Price Controls Don't Work
By Harris Sherline
November 2, 2009
One of the key elements of the proposals for reforming America's health care system is the use of price controls, which have been employed by Medicare. Since 1984, the government has established, in its sole discretion, a schedule of fees they pay to hospitals and doctors for their services. Hospitals are paid 80% of the scheduled fee that is set by the government, regardless of the actual cost to the provider. That's price control, and the result is that the Medicare program now has an unfunded liability in excess of $11 trillion.
Price controls have never worked, ever, as far back as 4,000 years ago in Babylon. In a November 2005 post to the Mises Daily, Thomas J. DiLorenzo noted: In Babylon, "the Code of Hammurabi was a maze of price control regulations."
Price controls also failed in ancient Greece and again during the third century B.C. in Egypt.
In Greece, price control laws were routinely ignored, in spite of the death penalty being imposed for failure to observe them.
In 301 B.C., the Roman emperor, Diocletian (244-311A.D.), issued an Edict on Maximum Prices, in an attempt to curb the inflation that was caused by his overspending. The law was quickly ignored.
Price controls are invariably imposed by people who are woefully ignorant of the most basic economic principles, a mistake that has been repeated throughout history. And, the current crop of American politicians is no exception. Does anyone really believe that Nancy Pelosi, Harry Reid, president Obama or other like minded politicians in Congress are so brilliant that they have the ability decide how much everything should cost?
What such leaders invariably fail to take into account is that people react to laws and regulations and modify their behavior accordingly.
DiLorenzo also noted an early example of this when ancient Egyptian farmers "became so infuriated with the price control inspectors that many of them simply left their farms." By the end of the century the "Egyptian economy had collapsed as did her political stability."
The health care proposals that are currently working their way through Congress all rely on some form of price control in the mistaken belief that it will reduce costs. However, to reduce costs, it would be necessary for the government to set prices at every level of production and distribution, which is virtually impossible, considering the billions of buy-sell decisions that are made throughout a society literally every day. There are plenty of examples of the failure of this sort of thinking, the most notable being the Soviet Union, which collapsed after 70 years.
In a November 2005 article, economist Thomas Sowell commented:
People who want the government to control the prices of pharmaceutical drugs seldom, if ever, raise the question of what actually happens in places and times when government has controlled the prices of pharmaceutical drugs.
Canada and other countries do it. What consequences have there been?
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