Stephen Monrad

To control inflation, prices for everything that is bought and sold need to be prevented from rising somehow.

One potential solution is to have the government set all the prices by decree. While this is appealing because the problem of pricing could be tackled systematically, it isn’t a good answer. The problem is that it is hard to make sure that prices follow the rule stated in my last post. That is, it is hard for the government to make sure that the costs of producing goods and services are less than or equal to their prices.

The government would need to have detailed information about how businesses operate to set prices. Since there are hundreds of thousands of businesses in operation, the task of pricing each business’s output would be unmanageably large. Making matters worse, even if by some miracle the government got all the prices right, they wouldn’t necessarily stay that way because the economy changes over time. It would take an enormous and ongoing effort to set prices centrally.

History has shown that central planning doesn’t work. Governments aren’t good at managing the minutia of the economy. While setting prices would be somewhat simpler than organizing production in its entirety, it is still far to complex a problem to be solved centrally.

Just because direct government control of all prices isn’t practical doesn’t mean that price controls can’t work. My next posts will explain how I think governments could effectively implement price controls through a combination of regulations and direct price controls on a small subset of what is bought and sold in the economy.