Economically, there is a big difference between using maximum price caps or price controls to stem inflation and the use of rationing policies. The former does little to rein in consumption while the latter actually does.
That price caps don’t work has been known since at least the days of the late Imperial Roman period. Alas, we increasingly live in an era where war is peace, freedom is slavery and ignorance is strength. It should be no surprise therefore that a new gaslighting phenomenon is upon us both here in the UK and in America. It is the great campaign by those who should really know better to convince us that price controls are just the thing to curb inflation. They’re not.
The latest flavour of the doublethink comes courtesy of the Washington Post, which hosted an oped on Tuesday by two academics, Meg Jacobs of Princeton University and Isabella Weber of the University of Massachusetts Amherst, arguing that “targeted price controls” have been successful in the past and are thus better than interest rate hikes or allowing a recession for controlling inflation.
As the authors note:
Instead Congress can stabilize prices and reduce inflationary pressures through selective price caps combined with investments to increase the resilience of our economy. The Inflation Reduction Act is a momentous step in the right direction. Carefully selected caps could buy time for the important supply-side measures in the legislation to come into effect, while also tackling short-term price spurts driven by today’s emergency conditions. Doing so would preserve purchasing power instead of erasing it and can create an economic environment that encourages urgently needed investments — public and private alike — in workers, care, education, infrastructure, climate mitigation and more.
Many economists warn that price controls never work. But history says that’s not true. Targeted controls combined with large-scale investments present a real alternative to the potent sort of stagflation — high inflation and a stagnant economy — that wreaked havoc in the 1970s and threatens us now.
While price controls have a bad reputation politically and a record of mixed success, they worked in one of the most important cases in American history — World War II. And the differences between that case and later failures reveal how policymakers can wield this tool effectively.
Citing WW2 as a positive example of price controls, however, is fairly absurd. The article itself admits that what really made the difference during WW2 wasn’t a price cap but consumers receiving “ration coupons that ensured a fair supply at controlled prices.”
Rationing is not the same as a price cap. It is a quantity-based control measure. If you really want to rebrand rationing as something that isn’t rationing just to make it more digestible for the masses, at least be accurate with the extended complexity you’re throwing at the label. I don’t know, call it something like Quantitative Consumption Tightening (QCT). Anything but targeted price controls. People really aren’t that stupid.
But according to the authors, it’s not just targeted price controls that can make a difference. The article also invokes the idea of deploying “powerful oratory skills to offer a clear and present rationale for government price setting” as a supplementary measure to encourage acceptance of such targets. As the authors note:
Not everyone could fight enemies abroad, but all could contribute to stabilizing the economy at home — by ensuring compliance and participation in what Roosevelt called “equality of sacrifice.”
They then applaud the power of snitching:
Finally, consumers, as much as the government, served as the shock troops of enforcement. It was up to each housewife not to pay more than ceiling prices, distributed on government-printed shopping lists, in at least 14 different languages. If they spotted a violation, they could report the profiteer to a local volunteer board and he would have to pay a fine.
Finally, the authors argue that Nixon failed with price controls whereas Roosevelt succeeded because unlike the latter he did not embark on an accompanying social mobilisation like the one that had been so successful during World War II.
But as the below-televised address by Nixon appealing to the masses to sacrifice for the greater good clearly shows, that is not quite true.
The difference between Roosevelt’s success and Nixon’s failure wasn’t the nature of the rhetoric, it was the nature of the crisis.
Top-down rationing by the state — which is what the academics are really arguing for — is always going to be easier to enforce during a state of war or any other external threat (like a pandemic) when the population can see the logic of making sacrifices for the sake of a greater good.
Under any other scenario, it is indicative either of an economic collapse or a veiled shift to a planned economy. Neither is likely to be universally supported the same way that a popular war is.
Suggesting that the policy is somehow commensurate with raising interest rates or an economic correction in a free market, is thus brazenly misleading. Faced with an external enemy that threatens one’s way of life, freedom-loving people tend to be accepting of the need to make sacrifices. At such times the “we’re all in it together for the war effort” mentality can soothe what would otherwise be destabilising and chaotic economic collapse. But this sort of rationing usually only works because it is perceived to be temporary — a necessary sacrifice until a greater victory is won.
The same cannot be said of a system in a state of self-inflicted economic collapse, as it was during the great rationings of the latter Soviet period or (less so) during the Nixon era. It is even less likely to be palatable if the public believes the rationings may be a pathway to a permanently planned economy that represses freedoms more broadly for the long term.
A pathway to demonetisation
Rationing is and always has been a last resort mechanism that countries in a state of economic collapse and/or war are forced to do. The only exception is a target-based rationing system of a planned economy, such as that attempted by the Soviets with Gosplan. But — contrary to what the academics above note — these have never historically worked. However you chop it, slice it or name it, all forms of rationing or price controls are a radical departure from a free-market system. That means they will always have the capacity to be challenged by black markets and private sector profiteering. That in turn means they will always be game theoretically unstable. That was the case when Diocletian issued his maximum price edict back in AD 301, and that’s likely to be the case now too.
When price controls eventually failed Diocletian, the Roman emperor was forced to adopt a target-based planned economy wherein agricultural yields were tied to available manpower. This quantity-based system had the effect of demonetising the economy, bonding people to the land and limiting everyone’s freedoms permanently.
Some fear — me among them — that this is exactly what might happen if programmable account-based central bank digital currencies (CBDCs) are used to institute modern-day rations such as those being discussed in the Washington Post article. What begins as a temporary measure to fend off energy shortages ends up being kept on permanently for the purposes of managing an extended period of global economic decline in a controlled way.
Some might at this point be wondering why not make the proxy war we are having with Russia and China for global supremacy explicit? Wouldn’t this do the job of rallying people in support of a temporary rationing system? It could do. And yet, if the war is perceived to be perpetual or never-ending in nature, it might not.
The fact that the political class has been so reluctant to admit to a state of war, when by all other objective measures that’s exactly what the West is in, is telling in its own right. This indicates there is great uncertainty about whether people will support an extended confrontation with Russia or China. Better, in that case, to pretend that “targeted price controls” are a sophisticated economic management tool that can in the long run lead to prosperity for all. Something I think they actually believe might be the case.
This, however, is no road to prosperity. If deployed in the form of a CBDC-based social-credit system it is far more likely to turn into a road to serfdom equivalent to the one paved by Diocletian when he nipped inflation in the bud by introducing a target-based system.
If you think all of that sounds far-fetched, consider that the first time I heard about account-based “programmable” CBDCs being deployed by central banks as a public good was in April 2021 following an off-the-record conversation with senior Swiss-based central bankers. It was they who floated the idea that these systems could be linked with digital IDs to store personal credit history and more. When I asked if they envisaged that this could include health data they deflected but did not deny the possibility.
*The illustration to this post shows an undated WW2-era ration book I inherited from my grandparents. It would have been used by them during the Nazi occupation of Poland.
