When I took economics, we had a little squib in there about price controls. But it was about something nobody would actually think to do these days . . . mandatory cheap bread or something. It was a historical example. At any rate, it's overwhelming conventional wisdom in the United States that price controls are bad.
But are price controls really that unpopular? What about, I dunno, limits on executive compensation?
I think there's a tendency to think about "price controls" as things that apply to sacks of flour during wartime or barrels of oil in the 70s. You know: real stuff, that you can produce and consume and hold in your hands. But look, there are controls on the price of labor all over the place, and a lot of them are extremely popular. The minimum wage, as far as I know, is a price control that is extremely popular.
What I find interesting is that the conventional wisdom would, as Matt says, coalesce very quickly on the view that any proposed price ceiling or floor on Diet Coke is a terrible idea. But when you start talking about the labor market, the C.W. gets scrambled. Why is that? Are the feedback loops that determine prices in the labor market just thought of as really crappy? Or are we less comfortable following economic logic down this particular rabbit hole when human welfare is most obviously and viscerally at stake?
(Those questions are meant seriously. I'm genuinely curious why this difference in public opinion occurs!)
Update: Mark Thoma of the indispensable Economist's View emails:
One answer could be that even if the degree of market failure is the same in labor and soft drink markets, the harm to individuals is much larger (monetarily and in utility terms) for the labor market case (because it has a larger impact on the budget).
There may also be exploitable rigidities in labor markets (workers who can't leave a job because they'd lose health care, have to move their kids out of existing schools, etc.) that generate market failures, and a minimum wage prevents employers from using this as a means of pushing wages too low.
Conor,
And what about the Fed controling the price of money. That's a pretty important price.
Hi Conor,
If you look around an average American supermarket you can see price controls everywhere. Massively subsidized corn is only the start. Most of our "real stuff" is cheap, in the sense that government intervention makes it seem that way (or lack of intervention, in the case of our allowing illegal migrant workers to pick our produce, resulting in "cheap" lettuce). There are heavily protected, massively distorted markets all around us in America, with more yet to come. And yet, to even broach the subject of price controls is enough to get the average person throwing around ideological tags like socialism, setting up the negative frame for discourse.
Without trying to sound too condescending, I feel like the reason we think of price controls as "bad" is because we are ignorant of how most of our commodities are truly priced. This ignorance is largely willful, as it is not hard to imagine what the true cost of things like food would be without these circumstances which are so apparently favorable to the American consumer. It makes economic sense to believe that this is capitalism and that these are free markets, because we live with such relative abundance. The fact that this abundance is caused by public policy (massively influenced by corporate lobbying) more than the "market forces" we fetishize is an inconvenient fact for the typical American who is loathe to think of him- or herself as a socialist. It goes against the grain of our independent, self-made national character. So, like so many other politically-charged issues, we in America succeed in avoiding a real discussion of price controls simply by agreeing to call it something else.
My autodidact 2 cents:
Potatoes are grown and packed and sold and it costs x amount to do so. If there's too much potatoes for sale, prioes will be low and potatoe growers will plant some other seeds in their fields.
The job market is something else. What does it cost for someone to live and to be able to "sell himself" to an employer? What happens if there's too much people trying to "sell themselves" in the same market? Will is salary go down infinitely? Minimum salary is not a market distortion, it's merely an anti-slavery law, particularly in states where social security is minimal.
Price control isnt as evil as it is potrayed. Deregulation might be just as bad as we have witnessed lately. Monopols and oligopols can be just as bad or worst than price controls as they distort prices without any control from the public. They should be fought more vigourously in America.
I believe people are generally against price controls on things they buy but more ambivalent on things they sell.
Who would benefit most from price controls on Diet Coke? Probably the Coca-Cola Company. Fortunately they don't have the majority vote in the matter. But labour - everyone sells that. And so a restriction on how little it can be sold for is useful for the majority.
Rationally, this is because it restricts competition and raises the average price of labour (in the short term at least, and short-term benefit often dominates people's decisions). But emotionally, I suspect it also gives people a feeling that their output is more valuable.
Of course price controls can be caps as well as floors, in which case they should favour the buyers. But the perception is that this leads to shortages and so it's unusual to keep them in place for long (anti-gouging laws on gasoline rarely seem to stick around). Even then, a cap which is well above the median price is not going to hurt the majority of sellers - in fact it may benefit them - and so it's not too surprising to see the majority supporting a cap on executive salaries.
I need to look up the economic theory on this, but I suspect that price controls in general can be shown to benefit the majority of sellers - at the expense of innovative and aggressive competitors, and certainly at the expense of consumers. Labour is a special market in that it has more sellers than buyers, and most of them are within a couple of standard deviations of the average, so it is not surprising that a majority-preference oriented political system (as opposed to one based on economic efficiency) would have the results we see.
Random, but two sections, a dozen or so pages, of this paper are really fun. Part I looks at a police officer in May 1739 going around the Parisian grain markets enforcing prices from his book of acceptable food prices, writing tickets to those off-price. (The dictionary at the time in France reads "MARKETS. SEE POLICE")
Part III jumps to the Chicago Board of Trade in March 1996, where two traders are investigated for violating rules prohibiting the trading of wheat futures 1m50s after the close of trades for the March/96 contracts, violating rules 1007.00, 350.05(h), and other rules of wheat trading.
Why does one feel natural and the other not? Under what conditions? It's a fun thought exercise.
My experience in teaching about price controls and not spending much time at all on bread but lots of time on the minimum wage is that people are loathe to think of labor as a commodity.
The price of labor is imbued with a huge moral component. I don't mean that its wrong to pay people X or Y, though that sentiment is there. I mean that how much you get paid is a reflection of your character.
This is the big stumbling block. Students seem to have a hard time getting past the idea that economists are saying unskilled workers aren't worth $7.25. Well, any human being is worth more than that, they think.
Nor do they take kindly to the notion that CEOs of failing companies are "worth" millions of dollars.
If you can carefully convince them that wages having nothing to do with the moral worth of the individual then accepting labor economics comes pretty rapidly.