diminishes respect for the law, because a law-abiding person loses respect for the law once he has been forced to become a criminal. Meanwhile, those unaffected by the disaster will remain well-fed in their comfortable, warm houses rather than undertake any risk to increase supplies because they could face prosecution for doing so. This was explained by Edmund Burke: “Of all things, an indiscreet tampering with the trade of provisions is the most dangerous, and it is always worst in the time when men are most disposed to it: that is, in the time of scarcity.” (Thoughts and Details on Scarcity, 1795.)

The other occasion on which governments foolishly experiment with price controls is when they have debauched the currency and caused monetary inflation. Here again price controls attack the symptom rather than the cause. In times of monetary inflation, price increases reflect the economy adjusting to the increased volume of money. Once the economy has adjusted, so long as the printing presses stop, price stability returns. However, price controls, by attacking the symptom and ignoring the cause, immediately remove all incentive for production.

This article is an extract from the book ‘Principles of Good Government’ by Matthew Bransgrove