price controls cause famines

Thomas Sowell, in his Basic Economics, has an excellent chapter on price controls. Because prices naturally settle at an equilibrium price, if the government uses artificial means to set prices then there will either be a shortage or a surplus depending if they set the price lower or higher than the equilibrium price. When governments let prices work, even famines can be avoided. Thomas Sowell illustrates this with two contrasting examples from India:

Halfway around the world, in eighteenth-century India, a local famine in Bengal brought a government crack-down on food dealers and speculators, imposing price controls on rice. Here the resulting shortages lead to widespread deaths by starvation. However, when another famine struck India in the nineteenth century, under the colonial rule of British officials and during the heyday of classical economics, opposite policies were followed, with opposite results:

In the earlier famine one could hardly engage in the grain trade without becoming amenable to the law. In 1866 respectable men in vast numbers went into the trade; for the Government, by publishing weekly returns of the rates in every district, rendered the traffic both easy and safe. Everyone knew where to buy grain cheapest and where to sell it dearest and food was accordingly brought from the districts which could best spare it and carried to those which most urgently needed it.

As elementary as all this may seem, in terms of economic principles, it was made possible politically only because the British colonial government was not accountable to local public opinion. In an era of democratic politics, the same actions would require either a public familiar with basic economics or political leaders willing to risk their careers to do what needed to be done. It is hard to know which is less likely.

Another take away is that this would not be possible in Democracy. Democracy naturally hates shortages being cured.

About christopher fisher

The blog is meant for educational/entertainment purposes. All material can be used and reproduced in any length for any purpose as long as I am cited as the source.
This entry was posted in Econ 101, Economics, Goverment, History, People, Price Controls, Sowell. Bookmark the permalink.

4 Responses to price controls cause famines

  1. In order to get the information they needed the planning directorate used two main lines of attack. First, they engaged in the most subtle forms of spying they could contrive. The most effective was to find some person in the production directorate who had a grievance, worm one’s way into his confidence, and get him to “spill the beans” on what was really happening in his directorate. . . . The other main line of attack was to discover officials either at MAP, the firms or the Air Ministry who realized the importance of coordination and were not oversensitive about the prestige of their own directorate, cultivate their acquaintance or friendship where this was possible, and use them as the main instruments of coordination, especially in an emergency when quick decisions were necessary.

  2. Tom Torbeyns says:

    Very well written… :-) But doesn’t the conclusion demand a sovereign ruling class?

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