It’s five years to the day since the Prime Minister of the UK announced the first lockdown. Anniversaries are always a good time to reflect and a lot of people are sharing their memories of that time and other commentators are telling us what it can teach us about policy or their experiences of working in government at that time (I’d recommend Iain Mansfield’s long read on this as it deals with both).
I was going to write something on what it was like starting to work for the government in the middle of the first lockdown or on how we responded at the Department for International Trade looking at logistics and supply chains and how we launched Operation Defend to ensure that the country could source everything it needed including food and medical equipment and what I think worked well and what didn’t.
I might still write this but it will be a bit technical and it’s a Sunday so I will write something which is slightly related and is also more timely.
One of my lasting memories of the pandemic is the panic buying which broke out in the days before lockdown. I had seen the stories on the news and Twitter about them but thought it was probably just a few isolated cases and was confident that when I returned home to Huddersfield (for what I thought would be a two week lockdown) I would have no problem buying what I needed. As such I was shocked when I got into the supermarket and found empty shelves as people grabbed what they could and constant announcements from the beleaguered staff that there were limits on products such as hand wash and toilet paper that customers could purchase. It was a scene I never thought that I would witness in the UK and it’s one I hope to never experience again.
It does offer an important lesson to policymakers (and the media) on the folly of opposing dynamic pricing (or what some people would call price gouging or profiteering) and in price controls in general.
History is littered with examples of price controls not only failing to achieve their aims but also in making things even worse. Going all the way back to Ancient Mesopotamia and the Code of Hammurabi we see price controls being enacted. Same with the Ancient Greeks who implemented price controls and threatened to execute people if they broke them. Thankfully Greek traders ignored this and it is the only reason why the people didn’t starve to death. The Romans also had a go at this. Emperor Diocletian implemented his Edict of Maximum Prices which led to a collapse in trade and the people died of starvation.
Fast forward to the French Revolution and the Reign of Terror. Robspierre introduced the General Maximum which saw price controls imposed. Once the people began starving to death the price controls were scrapped.
In the aftermath of the Second World War the Allied powers introduced price controls to West Germany. Again, although well intentioned, it led to severe shortages of essential goods. Thankfully the Minister for Economic Affairs, Ludwig Erhard, decided to scrap them without telling the US authorities (you can just do things). Practically overnight the shelves began to fill and ordinary people could get what they needed and (West ) Germany was on its way to recovery.
Commentators who call for price controls and politicians who implement them are often well meaning - they want to ensure that people can get access to what they need without them being extorted or law and order breaking down. Unfortunately, they just don’t work as they ignore prices themselves. Prices act as a signal over the availability and demand for goods and services in an economy. They help households to make informed decisions about their purchasing while allowing firms to enter or leave a market or start to produce and sell more or less of something.
This is very basic economics but a potential objection could be that this might work well as a general rule, but what about in unique situations or emergencies such as a pandemic? We saw this objection as recently on Friday as hotels near Heathrow Airport hiked their rates after the substation fire left passengers stranded. The hotels were condemned as unscrupulous profiteers greedily taking advantage of people – there were even commentators suggesting that this should be illegal and the hotels forced to close down!
In reality, the opposite is true. It is in an emergency when we should be particularly grateful for the price mechanism and firms who respond to the fundamental law of supply and demand by increasing prices. This is because, although it will come as a financial cost to consumers, it will ensure that resources such as toilet paper or hotel rooms are allocated to those who most value them while also providing a strong disincentive to panic buying.
Take the panic buying at the start of Covid as an example. It was initially a small proportion of consumers who decided to buy as much toilet paper and hand wash as they could because they feared that they might not be able to buy it later. While most people (correctly) realised that even within a lockdown we would still be able to buy essentials and that supermarkets would figure out a way to stock essentials, if other people were panic buying then this would lead to shortages and so it was only rational for them to also stock up… just in case. If supermarkets had increased prices to reflect the increased demand (and the increased costs which had been passed onto them by producers) then they could have continued to stock what they needed and it would have provided a strong incentive against panic buying. If households think that a product (which doesn’t go off) is shortly going to be available but remains at the same price then of course it is in their interest to buy more of it but if the price suddenly doubles or triples then they are more likely to just buy what they need.
Increasing prices in an emergency also sends a strong signal to firms that there is money to be made by producing or selling a certain product. For example, a factory producing one thing might see a business opportunity and so decide to go from manufacturing one type of product and instead focus on the product which is now in high demand as they know that they can make money. As a result the supply of that good starts to catch up with demand and so the price will start to decrease.
Unfortunately supermarkets in the UK were reluctant to increase their prices. They generally are as there is a lot of healthy competition between them (I’ve written before on why ‘Greedflation’ is mainly a myth). However, in this instance they were warned by the Competition and Markets Authority against doing so. Even if they had ignored the often damaging and incompetent quango then they still would have faced the reproach of politicians and the media.
The clamping down on dynamic pricing because it is seen as profiteering or price gouging is not the worst thing the government and the media did during the pandemic. However, this is only true in the sense that price controls are not the worst things that certain Roman Emperors, or Robespierre, or the Maduro Regime in Venezuela did. It is a very low bar.
Ignoring fundamentals of economics such as supply and demand and the price mechanism causes immense damage. This has been demonstrated throughout history and yet it still persists as calls for rent controls or closing down hotels who increase their rates show. We should ignore those who ignore economic reality.
Other stuff
Tariffs are, unfortunately, back on the menu. As such, I wrote an article for UnHerd on why the UK government is right to not retaliate against Trump’s steel tariffs. You can read it here.
I also wrote something for the LSE on why the government is right to liberalise the planning system.
This is my first post here for a while as I’ve been busy with a new job and a few other things. However, I’m planning on starting to write at least once a week again.
Thanks as ever for reading!