Prices are essential signals for coordinating the distribution of goods in an economy. Prices tell us where scarce resources are most needed. F. A. Hayek’s insights on this have been summarized by Peter Leeson:
Market prices, he [Hayek] argues, signal to producers and consumers the relative scarcity of resources. They tell producers how to combine resources in the ways that produce the most value for consumers, and tell consumers when they should expand or contract their consumption of various goods and services.
So, what would happen if prices were controlled by government policy? The answer: bad things.
Trouble in Zimbabwe
Between 1983 and 1985, President Muhammadu Buhari was General Muhammadu Buhari, the military head of state of Nigeria. He instituted price controls on milk, soap, sugar, etc. Overnight, milk, soap, and sugar disappeared from the shelves in different stores. This is not rocket science; once it becomes illegal for producers and sellers to sell their commodities over a certain price — and that price is less than what it costs to make that commodity available — producers and sellers will not make that commodity available.
For example, say there are one hundred million Nigerians who eat bread. Then, the government passes a law stipulating that bread should not be sold for more than 150 naira (forty-one cents) per loaf. Since many bakeries have different costs of production for their bread, they would be affected differently. Let’s say there are one hundred bakeries in the country. Those whose bread costs 150 naira and above to make and who have to sell above that price to make a profit would go out of business. Let’s say forty bakeries fall into this category. Now we have only sixty bakeries to provide bread for the one hundred million people. Remember, the quantity of bread demanded did not decrease, yet we now have fewer bakeries selling bread. The result is a reduction in the supply of bread. According to the economic principle of demand and supply, the price of bread will go up, because supply just been reduced and there are more people competing for the limited bread supply. But remember that bakeries cannot sell bread for more than 150 naira.
If the bakeries continue to sell bread at 150 naira, there won’t be enough supply, so people will have to line up for the limited amount available. Shortages will result. You may say, “Why can’t the sixty bakeries increase their production capacity to cover the lost supply of the remaining forty bakeries that just went out of business?” In an unhampered market, they easily could. But under a regime of price controls they can’t. Why? Because to increase production, bakeries need to buy more equipment and ingredients. But without charging more for bread, it’s unlikely that these bakers will be able to cover their costs. That is, increasing production would be financial suicide.
In reality, what happens is that some of those bakeries’ owners will be willing to take the risk of going to prison (or, in some cases, losing their lives) to sell their bread to the more desperate customers at a higher price, creating a black market. But the thing with black markets is that since they are illegal and sellers are exposed to the risk of prison or death if caught, prices will be well above the mandated legal price ceilings.
But black markets are not a substitute for a truly free market, and in many cases — such as that of Zimbabwe — price controls mean that the economy comes to a halt, plunging people into squalor and untold suffering.
As a result, President Mugabe of Zimbabwe embarked on “economic” reforms in the early 1990s. But because these reforms did not feature more market freedom, other disasters awaited. By the late 2000s, the Reserve Bank of Zimbabwe had printed so much money that its supply rose far beyond what was demanded, resulting in hyperinflation. It became so bad that by November 2008 the inflation rate had reached 89.7 sextillion percent per year according to economist Steve Hanke. New money had to be printed to reflect these changes, and the highest denomination of the Zimbabwe dollar during this era was the one hundred trillion note.
By 2009, the central bank had stopped printing currency, as it had become completely worthless. The country started using the currencies of other countries, such as the South African rand. In 2015, the Zimbabwean state announced that it would start using the US dollar as legal tender.
But all this inflation led to a perceived need for even more price controls. Mugabe thus instituted new price controls and the economy came to a halt.
Thomas Sowell, describing the situation, quotes The New York Times:
Bread, sugar and cornmeal, staples of every Zimbabwean’s diet, have vanished, seized by mobs who denuded stores like locusts in wheat fields. Meat is virtually nonexistent, even for members of the middle class who have money to buy it on the black market. Gasoline is nearly unobtainable. Hospital patients are dying for lack of basic medical supplies. Power blackouts and water cutoffs are endemic.
Hunter Lewis continues,
Zimbabwe … was once considered a breadbasket … of Africa, but in the 2000s began to suffer mass starvation. The principal reason was that President Robert Mugabe promised land reform, but actually gave the once rich farms to his cronies. At about the same time, everything was price controlled, often below the cost of production. The Central Bank was printing unlimited numbers of Zimbabwean dollars so that by 2008 prices were rising 98% a day. Property and market values plunged by at least 99%, but it was hard to say for sure because there were no buyers. While these events were unfolding, Mugabe railed against “greedy entrepreneurs, ruthless markets, and the forces of globalization.”3
Mugabe blamed capitalism, and the United States, but it was his regime that destroyed the economy for his people through price controls and inflationary monetary policy. It’s ironic that in 2015 the Zimbabwean state started using the US dollar as legal tender. The cycle began again in 2019 when the new regime created a new currency and decreed that all foreign currencies would no longer be legal tender. Again, history is repeating itself.
Source: Mises Wire