Why can’t the government just set a concrete price for everything (Rent, groceries, etc) and forbid it from ever changing? That would prevent inflation from ever happening, right?
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The issue is that prices act as signals and are in fact nothing but information moving from an economic agent to another (as per Hayek’s theory). So controlling prices would remove information that is necessary for economic agents to coordinate their activities. Plus, no one really knows what should be the price. Each price is unique to a specific transaction, at a specific time in a specific place between two particular transactors. If the government sets the price of bottled water to 1 dollar for instance. You would find it only in palaces where it is still profitable like big cities but probably not in sparsely inhabited areas that require lots of fuel for instance. Second controlling prices mean controlling costs and wages. If the price of an item is controlled and its components are purchased abroad and their prices increase, these items will soon become unavailable. It also poses the issue on how to value unique items such as songs, books or a painting. Moreover, it creates a disencentive for people to engage in certain jobs as a result of wage control. For instance if you limit the salary of doctors lots of people will be reluctant to invest so many years of their lives studying and will try to shift to jobs that require less education time in a bid to maximize their lifetime earnings. Finally, and it’s maybe the biggest problem if your wage does not evolve you’ll be less inclined to perform and the productivity would fall, leading the whole country to poverty. There’s an old say from the Soviet union times that sums this up: “we pretend to work and the government pretends to pay”.
Price of many things depend on demand and supply . And everyone can understand that demand and supply are not constant throughout a given period of time which leads to fluctuations in price of a given item or commodity + the chnage in price of one commodity can trigger a chain reaction which affects the price of multiple items . For example lack of wheat crop can cause a rise in its price which will cause the price of flour to rise due to which the price of bread , cake , biscuit and all sort of products using wheat as an ingredient will rise . And since the price of wheat has increased people will demand more salary as they would want more money to make the ends meet for thier family which in return would lead to rise in price of labour cost and them again it will start affecting price of different items . So you cant control everything. There are limitations and conciquences to every action that one takes including governments.
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Well if you read this answer you got a quick summary of how basic economics works .
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Congratulations 🎉👏
For example:
Imagine govt setting the price of a laptop of LCD at $500 in 2000, now companies wont spend money to develop LED screens because in 2000 LED will cost $600.
Now because of this, in year 2022 LED TV wouldnt have been there because no one developed it. Inversely if there was no cost control then companies would have developed it more and spent more money on R&D and finally in year 2022, you get LED screen for $300 rather than $600 in 2000.
In Belgium at least, maximum price for bread do exist
But bakeries are going out of business because of high prices for labour, wheat and gas.
They try to set fix prices for gas and wheat, but this has to be coordinated with other countries, and there are stakeholders and lob groups that oppose.
Fortunately gas is replaceable by electricity, witch can be sustainable procured by solar panels.
Wheat is very dependent of fuel and labour.
Capitalism is based on the premise that competing companies provide better quality products for lower prices, and the consumer decides what to buy. The idea is that competition forces companies to maintain good standards and fair prices, leading to a healthy economy.
What really happens is companies produce shit and sell it with good marketing, but that’s the idea.
I have a feeling if the federal government attempted to do that it would in some way subvert federalism and dual sovereignty. Arguably, one could argue this was in some way tied to the power congress has under the commerce clause but it would still be incredibly difficult and there would be several constitutional hoops they would have to jump through when writing it.
It would (at least in the absence of a black market), but the problem with economics is that things have knock-on effects. For example, what you’re suggesting would remove any way to make money by (say) making better-quality goods, because you wouldn’t be able to charge more for them anyway. And if the fixed price is too low, it might make producing those goods not worth it at all, meaning the supply of those goods would fall to zero.
Some countries do this but generally only for what they consider “essential”. Some control prices for basic foodstuff like milk or wheat/bread. Some countries control fuel prices. A very common one would be things like water and electricity – especially if it is government owned.
The biggest problem is that it is problematic to decide “concrete price”. Set it too low and few producers will make the product. This can be bad for an economy. Second, nearly every product relies on other materials. Say you fix the price of bread but don’t control the price of wheat. So if the price of wheat increases, who would want to make bread at a loss. This effect is even worse if the raw materials are imported since there is no way to fix a price without offering some kind of subsidy.
In short, fixing prices leads to a lot more problems and the more products that have “fixed” prices, the economy tends not to develop as quickly. Many politicians have tried this – and many of these schemes ended badly.
Say that rent is worth $700, and the only people willing to rent out their place anymore are people whose places are worth less than $700. No one would be bothered to build rentals if they knew the value of the finished product would be capped low. Resources would move *away* from giving renters a place to live, and *towards* everything and everyone else. Suddenly, you’ve forced the exact opposite of what you wanted to happen, to happen.
Ultimately, price is not an actual quality of an item, it’s a product of other factors, mainly supply and demand. Fixing prices will only bend supply and demand to fit that new intersection. If you want more people to be housed, the only possible way to do that (unless you already screwed up the market, then you could just reverse your screw ups) is to increase supply. Supply can refer to a lot of things though, the supply of the materials, the amount of product produced (houses/apartments in this case) or even the total number of manufacturers (like with insulin). Increase supply, and you undermine high prices. Fix prices low, and you undermine supply.
The problem with price caps (which is effectively what you’re describing) is that price increases are the result of demand outstripping supply. If you cap the price, often the result is that you run out of the thing you’re controlling. Once that starts to happen, you get black markets; why would I sell my loaves of bread for the government mandated $2 when I could instead sell them on a street corner for $5?
The other thing is that inflation isn’t universally bad. The government tries to maintain a couple percent inflation per year. Inflation is good for people who borrow money, and helps drive people to invest their money, which is good for the economy. You don’t want to completely squash inflation, just like you don’t want to let it grow out of control.
There are other ways to slow inflation besides price caps. Take money out of the economy by taxing the rich (you may have to tax them more to get the same economic effects you would by taxing the poor, but hey, they can afford it). Increase the supply of goods by reducing tariffs and building housing. Increase interest rates (which can reduce employment rates; maybe use the money you’re getting from those taxes to bolster the social safety net?). Experiment with principles from modern monetary theory. There are a lot of things you can try to combat the negative effects of inflation.
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