Why Forty Centuries of Price Controls?

My answer on the podcast was pretty lackluster. I described how the impulse for price controls often stemmed from the public deeming it illegitimate for prices to increase after consumer demand spikes, rather than supply problems (see the Daniel Kahneman and Richard Thaler survey experiments in the 1980s).

This helps explain the opposition to price gouging in emergencies, the skepticism we see about dynamic pricing, and the dismissal of the idea that excess demand‐​side stimulus drove inflation (rather than, say, greed being the explanation). In short, people consider that businesses or merchants have agency in reacting to demand spikes, and so think it’s unfair if they raise prices “above normal” levels when demand surges (as opposed to when their costs go up). This stance clearly provides intellectual ammunition for many contemporary price controls.

This is all fine and true, as far as it goes, but it’s clearly insufficient as a response to Jonah’s question. The real answer for why price controls get continually reintroduced, I think, requires a three‐​step explanation.

First, price controls *seem* well‐​targeted at the problem identified, generating a strong demand for them. If you ignore the distortive second‐​order consequences like shortages and surpluses, and consider only the benefits of immediate relief, then the obvious answer to the problem “prices are too high” is “hold prices lower”! Thus price controls have evident appeal relative to doing complex supply‐​side reform or providing more general relief — especially to people uninitiated in economics.

Second, there are public choice incentives for politicians to favor price controls to help those struggling, rather than delivering more overt redistribution. The losers from extra taxes and spending are obvious. The losers from price controls’ effects — shortages, black markets, misallocation, quality declines, etc — are less obvious and often more dispersed. The degree of separation from the original regulation also gives plausible deniability to politicians that price controls are really to blame for the unintended effects. This all encourages politicians to supply price controls.

Yet these two economics answers alone still feel unsatisfactory. Ultimately, we now have powerful knowledge of price controls’ past effects, which should at least severely mitigate our desire to use them again. Given the documented empirical record of price controls, we thus need a psychological explanation for why we collectively fool ourselves into thinking “this time will be different” upon reintroducing controls.

Talking to Jonah afterwards, he suggested that humans get seduced by metrics and this could be part of the explanation. We observe that we have extensive data on the housing market, say, and, ignoring all the subtle information embedded within prices and forgetting all the margins by which economic actors might adjust to them, think, “well, with all this data, we can make sure this rent control thing really works this time.” It’s a sort of conceit that today’s better information will prevent the usual outcomes.

I’m not sure I have a better explanation yet for the delusional psychology at play. (If you do, then I’d love to hear it!) I suspect some of it is also due to us catastrophizing the crisis du jour and convincing ourselves that today’s circumstances really are the exception that justifies something drastic. What’s undeniable is that we keep using price controls, despite their long and destructive record.