Food price controls don’t work and they destroy efficiency
I’LL be honest: I was blindsided by the news this weekend. I really hadn’t expected to be reminded of the Soviet Union by the trailing of a new plan by Rishi Sunak.
On Sunday, it was revealed the Government has been in talks with food retailers – essentially the big supermarkets – about price caps on foods.
Perhaps a better word would be “re-introducing”. We have had price caps – or price controls, to be blunt – before.
The last version began in 1973 under Tory PM Edward Heath, expanded in 1974 when the new Labour government set up a Whitehall bureaucracy – the Department of Prices and Consumer Protection.
The parallels with today are interesting, although far from exact. Inflation then – as now – was far too high, running at 12.9 per cent in March 1974, and in the 1970s, governments believed they could somehow legislate the problem away.
The Prices Act gave the government “power to regulate the price of food and certain other goods and… the Price Commission additional powers for preventing or restricting increases in prices and charges.”
THE most important difference between then and now is that the Sunak Government insists its plan will be entirely voluntary: retailers will decide if they want to sign up to a price cap.
It all sounds so obvious, doesn’t it? If the cost of living is causing hardship – if food is too expensive – just insist prices are made more affordable.
Sometimes, however, the supposedly obvious solution is far from being any solution at all.
Which brings us to the Soviet Union. The Russians had a joke for almost everything – including the food shortages which were endemic in a system with prices set by state diktat.
“I don’t suppose you have any meat today?” a Russian asks a shop assistant.
“No, comrade, you have come to the wrong counter. We are the shop that doesn’t have fish,” she replies. “The shop where they don’t have meat is over the road.”
We are fortunate to live in a capitalist democracy, where the cost of food is set by the price mechanism.
In theory – and in most cases in practice – the price of something is a result of the balance between two factors: its supply (how much is available) and demand (how many people want to buy it). Why do some footballers sell for more than others, for example? It’s supply and demand.
There’s only one Harry Kane, but every team wants someone as exceptional, so if Spurs were sell him, the price will be huge.
There are, however, plenty of average players that are not so highly sought after, so they cost less. There are two key problems with price controls: they don’t work, and they destroy the purpose of the price mechanism, which is the efficient allocation of goods and services.
Prof Michael Parkin of Manchester University – in one of the most comprehensive studies of controls – concluded that “whatever their superficial attractiveness, they simply do not work. They do not control inflation… At worst, they distort the allocation of scarce economic resources…
“It is noteworthy that, with the exception of 1956, the rate of UK inflation was higher at the end of each control episode than it had been at the beginning of the episode.”
The price mechanism balances supply and demand. Separate the two and everything goes haywire.
ONE outcome is guaranteed: instead of lots of food costing less than it does now, there will be row upon row of empty shelves. It might cost less, if you could actually get hold of any.
It is depressing and enraging that the Government has either forgotten or is entirely unaware of the lessons of the 1970s.
Far from helping the economy, controls accelerated the process of turning the UK into a basket case – necessitating painful readjustments in the 1980s under Margaret Thatcher.
The problem is that this is all about politics, not economics.
Rishi Sunak pledged to halve inflation to five per cent by the end of the year. It is going down – but not fast enough.
So he is trying to engineer a further fall and to find an alibi for not meeting the target. Hence the idea that supermarkets are profiteering and need to be brought under control.
But there is no evidence for this. Quite the opposite: competition between supermarkets is intense and food profit margins are tiny.
Food prices have risen due to a combination of Covid and Russia’s invasion of Ukraine.
It is no wonder that Mr Sunak wants to be seen to be doing something. But making things even worse is not the answer.
‘The Government appears to be unaware of the lessons of the 1970s’