Liberals Lured by Free Lunch

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 down.

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 of production.

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 housing.

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 process.

But the lure of the free lunch goes on.