Economic Policy Review ISSN 1313 - 0544

Price control

Author: Veliko Dimitrov / 09.09.2008
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Both with respect to central economic planning and price control, as its very important part, there was never proofs that they were useful and not destructive for the largest part of the population, it is also a fact that the small part of those who benefit from such measures have always been its big supporters. Although there are no proofs in support of limiting the free price formation and although there are a number of examples in the history of the very undesirable consequences from the introduction of such measures, to a lesser or larger degree they are applied even today, and unfortunately their use is extending.

The lessons which should have been learned from what happened, to the greatest extend, in the former USSR and its satellites and also in many countries giving promises for a bright future, apparently either have not been learned well enough or have been already forgotten. May be the rulers, before starting to make economic policy, should pay more attention to economic history and in particular to what measures have led to which results. This applies both to the Bulgarian statements and politicians as well as their colleges in Brussels, which particularly in recent years seem to believe that prosperity in natural, while poverty is a result from its "inappropriate" distribution[1]. The following example provides a detailed description what should be expected when the mechanism for natural price formation is replaced with someone's subjective (individual or collective) opinion about the level of a given price.

During World War II in Stockholm, Sweden are introduced "temporary" controls on the size of the rents for apartments (although the measure was clearly harmful, the total removal of the controls became a fact 33 years later - during 1975)[2]. As a result there was a shortage of apartments, which forced the authorities to create a waiting list on which basis the available flats were distributed, according to order of the list. During 1 963 315 000 people (40% of the city's population) were on the waiting list, there were almost no official offers of dwellings, because the owners were not inclined to rent out the good quality dwellings at the controlled rent and the information about what is on offer and the demand was disseminated through neighbors and friends. A common gift for holydays and christenings had become a certificate which proved that the child was included in the official waiting list. However, there were dwellings and the "illegal" renting out deals flourish (that is what one of the maxima in the economic theory say - "If there is no free market there would be a black market"). Facing the reality and the reduced supply of dwellings, the officials instead of removing the controls and thus resolving the problem, took measures similar to those which had created it and naturally transferred the disorganization of the economic system in other sectors as well. In order to increase construction and supply of dwellings, the government began to regulate the cost of mortgage loans by defining and upper limit of the interest rates. Instead of leading to a boom in the construction industry this measure has exactly the opposite effect - the investors redirect even those funds which until recently were in the construction industry to other sectors of the economy, which give higher rate of return and are not regulated. In order to compensate this development, which was easy to expect, but apparently was again unexpected; the government puts an obligation on the financial institutions to invest certain percentage of their assets in the dwellings market. This naturally led to transferring most of the assets out of Sweden and their investment in other countries and other activities. And all of this began with one objective - to lower the average rent in order to make it possible for more people to have dwellings in Stockholm. This aim was definitely not met and many more people were left without dwellings than it had been possible before the introduction of the rent controls. To that one should add all the negatives and missed benefits as a result of the "innovative" ideas of a number of Swedish governments.

Unfortunately this case is not a precedent in the World history, more likely it is one of a number of examples for carrying out wrong and bureaucratic economic policy. The standard and very expensive mistake which many statesmen make even today is that after they find out that "there is a whole in the bottom of the boat" instead of plugging it they start making others hopping that the water would flow out.  

[1] It is reasonable to ask the question why the African societies are still poor - whether this is due the capitalistic nature of western democracies or due to the lack of capitalism and democracy in the African states themselves.

[2] The idea and the exact data are taken from the book of Dwight R. Lee и Robert F. McNown - "Economics in Our Time", "Science Research Associates" Inc., 1983