November 16, 2005
Ignoring Economics III
I first became aware of the law of gravity as a small child
when I pedalled by tricycle off the porch and crashed into the
yard. Gravity was of course operating all along, whether I was
aware of it or not.
Economics is a lot like that. Many people who are completely unaware
of economics sometimes discover it the same way I discovered gravity,
through some personal or national crash.
Liberals especially tend to think up all sorts of good things
we want -- a "living wage," "affordable housing," "universal health
care," and an ever-expanding wish-list of things that everyone
should receive as "rights" -- with little or no awareness of the
economic repercussions of turning that wish list into laws.
In many cases, items on their wish list have already been turned
into laws in other countries and in other periods of history,
but there is remarkably little curiosity as to what the actual
consequences were in those countries and times.
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?
One major consequence is that Canada and other countries do not
create nearly as many of the new life-saving pharmaceutical drugs
as the United States does. These other countries live off the
results -- the medicines -- produced by the enormously costly
research that "obscene" pharmaceutical profits finance in America.
Those who want us to imitate those countries do not confront the
inescapable fact that we cannot all live off somebody else --
in this or other things. Somebody has to pay the costs.
We can of course kill the goose that lays the golden egg -- and
discover the consequences the hard way, as I discovered the law
of gravity by pedaling off the porch. People needlessly suffering
from diseases that new medications could have cured or prevented
will pay the highest cost of all.
Prices are perhaps the most misunderstood thing in economics.
Whenever prices are "too high" -- whether these are prices of
medicines or of gasoline or all sorts of other things -- many
people think the answer is for the government to force those prices
It so happens there is a history of price controls and their consequences
in countries around the world, going back literally thousands
of years. But most people who advocate price controls are as unaware
of, and uninterested in, that history as I was in the law of gravity.
Prices are not just arbitrary numbers plucked out of the air or
numbers dependent on whether sellers are "greedy" or not. In the
competition of the marketplace, prices are signals that convey
underlying realities about relative scarcities and relative costs
Those underlying realities are not changed in the slightest by
price controls. You might as well try to deal with someone's fever
by putting the thermometer in cold water to lower the reading.
Municipal transit used to be privately owned in many cities, until
local politicians' control of fares kept those fares too low to
buy and maintain buses and trolleys, and replace them as they
wore out. The costs of doing these things were not reduced in
the slightest by refusing to let the fares cover those costs.
All that happened was that municipal transit services deteriorated
and taxpayers ended up paying through the nose as city governments
took over from transit companies that they had driven out of business
-- and government usually did a worse job.
Something similar has happened in rental housing markets, where
rent control laws have kept the rents too low to build and maintain
rental housing. Whether in Europe or America, rent-controlled
housing is almost invariably older housing and more deteriorated
Costs don't go away because you refuse to pay them, any more than
gravity goes away if you refuse to acknowledge it. You usually
pay more in different ways, through taxes as well as prices, and
by deterioration in quality when political processes replace economic
But the lure of the free lunch goes on.
2005 Creators Syndicate