All Commentary
Saturday, April 1, 1978

What Price Control Really Means

“In the great chessboard of human society,” observed the eighteenth century Scot philosopher and economist Adam Smith, “every piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”

The belief that individuals are pawns to be pushed about by central planners is not new, as this statement by Smith clearly indicates. Indeed, socialism—the controlled society—has its roots in the actions of primitive man. When the first cave man clubbed his neighbor to expropriate the food his neighbor had gathered, he gave blunt, physical expression to the essence of socialist society.

Two centuries after Adam Smith penned his eloquent defense of the right to be free from coercion, coercion is again in the ascendancy. It is seen by many as the “quick fix,” the answer to chronic problems, a panacea that will bring order out of chaos. In 1795, James Madison described this phenomenon as “the old trick of turning every contingency into a resource for accumulating force in goverment.”

The issue of price control provides an excellent illustration. Invariably, as prices rise due to an expanding money supply, talk is heard that government must impose controls. The fact that such talk is becoming more and more prevalent these days may be a warning that price controls loom on the horizon. Therefore, it is absolutely essential to the debate that all be made aware of the true implications of government price-fixing. Just what is it that control of price by central planners means? What are we abandoning when we embrace the idea?

Forcing People to Conform

The object of price control is really not the control of trillions of numbers and dollar signs in the economy. Price control is merely an excuse to coercively dictate the terms of trade between people. The penalties for violating price control edicts are levied on individuals. Jails and fines are made for people, not for prices. In Revolutionary France, those individuals who dared to trade at prices not in conformity with the “Law of the Maximum” paid a visit to the guillotine.

When government fixes price, coercion is substituted for voluntary exchange. Price is no longer determined peacefully in the market place of free and willing trade. Economic consequences must follow and they are easily discernible in light of the two functions of price.

One function is to allocate scarce resources. When anything is scarce, as all economic goods are, it must be rationed. Supply must somehow be equated with demand. If the market place be imagined as a huge auction, the problem becomes one of who shall get what quantity of the goods to be auctioned. Do we draw straws, or beat each other up until the number of survivors equals the number of goods? Would it make sense to line everyone up, fire a gun, and declare that the fastest runners shall receive the goods?

The economic way to ration scarce resources is through the price system. By way of the “market price,” supply and demand meet, the market is cleared, and scarce resources are allocated. In so doing, chronic shortages and surpluses are avoided, the productive process is left unharmed, and peaceful exchange becomes the reigning principle. It is a perfectly natural process; all that is required for it to take place is for men to be left alone to pursue their own desires and abilities.

Price also directs production, its second function. Businessmen are professional price-watchers. If consumer demand for a product increases, consumers are willing to pay more for that product. This puts pressure on price to rise, which raises profit margins. In order to take advantage of this profitable situation, businessmen increase their production. The process works in the other direction too: declining consumer demand will mean falling price and falling profit margins. In that case, price will “signal” producers to abandon that line of production and enter another where the demand is more urgent. In the free economy, it is not necessary for the government to issue an edict to the farmer, “Grow wheat; the people want bread.” It is not necessary for the government to instruct a manufacturer, “Make televisions; the people want entertainment.” The marvelous mechanism of price does the job far better than the noblest and wisest politician.

Economic Disruption

The economic consequence of government price control is economic disruption. A controlled price will still allocate resources, but not in accordance with supply and demand. Likewise, a controlled price will still direct production, but not in the same directions as consumers, by their voluntary purchases, would have dictated. The signals are falsified and distorted by fixed prices. The history of price control in America and everywhere else has been the history of shortages, queues, and popular disaffection.

The economic effect is but one aspect of price control. A moral question is also involved. By what right does any party coercively dictate the terms of trade between others? By what twisted principle of justice is one penalized for trading with another at a mutually-agreed upon price?

Price control is a form of public theft. In the name of “the public good,” the authorities are empowered to force their particular values on others. The victims are all those deprived of the opportunity to trade or to trade on terms which they regard as satisfactory. Price control breeds a spirit of lawlessness, a network of spies and informers, and is unmistakably a hallmark of an immoral society.

To those who are committed to price control, these arguments perhaps will not be sufficient to dissuade them. They may reply that whatever evils price control might produce can be corrected at the ballot box. The people can supposedly use their political liberty to counterbalance their loss of economic liberty. To make this assumption is to ignore the manifest threat to political liberty that price control poses.

It is no exaggeration that the economic order determines the political order. If people are so controlled economically that their every move is subject to scrutiny by the State, then they can be effectively silenced by the State. “Control of a man’s subsistence is control of his will,” wrote Alexander Hamilton. It is inconceivable that economic freedom can be lost while political freedom remains intact. A brief glance at history confirms what theory teaches.

In the mercantilist period, roughly 1500 to 1800, the State controlled the economy. The subjects did not elect their kings and queens.

In the thousand years of feudalism, the State controlled the economy. The serfs did not vote their masters to power.

In modern-day Russia, the State controls the economy and two hundred fifty million Russians are governed by a single political party.

In similar fashion, it is no coincidence that Adam Smith’s ideas of economic liberty nurtured ideas of political liberty in the nineteenth century. Because price controls empower the government to establish a vital command post over the economy, they would sow the seeds for the loss of political liberty as well.

Will Americans endorse a policy of price control? If they have lost faith in the free society they more than likely will. If the power of price is delivered from the market place to the politicians, surely ignorance of the grave implications will be the proximate cause.

  • Lawrence W. Reed is FEE's President Emeritus, having previously served for nearly 11 years as FEE’s president (2008-2019). He is also FEE's Humphreys Family Senior Fellow and Ron Manners Global Ambassador for Liberty. His Facebook page is here and his personal website is