The 1970s called and they want their economic policy back. This may sound like a cheap quip against the growing popularity of attempts to control prices in the face of inflation. After all, France is implementing price controls right now, while Canadian Prime Minister Justin Trudeau also forced grocery stores to come explain price hikes with the hint that he might start doing the same. These policies and scapegoating of businesses are the same as in the 1970s, hence the quip. But I could have quipped about any number of historical examples – the 1940s, the 1930s in Germany, the 1910s, the 1790s in France, and on and on. After all, as one aptly titled book made explicit – “forty centuries of wage and price controls” teach us exactly “how not to fight inflation.”

The best way to understand why is by invoking an analogy about thermometers and temperature that Milton Friedman employed when inflation was a big issue during the 1960s and 1970s. Prices function somewhat like a thermometer inside your house. They indicate the point where the quantities that producers are willing to supply to the market match the quantities consumers demand, based on their available budget. Monetary policy for its part, is the thermostat. If the thermometer says that the temperature is going up, it’s either because there are changes in the economy in general (i.e., the outside temperature) or because someone turned up the thermostat. Sometimes, it can be a mixture of both factors (i.e., loose monetary policy and supply shocks occurring simultaneously). Distinguishing between them is not an easy task. People who propose to impose price controls are essentially trying to break the thermometer by preventing it from showing the rising temperature and claiming the problem is solved.

[That’s a great analogy, actually. Put even more simply, prices are determined in a market when costs get balanced against demand. People who advocate for price caps are confusing “price” with “cost,” and inevitably in such a way as to make it less attractive to produce the goods or services. That means less supply to meet demand, which creates a market disruption of the kind seen in every economy that has tried price caps — shortages and political blowback. It’s inevitable. — Ed]