China…ah yes…China… is there anything so stupid that the Chinese will not give it a try? These were the people who put up with Mao, after all – and his Great Leaps…his backyard steel ovens…his agricultural policy…his Cultural Revolution. What will they fall for next?
Yes, the latest news from the middle kingdom tells us that the Chinese want to deal with rising inflation in the worst possible way. What would be the worst way you could possibly try to stop inflation? Price controls, of course. They have been proven…on many occasions…to do more harm than good. Therefore, it seems obvious that the Chinese would want to give them a whirl.
Emperor Diocletian used them to help screw up the Roman economy two millennia ago. Of course, Mao used them in China – to disastrous effect. More recently, Richard Nixon used them to whack the US economy in the ’70s.
Price controls don’t work. It is obvious why they don’t work. They provide distorted information. Prices tell you something. They give you an idea of how much resources go into producing a thing…and how much people want it. If the difference between the cost of producing it…and the price for which it sells…is higher than the cost of capital, you know you should produce more (ceteris paribus…and keep your fingers crossed).
Impose price controls…and suddenly, you are the driving without GPS…without lights…at night…after attending the opening of a distillery.
You will make a wrong turn. You will run into something. In economic terms, you will become poorer.
Why then, do central bankers control the price of the one thing that is most important for economic decision-making? The Fed imposed a new price control on short-term credit on
Tuesday. Tighten your seat belts, dear reader.
Markets and Money