“Orbán used to be one of the biggest anti-communists; now he’s making us all feel like we’re living under communism again,” a Hungarian student activist told me last week at European Liberty Forum. He referred to Viktor Orbán, the Hungarian Prime Minister, attempting to control inflation by capping the price of essential goods like food, mortgages, energy, and fuel.
I laughed along secure in the knowledge that at least the British government, for all its faults, would not go that far. Unfortunately, within just a few days my new Hungarian friend may have gotten the last laugh. In an ironic twist of timing, last weekend it emerged that the UK government is contemplating a ‘voluntary’ price cap for supermarket essentials.
Prices are not just made-up numbers. As Hayek explained, they contain dispersed knowledge about market conditions and transmit tacit information about preferences, efficiently coordinating the economic activity of billions. Interrupting this process can be disastrous. In this case, controlling prices for some goods could lead supermarkets to make up for lost margins by increasing prices or reducing the quality and quantity of their offering.
Higher prices also perform a vital function by communicating to producers that consumers want more of a particular good, as I discussed in CapX this week. This was recently demonstrated in the United States when egg prices shot up at the end of 2022, prompting calls for price controls and regulation of ‘big egg’ to stop the so-called ‘greedflation’. Thankfully, these calls were resisted, and the price of eggs cratered in the first quarter of 2023. If that mechanism is blunted, the incentive to find ways of producing more food is stymied. As Venezuela’s recent history has shown, embracing price controls can quickly lead to chronic shortages and widespread starvation.
This last week is just another reminder of the importance of remaking the case for free market principles. Thankfully, the IEA has been on the case for many years. In 2015, we published Flaws and Ceilings: Price Controls and the Damage They Cause, a 227-page book on the topic. We were back across newspapers and the airwaves this week reiterating these points.