Miliband Is Fighting 2000 Years of History with Price Controls; ECONOMIC ANALYSIS

The Evening Standard (London, England), September 26, 2013 | Go to article overview

Miliband Is Fighting 2000 Years of History with Price Controls; ECONOMIC ANALYSIS


Byline: Russell Lynch economic analysis

IN common with most of the political class -- including the man he wishes to replace as prime minister -- Ed Miliband has an Oxford degree in politics, philosophy and economics. Judging by his announcement of a 20-month cap on gas and electricity prices this week, perhaps his time would have been better spent studying history.

It's staggering to hear such a thing from someone with serious pretensions to lead the country. Political leaders have periodically tinkered with the idea of price controls for the best part of two millennia and the result invariably ends in tears. Go all the way back to ancient Rome and the emperor Diocletian. His attempt to tackle inflation with a series of price controls -- to be observed under pain of death -- ended in bloodshed and the eventual repeal of the law. People refused to produce goods, there were shortages, trade was disrupted.

Or take Revolutionary France. In 1793, the government put a maximum price on grain. Chaos ensued across the country as farmers refused to supply markets, and the black market flourished. Other examples include rent controls in New York to help house workers in a wartime shipbuilding boom. Capping prices -- effectively removing the market signal that we need more buildings -- removed the incentive to do exactly that as well as triggering a boom in illegal sub-letting.

And when the US set maximum prices for petrol twice in the 1970s, long queues developed to fill up the car, and shortages resulted as stockpiles ran dry. Economists say of the period that if you added the cost of your time in the queue to the "cheaper" cost of petrol, it was actually dearer to fill up the car. More recently than that, in California retail price caps reduced the incentive of energy firms to increase supply -- helping Enron scandalously manipulate the market. Blackouts ensued.

We already have a serious energy problem in this country. Only in June, Ofgem said spare electricity power production capacity could fall to 2% by 2015, and called for more investment in power generation. …

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