What price caps achieve

The nominally Conservative UK government in the UK is talking to the supermarket owners with a view to seeing prices of essential foodstuffs being capped.

We have price caps on energy, and there is talk of rent controls such as exist in Dublin and Stockholm. There are many bad ideas in economics, but price caps must rank as one of the worst.

In 1978 my colleague, Dr Eamonn Butler, co-authored a book entitled “Forty Centuries of Wage and Price Controls.”  It chronicled 4000 years of attempts to cap wages and prices, from Hammurabi in ancient Babylon to the attempts by Edward Heath in the UK and Richard Nixon in the US to fix wages and prices. The one consistent feature is that all of them fail. They fail because prices are a signal that changes behaviour. If something is in short supply, a price rise encourages people to use less of it. It also encourages producers to bring more of it onto the market. A price cap prevents that signal from being sent, and does not encourage less consumption and more production. A price cap on energy does not persuade people to use less of it or for producers to search for more of it.

A price cap on rents guarantees a shortage of rental properties. It tells landlords that they can make better returns on their capital elsewhere, and to take their properties off the market.

Prices signal the interaction of supply and demand. They tell us what is happening in the economy. To set that artificially is to lose that information and the behavioural changes that it engenders. It is akin to trying to control the temperature in the room by blocking up the thermostat. You stop the signal, not the reality that it should be measuring.

It is part of the sad reality of broken Britain that we are looking to policies that we know from experience simply do not work and never have.