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Subject Area: Political Theory
Topic: Progress

Price Controls, Legal Regulation & Inflation - Leonard P. Liggio, Literature of Liberty, Winter 1981, vol. 4, No. 4 [1981]

Edition used:

Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.

Part of: Literature of Liberty: A Review of Contemporary Liberal Thought, 20 vols. 19781-982

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


Price Controls, Legal Regulation & Inflation

William K. Jones

  • Milton Handler Professor of Trade Regulation, Columbia University School of Law

“Government Price Controls and Inflation: A Prognosis Based on the Impact of Controls in the Regulated Industries.” Cornell Law Review 65(March 1980):303–329.

Government price controls in the United States have historically followed one of two patterns. Controls have, first, been imposed upon specific industries to remedy perceived deficiencies in the pricing practices of the individual industries affected (such as the regulation of railroad rates); second, controls have been imposed on the economy as a whole, dictating virtually all prices and regulating wage levels as well. The author draws on a substantial body of evidence on the effects of price controls in regulated industries to consider the manner in which these controls have functioned and to determine whether this evidence sheds any light on more general efforts at price control. He studies three areas: (1) the application of price controls to “monopoly” enterprises, (2) the application of controls to “competitive” industries, and (3) the implications of this experience in judging the prospects of a large-scale program of government price controls. The author draws on his unpublished monograph, The Impact of Common Carrier Regulation on Competitive Activities, which IBM submitted to the FCC in 1977.

As to the effects of government price regulation on such “natural monopolies” as public utilities, the author sees some flaws. “But on the whole, profits have been effectively limited, service has been made widely available, and productivity gains and price levels compare favorably with other sectors of the economy.”

More disastrous consequences attend price regulation in “competitive industries.” Whereas public utilities aimed at forbidding competition, government regulation in this second area sought to retain competition while attempting simultaneously to control “discriminatory practices.” Attempts to control competitive industries which lack monopoly characteristics “can be expected to produce unsatisfactory results,” in price levels, service quality, and innovation. Government regulation diverts energies of the regulated firms from the provision of improved service or lower prices to the prevention of actions by rivals who may provide improved service or lower prices. “The competitive rivalry is suppressed in the marketplace and intensified in the regulatory area. This diversion of energy and attention is not conducive to innovation, improved economic performance or increased consumer welfare.”

Moving from particular industry regulation, what is the prognosis of a general program of wage and price controls? Enormous difficulties would prevent a federal price administration authority from controlling evasive accounting methods and product variation (to escape price controls). The price of attempts to control prices is high. “Government regulation of prices may result in price levels that are too high or too low compared to the levels that would be achieved by competitive markets. Dictating low prices will make service deteriorate, drive away needed capital, and produce shortages. Shortages, in turn, will call for more government intervention in the form of short-run rationing and long-run subsidization. Dictating prices higher than the market creates obvious wastes. Whether government sets prices too high or too low, the result will be inefficient performance and a decline in the nation's productivity. Lower productivity will seriously augment the harm of inflation, which would be the most dangerous aspect of wage-price controls.