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You might rightly accuse me of being a pedant when it comes to teaching students about price controls. One lesson I emphasize when teaching it is to ask students why they wish to intervene in particular markets and then to consider whether altering the incentive and informational signals embedded in prices is the right way to accomplish it. I suspect that in a majority of cases, the popular desire to fix prices derives not from some fundamental desire to correct a market “imperfection.” Not at all. It seems to me that folks imagine that messing with the price system is the only way they have to implement other social goals and distributional goals that have little to do with the markets themselves.

For example, the desire to control rents or to impose minimum wages does not derive from some argument that there are massive externalities that are not being priced in the labor or housing market. Nor do I suspect that folks have monopsonistic models in their head when they favor minimum wages. Rather, it seems to me that the problems of poverty or poor life choices get revealed by the troubles some people have in labor markets and housing markets. And that all of us like to imagine ourselves in the situation where we cannot afford the housing that we want or obtain the wages that we want. And it is just much easier to say, “make housing cheaper” than it is to understand why housing is unaffordable for people in the first place.

If this is the mindset, and if the mindset of folks is that markets simply are not competitive, then no matter how I teach the economics of rent control and minimum wages, the analysis is always going to be deemed my opinion or a biased presentation of the material. Why do I say this? Because I am regularly accused of it, even as I give caveat after caveat about these observations. Students want to believe what they want to believe.

With that in mind, I think the new strategy to teach about rent controls and minimum wages is to flip the arguments. We should start by asking students to think about how they would feel if the government passed a law that did not allow buyers of apartments to purchase them for anything less than a government mandated price floor. In other words, rather than teaching about rent controls as price ceilings, teach about them as if they were price floors. Would students think that forcing rental prices above “market” prices would encourage more people to want to rent apartments? Would students think that forcing rental prices above market prices wouldn’t induce lots more people to want to sell apartments? Would students think that no mechanism would emerge to “clear” the imbalance that would be created by the surplus of housing that would be generated? Why not?

Similarly, rather than teaching about minimum wage laws, we should ask students to think about how they would feel if the government passed a law that did not allow sellers of their labor services to obtain any more than the government mandated price ceiling. In other words, rather than teaching about minimum wages as price floors, teach about them as if they were price ceilings. Indeed, the medieval guilds and WWII US economy both are illustrations of where this happened, with ugly consequences. Would students think that forcing wages below “market” wages would not discourage workers from wanting to sell their labor? Would students think that forcing wages below market rates wouldn’t induce lots more firms to want to hire workers? Would students think that no mechanism would emerge to “clear” the imbalance that would be created by the shortage  of jobs that such a policy would generate? Why not?

I suspect you know the answers to those questions. So we are left wondering how our “critically thinking” students could somehow accept the idea that minimum rent laws cause unintended (negative) consequences but that minimum wage laws do no such thing. And we are left wondering how our “critically thinking” students could somehow accept the idea that maximum wage laws cause unintended (negative) consequences but that rent controls could do no such thing.  I don’t think it’s any mystery why we observe these particular outcomes, the mystery rather is why we pretend that this sort of thing is not common. We’ll address this in future posts.

4 Responses to “Price Control Pedantry”

  1. Speedmaster says:

    >> “… folks imagine that messing with the price system is the only way they have to implement other social goals and distributional goals that have little to do with the markets themselves.”

    +1000

    >> “And it is just much easier to say, “make housing cheaper” than it is to understand why housing is unaffordable for people in the first place.”

    +10,000

  2. Harry says:

    My uncle Harry rented a suite in the McAlpin Hotel on Herald Square, across from Macy’s, in NYC, maybe in 1940, and it was rent controlled all through when Sheraton owned it and we finally gave it up in 1971, the same year Nixon abandoned Bretton Woods and followed John Connaly’s advice to freeze wages and prices for 90 days. I think the place cost $150 per month, Sam Spade price .

    Today there is progress. Mike Bloomberg is Mayor.

  3. Harry says:

    Around the same time, maybe a few months later, the Shah of Iran (remember him?) put a two page ad in the Wall Street Journal arguing for pricing oil in gold, not dollars, and I can remember sitting around the table and agreeing he had a point. Why should foreigners sit around and watch us debase our money? He the monarch, a member of OPEC, the granddaddy of monopolies and oligopolistic cartels, cared for his people.

    Three years earlier I was in Paris, and some Iranian Sorbonne people had befriended me, showing me around to the best sights. We eventually made our way to the mosque to have Turkish coffee, and on the way on a yellow wall was a crudely painted hammer and sickle, a symbol that must have given delight to the Ayatollah Khameni, the present ruler of Iran. Who knows how near Ayatollah Khomeni was? They were all living in Paris, and probably regularly vomited when they saw an Iranian woman dressed in stylish clothes (scarf over head) with a blond heathen American drinking coffee in their mosque.

    So ever since I was sympathetic with the Shah, even though we were not ski buddies. At least he got the modernization and inflation points right.

  4. Trey says:

    Thomas Sowell, in A Conflict of Visions, might say your students have the “unconstrained vision”. They believe (their) solutions trump tradeoffs. The opposite (constrained) vision is “there are no solutions, only tradeoffs”. Sadly, your class may be the first exposure they have had to the constrained vision.

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