Essay Introduction

In "The Fallacy of Controlled Prices," Herrell De Graff uses the 1952 potato famine as a case study to illustrate the economic consequences of government price controls. He argues that prices have a vital function: to balance supply and demand. When the government artificially holds prices down during a shortage, as it did with potatoes, it prevents the natural market mechanism from rationing the limited supply. The result, De Graff contends, is that consumption is not curtailed as it should be, leading to a complete depletion of the product. He concludes that price controls are a fraud because they fail to lower the actual cost of living or assure adequate supplies.

The Fallacy of Controlled Prices

by Herrell De Graff

ON January 4th of this year, Michael DiSalle, at that time price-boss in charge of the Office of Price Stabilization, issued an order setting dollar-and-cents ceiling prices on potatoes. In one of our January broadcasts in this series, we reviewed the potato situation and suggested the possibility that—as a result of the price control order—we were likely to have a potato famine before a new crop of potatoes could be harvested. The famine is now a reality.

This is another lesson on the importance, and the function, of freely fluctuating prices. Prices have a job to do! When we forget that fact, and either by price controls or price supports prevent prices from doing their job, we invariably get into trouble. This now has happened again—with potatoes.

In the fall of 1951, we had an unfortunately small potato harvest—more than 100 million bushels less than the year before. The reasons for the small crop were, first, that farmers had planted a smaller acreage, and second, that weather conditions resulted in a lower yield per acre than in the previous year. Apparently, no one realized quite how small the crop was until the harvest season was well along. Then, because the yield was disappointingly small, the price of potatoes began to go up.

Of course, consumers do not like to pay higher prices for their essential purchases. But it was logical and proper for potato prices to rise sharply last fall. At the higher price, everyone who used potatoes would use them more sparingly and carefully. In that manner, the short crop could be stretched across the winter and the spring until new potatoes from the southern states could be harvested.

But when, in December, potato prices reached the minimum level at which price control would be legal, Mr. DiSalle had a ceiling price order prepared which was issued on January 4th. What that price control order did over the last three months was to hold down the price of potatoes to a lower level than otherwise would have prevailed. And at this lower price, we have eaten up our potato supply faster than we should have. We are still several weeks away from any considerable volume of southern new-crop potatoes, and we are almost out of potatoes to eat.

Table-stock potatoes are almost nonexistent. All that are now available are being sold as seed-stock. Seed potatoes in states like New York and Maine are selling at farms at a cent to a cent and a half a pound above the ceiling price for table-stock—but much of what is called "seed" is actually going into consumption instead of being planted.

Let me hasten to add that farmers selling "seed" potatoes at these prices are not selling in the black market, because the ceiling price does not apply to seed potatoes. If they are being sold to consumers, it is because some people are willing to pay seed-potato prices to get some to eat.

No doubt, OPS will argue that if it had not been for their ceiling, the price of potatoes would have gone "too high." This simply cannot be so, because at a higher price consumers would have used a smaller quantity—and then if the total supply did not move fast enough, the price would have had to drop to clean up the old crops before new potatoes captured the market. It is always true that high prices slow up consumption—and low prices increase consumption. This is one of the most important functions of prices. When supplies of any commodity are large, prices go down, consumption is increased, and the market is cleaned up. Likewise, when supplies are small, prices go up, everyone uses the product more carefully, and the supply on hand is stretched to the time until more can be produced.

In the present potato situation, the price has been held too low during the last three months—and now we are out of potatoes. The price ceiling that was to hold down our cost of living turns out to have been a fraud—a fraud because we cannot buy potatoes. And a low price is a meaningless quotation when you cannot buy anything at that price.

From the point of view of our food supply, this potato famine is not serious, because we can eat rice and macaroni and noodles and other good substitute foods. But this is one more lesson that we cannot artificially meddle with prices without having to pay the consequences. It is one more illustration that price controls are a fraud, because they neither hold down our cost of living nor assure us of adequate supplies of the things we want to buy.

About the Author

Herrell De Graff is professor of economics in the School of Nutrition, Cornell University. "The Fallacy of Controlled Prices" is taken from a broadcast over Liberty Radio Network at Cornell on April 9, 1952, and was published by the Foundation in 1952.

Attribution

De Graff, Herrell. "The Fallacy of Controlled Prices." In Essays on Liberty, Vol. 2, 118-120. Irvington-on-Hudson, NY: The Foundation for Economic Education, Inc., 1954.