Maximum prices are usually set to prevent inflation.
Over the course of history, governments tried many times to regulate prices in some manner, either to set them directly, or by setting minimum and maximum prices. The policies have a long record of failure.
A particular example was the Ancient Egypt, where the price controls led to the ownership of all land by the state and finally its collapse.
In the sixteenth century price controls decided the fate of Antwerp, the most important city of today's Belgium. From 1584, it was besieged by Spanish forces led by the Duke of Parma. The City Fathers of Antwerp fixed maximum prices for food, with severe penalties. As a consequence, no merchant would risk ships to serve this and the city has blockaded itself better than the Duke of Parna could have done. The enforced low prices didn't force anybody to economize, and the city lived in high spirits until all provisions gave out at once. In 1585 the city of Antwerp surrendered.
In the Indian province of Bengal failed the rice crop in 1770 and a third of the population died, the disaster attributed to the rigid policy of the government, determined to keep the price of grains down. But for at least once in human history, government did learn by experience. In 1866, the province of Bengal was again on the verge of famine. This time the procedure was completely different, as William Hunter relates: "Far from trying to check speculation, as in 1770, the Government did all in its power to stimulate it . . . . In the earlier famine one could hardly engage in the grain trade without becoming amenable to the law. In 1866 respectable men in vast numbers went into the trade; for the Government, by publishing weekly returns of the rates in every district, rendered the traffic both easy and safe. Everyone knew where to buy grain cheapest and where to sell it dearest and food was accordingly bought from the districts which could best spare it and carried to those which most urgently needed it."
Price controls did not work even for Nazi Germany, rigidly enforced and highly elaborated. According to Hermann Göring, controlling people's wages and prices - people's work - is not enough, people's lives must be controlled as well. They tried both and failed. The Soviet Union was an example of a mature and long-lived total wage and price control policy in operation. And yet, prices for goods, services and wages covertly increased, and a huge black market swelled up.
Price controls rarely succeed even for a short time, and have a long record of failing in the long term, with many adverse consequences. A list of effects (many coming from a former price controller):
- Controls lead to distortions in the market system. Prices inform buyers and sellers of the relative scarcities of all products and encourage them to restore supply and demand. But manipulated prices distort these "signals" and create shortages. Black markets emerge to meet the demand of customers. Firms, that would be profitable otherwise will be pushed out of production or not enter it at all; other firms, that would be unprofitable, survive; impairing rational investment. This encourages calls for more government intervention.
- Controls penalize non-inflationary wage or price increases. For example, wage controls also block increasing wages due to better performance.
- Controls negate the profit principle. It is the profits, that draw investment resources to worthwhile industries and by calling this motive into question, controls undermine the philosophy of the free market and cause dislocations in capital formation and investment.
- Controls are demanded by lobbyists to achieve noneconomic ends. Even with noblest of goals, more controls can be called for using similar reasoning. Why stop at regulating one product or a few?
- Controls create comfortable attitudes. In the market, decisions have to be made, profits rise or fall, firms succeed or go bankrupt, and men are given jobs or laid off. Controls sometimes create the illusion, that these decision do not have to be faced.
- The regulatory body becomes more important than the market. Employers and union leaders, observing that wages and prices can be fixed or increased only by the agreement of some regulatory body, pay more attention to influencing the decisions of that body in their own favor than they do to improving their market performance and the productivity of their labor (see also "regulatory capture").
- Controls draw attention away from the real causes of inflation, and the need for actual reforms.
- Controls shift the traditional economic powers from consumers to government, labor organizations and businesses.
- Some businesses expecting price controls post "list prices", with a high 'official' price and a large discount. This gives them a chance to raise prices if needed.
- Prices may rise through other means - like reductions of quality and product changes.
- During periods of inflation, prices are rising and workers are claiming higher wages - at the same time, seller are raising their prices to keep up with the costs. There is no right moment, when the prices can be frozen, without causing problems to many businesses as workers.
- Finally, when the controls fail and are removed, any prices, that did not catch up with the real inflation will rapidly rise, creating further economical problems.
Price controls influence also employment:
- they may increase employment, if the price raises are expected to be dampened
- controls require a number of agencies, commissions, councils and boards to administer, with research and economic experts, executives, planners, members, and supervisors
- reduced profit margins make it less profitable to employ as many people as before (this also impacts any publicly owned companies)
- if businesses are hindered to make the necessary adjustments, then the number of their bankruptcies will rise
- See also: Minimum wage
- Price controls inhibit recovery after disasters and hurt precisely the people they are intended to help.
- The costs of queuing, evasion, and black markets often lead governments to impose some form of rationing. Rationing must be watched closely and constantly adjusted to reflect fluctuating supplies and demands and the needs of individual consumers. While solving some of the issues, there is a high risk of corruption.
- Price controls sometimes, paradoxically, raise prices more than no controls.
- A country can't maintain price controls without limiting exports, damaging foreign markets and trade agreements - otherwise, the underpriced goods will be exported.
- Ludwig von Mises. "1. The Government and the Autonomy of the Market", Chapter XXX, Interference with the structure of prices, Human Action online edition, referenced 2009-09-11.
- Robert L. Schuettinger and Eamonn F. Butler. "Forty Centuries of Wage and Price Controls", Chapter 1 - Ancient World, p. 9-18, referenced 2009-09-11.
- Robert L. Schuettinger and Eamonn F. Butler. "Forty Centuries of Wage and Price Controls", Chapter 3 - From Medieval to Early Modern Times, p. 33-35. See also The Unseen World, and other essays by John Fiske. Referenced 2010-04-30.
- Robert L. Schuettinger and Eamonn F. Butler. "Forty Centuries of Wage and Price Controls", Chapters 9 and 10 - National Socialist Germany; The Soviet Union, p. 65-80, referenced 2009-09-11.
- Robert L. Schuettinger and Eamonn F. Butler. "Forty Centuries of Wage and Price Controls", Chapter 19 - The Economic Effects Of Wage and Price Controls, p. 139-145, referenced 2009-08-09.
- Art Caden. "Price Controls Create Man-Made Disasters", posted on Mises Daily on 2008-06-25, referenced 2009-09-11.
- Hugh Rockoff. "Price Controls", The Concise Encyclopedia of Economics, referenced 2009-09-12.
- Robert L. Schuettinger and Eamonn F. Butler. "Forty Centuries of Wage and Price Controls", Chapter 15 - The U.S., Britain and Canada: 1970-78, p. 111-112, referenced 2009-08-09.