WWII America that is. The fundamentalist 'freemarketeers' keep saying that it doesn't work. Yet when push comes to shove even the US of A adopts price controls- and it worked perfectly well.

Another example of price controls was the regulated electricity/energy market here in the US of A. It kept electricity prices and natural gas prices on an even keel for years. It also kept the energy companies from having windfall profits- but at least they made a steady profit. Worked perfectly well for years, until the deregulation craze of the 90's. The most important point in price controls is to ensure that people are able to make a reasonable profit (but not exorbitant). As long as there is a guarantee of a reasonable profit the need will be filled. Taxicabs is another instance of price controls working perfectly well (for the consumers anyways- I feel sorry for most cab drivers)

Just like everything else- it will work if done properly and it will fail if done wrong. Even privatization is like that- the world is littered with examples of spectaclar privatization failures. Yet even I won't go as far as to say privatization is doomed to fail.

So many people seem to have forgotten that the last time America had wage and price controls was under that well-known socialist Richard Milhouse Nixon. Nixon's on-again off-again approach to controls is a textbook case of what does not work.

There is an art to how to apply controls and how long to retain them. As with rent control, keep them too long and you end up with secondary markets, grey and black. Keep them too short and you end up exacerbating the very thing you were trying to limit.

Nixon's controls did not limit or even slow inflation. They did, you can argue, break up a wage/price spiral, though that model is not necessarily accurate. In any case, since then wages have stagnated and slipped farther and farther behind prices, so you could say Nixon achieved something, though the permanent impoverishment of the working poor is not exactly legacy material.

The worked because the US was deficit spending and paying corporations cost-plus. The US debt went from 40% of GDP to 120% of GDP during WWII. Every corporation producing for the war effort was guaranteed a profit.

There was essentially no competition amongst businesses in WWII: The customer, the US war machine was buying everything it needed at any price.

It "worked" because survival was primary and fiscal sanity was a distant second. The mentality was "win now, pay later". And that won't work today.

Price controls didn't work in America during WWII any better than they ever have anywhere else.

What price controls did was drive up the prices for real goods, and drive their sales underground, creating a black market. One could buy and consume tires and gasoline and sugar and flour and a number of other "war essential" materials on the black market -- albeit at much higher prices than those set by the government.

For goods not readily black marketed, cars for example, they simply weren't produced. There were also price controls on used cars, and the law said you could not sell a car for more than your purchase price, unless you had added something of value to the car. My grandfather told me about a friend of his who looked at a used car on a lot in Kansas city in 1943. The was a sticker price on the car ($250 is what is in my memory) but the salesman then took off his necktie, hung it on the steering wheel, and then having added something of value to the car, said its real purchase price was double that displayed -- and you could either buy the necktie, or not buy the car.

As for the regulation of gas and energy prices, witness the California brown outs in the 90s. California elected to set the wholesale price of electricity, and the result was electricity produces made their own choice -- to sell electricity to places other than California, where they could make higher profits. Those places had plenty of electricity, while the price-controlled CA had brownouts.

The point is, price controls attempt to tamper with the choices made by individuals, whether they are purchasers or sellers of a given commodity. As Schore quite reasonably points out, if you set a price control on food, there is no incentive for those who make food to make MORE food, because they won't make more profit for doing so.

If the point of price controls is to make certain people make a reasonable profit, what you're really saying is that the government is in a better position than the open market to determine what is "reasonable." Time and time again it has been shown that this doesn't work well, but that a free market will lead to competition, and competition will ensure that profits are reasonable.

"As for the regulation of gas and energy prices, witness the California brown outs in the 90s. California elected to set the wholesale price of electricity, and the result was electricity produces made their own choice -- to sell electricity to places other than California, where they could make higher profits. Those places had plenty of electricity, while the price-controlled CA had brownouts."

You don't think Enron and other energy companies were not manipulating energy availabilty in California?

As far as Utilities such as gas and electric, they were regulated; but, the price increases were to be justified by regulatory agencies due to aceptable costs.

Melvyl:

Almost akin to the Fed Rate going up and down, Money Supply contracting and increasing, Bank Reserves being increased or decreased, or disallowing them to put reserves into the money market.

Thin that is a tad of price control? Except for oil and soon food?

Don't ask me -- I'm not a monetarist. Bouncing the cost of credit up and down has less to do with controlling prices on essential commodities than it has with regulating inflationary pressures, understood as some sort of antique steam engine.

But what does the Fed do when clever, creative bankers (religious believers in the Free Market love to think of capitalists as Great Creators, but when bankers got too creative they become Michael Milkin) invent new kind of financial products, packaging usury in a bright, shiny new wrapper?

The people who control THAT kind of swindle are supposed to be working for the SEC, policing the banks to prevent and punish predatory lenders. And what happens when they stop policing and let the Market self-regulate? Take a look at our current fiscal crisis that's by no means over. There was lots of brave talk about the Great Engine of the american economy surging forward despite the predictions of the doom and gloom folks. Now it turns out that "great surge" was just the upper tier of a pyramid game, and the doom and gloom guys were right.

Melvyl:

You are always a good read and I enjoy reviewing at your posts. You remind me of an economist in Colorado Mark55 and another economist at Harvard JHinter. I did study Friedmandand econometric models.

When credit costs increase, doesn't pricing increase in terms of total cost? The market contracts fiscally causing those who must borrow at higher costs. This is then passed on to the consumer. The same happens when money supply is contracted . . . less supply and higher costs. In each case people buy less except for oil and food which are relatively inelastic.

I agree with the last two paragraphs of your post which is indeed a sound argument for less free market for some commodities that are essential. Our infrastructure is falling by the wayside as we await the "laissez faire" market to react. Time for a little proactiveness and foresight.

Thanks for the flattery, but then you go on to baffle me completely. This isn't your fault, it's mine. As an economist, i make an awfully good house painter.

My problem is when people start talking about market effects as if they were tightly, mechanicaly linked: cause and effect. In the "real world" (show me this "real world" -- as a Buddhist and a house painter i do not believe such a thing exists) all these effects happen in the middle of a cloud of inefficiencies, which is where lots of smart guys in New York make lots and lots of money. I find those clouds fascinating, but do not want to live there.

It isn't that I don't support the cult of the free market and its hidden hand(which, like the God of my ancestors, is invisible, all-powerful, and nonexistent), I just have to admit to being an agnostic. My own private theory about this is that newspaper economics is a kind of misdirection ploy: we are supposed to keep our eyes on the nice birdie while the smart guys are going through our pockets.

Melvyl:

Sometimes I confuse myself dependent upon the hour of the night and where I am going with my thoughts. Just chatting for all intents and purposes.

Interpretting the economy is a little like using an Ouija to foretell the future and call up the demons of fortune. Whoever has the strongest finger on it will guide it to where they wish it to be. Seems like we have inherited an abundance of stronger fingers as of late at the expense of many. Causality??? Maybe some; but not in entirety for it.

For the most part I agree with your thoughts. And now I need to get ready for an interview. Thanks for your response.

Have you ever seen a WWII cartoon?

I recall the villian of the piece was just unbelievably rich, they had things like tires, sugar, meat, and many many ration stamps. The cartoon wasn't even making fun of rationing, the common man not having tires or sugar was just an accepted fact of life.

So did the price controls "work" in WWII? Maybe, but the side effects were extreme and not something we'd tollerate without something like a world war going on.