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?
In: 0
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”.
Latest Answers