The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy

The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy edited by Ryan A. Bourne

Prices are an indication of the marginal value that buyer and seller place on an exchange. They don't explicitly represent the value that went into creating something or even the worth of the object. Water is required to live, but is cheap. Prices help allocate resources to those who are willing to pay for them.

Prices of individual items go up and down to match the desires of buyers and sellers. Inflation is typically caused by changes in money supply and velocity. Price controls may cause mismatches in supply and demand and may not alter inflation. Consumers will respond to artificially low prices by consuming more. Producers will respond by producing less or reducing quality. This can lead to shortages and lead to everyone being worse off. (Though it could possibly lead to alternatives.) Artificial prices may often substitute one cost with anther. Instead of paying in money for something, people may need to pay in time by waiting in a long line or hunting for a hard to find item.

The negative impacts of price controls can be far reaching. During World War II, the US implemented wage controls. To get around these, workers offered fringe benefits, such as health insurance. This became the de facto way that health care is obtained in the US and results in a complicated system that exists today and is very difficult to disentangle.

People also are not stupid. Is there a "pink" tax requiring women to pay more than men for the same products? If it were truly so, women would just buy the men's version. However, the female products are often different in ways that females value more. The "gender wage gap" is also explained by forces. (After all, what company wouldn't want to employ as many people as possible for a fraction of the cost?) Early career men and women in the same profession tend to earn the same. However, women tend to gravitate to less risky and less remunerated careers. They are also more likely to take time off for childbirth and child rearing. They are more likely to value flexible work schedules. (Increasing maternity leave for women can make this even worse, by encouraging them to take more time off, thus limiting experience. Perhaps more paternity leave is the answer?) 

The book looks at many other examples. The general theme is that meddling with prices will impact the economy and will often have unforeseen consequences. People are quick to adapt to find new loopholes in a regulatory environment. The more more friction there is in pricing, the slower the economy will adapt. It reminds me of an interesting analysis of the German industry. Labor has a seat at the board and influences actions of the company. This makes it very friendly to existing workers. However, this also makes it difficult for pivots to electric cars and other significant changes. Will they have much of a role in the future industry?

What is the best way to regulate a market? Is allowing uber-wealthy a necessary cost of doing business? How do we appropriately set markets for externalities (like emissions, deforestation, etc.)? The current regime of regulating the response to regulations doesn't help.