Editor’s Note: An earlier version of this essay was published at the Ford Leadership Forum, and is reproduced here with permission.
Despite their historical failures, price controls remain an attractive policy option for many. If we can control prices through legislation, the argument runs, goods and services will be more accessible. Mandating lower prices will simply reduce the markup over cost for businesses, leading to slimmer profit margins but greater benefits for consumers.
This is faulty logic resting on a conflation of cause and consequence. High prices are a signal of the relative scarcity of a good, not the cause of the scarcity. Regulating prices will do nothing to make a good or service more abundant. Instead, it will cause shortages by simultaneously encouraging increased consumption and decreased supply.
Price control debates in this country stretch back to the days of our founding.1
An early attempt at price controls took place amongst Philadelphia radicals in 1774. In retaliation for Britain’s “Coercive Acts,” these radicals attempted to enforce a non-importation agreement on British goods. The agreement was complemented by a commitment imposed on colonial merchants to maintain prices at their 1774 levels, to prevent sellers from taking advantage of the shortage of goods caused by the banning of British imports.
After the outbreak of the war, Pennsylvania resorted to legal price controls to address the rising price of West Indies staples. These ultimately failed and were abandoned. Not only did the controls fail to alleviate shortages, but they even failed to limit the total cost paid by consumers. As Benjamin Rush noted in his Diary, in order to ensure an adequate compensation for their troubles, merchants charged “a heavy profit upon the barrel, or the paper which contained the rum or the sugar.”2 Rather than increase the price of rum or sugar—illegal under the Pennsylvania regulations—merchants raised the price of complementary goods such as barrels and paper.
A deal has many attributes, and price is merely one of them. When minimum wages rise, employers cut non-wage benefits or substitute labor with capital. When lenders face interest rate caps, added fees emerge. As Rush’s comments show, price controls don’t lower total costs. Scarcity drives prices up as consumers compete for existing supply.
In December 1776, delegates from Rhode Island, Connecticut, and New Hampshire met in Providence to discuss solutions to high prices of staple goods. They attributed high prices to the “unbounded Avarice of many Persons”—especially Royalists and Tories—who they assumed looked to opportunistically take advantage of wartime shortages.3 The delegates recommended a wide set of price ceilings; so too did they recommend the seizing of goods withheld from sale at regulated prices by “Monopolizers, Engrossers, or others.”4 After many of these recommendations were taken up by New Hampshire, the Continental Congress, in January 1777, debated whether to formally recommend the price controls of the so-called Providence Plan to the rest of the states.
It was at this meeting of the Continental Congress that Benjamin Rush pointed out the recent failures of Pennsylvania price controls. Samuel Chase responded that the failure in Pennsylvania could be attributed to Royalist presence. Given a patriotic population with a spirit of cooperation, Chase reasoned, the price controls would work. Patriotic merchants would gladly agree to limit the price charged to consumers for the sake of the common good. The price control measures would serve as a coordinating device—a device to guide transactions and ensure reasonable, just exchanges.
Congress recommended the measures of the Providence Plan officially on February 15, 1777. By the end of the year, however, the shortcomings of the Plan were apparent. Price controls in New Hampshire and Connecticut led to disaster. The New Hampshire legislature explained that “the Several Acts to prevent monopoly & oppression made the present year [1777] have been very far from answering the Salutary Purposes for which they were intended.” In Connecticut, price controls wreaked havoc in the beef market. Congress wrote to Governor Turnbull of Connecticut specifically requesting he lift the price control on beef. By June 4, 1778, Congress issued a new resolution to the states:
It hath been found by Experience that Limitations upon the Prices of Commodities are not only ineffectual for the Purposes proposed, but likewise productive of very evil Consequences to the great Detriment of the public Service and grievous Oppression of Individuals.5
Two of the founders, James Wilson and John Witherspoon, had argued from the beginning of the discussions surrounding the Providence Plan in 1777 that price controls were a fool’s errand. Witherspoon argued that “laws are not almighty,” and “it is beyond the power of despotic princes to regulate the price of goods.” Wilson claimed, “There are certain things…which Absolute power cannot do.”6
Witherspoon and Wilson’s shared skepticism flowed perhaps from their Scottish origins. Both men studied in Edinburgh and were acquainted with the works of David Hume. Hume argued at some length in the second and third volumes of his History of England that price controls under Edward II and Henry VII predictably failed to alleviate the scarcity of commodities and made matters worse. They also studied the price theories of Samuel Pufendorf and Francis Hutcheson, both of whom emphasized prices as outcomes of a market process. Witherspoon drew deeply from the works of Hutcheson when he developed his own course in moral philosophy at Princeton.
These lines of thinking from the Scottish Enlightenment (and also from the modern natural law tradition) conceive of prices as symptomatic of underlying economic realities—the relative scarcity, the risks and toils required to bring a good to market, and so forth. Efforts to change the underlying economic realities that cause prices by regulating the prices themselves have as little a chance of succeeding as efforts to change a room’s temperature by simply altering the numbers displayed on one’s thermometer.
It was Witherspoon who made this case at the greatest length, in his 1786 Essay on Money as a Medium of Commerce and in a little-known open letter he drafted—but never published—to George Washington in 1778. In the Essay, he reiterated points he made in the meetings of the Continental Congress in 1777, namely that high prices facing the states had come from an excess quantity of money, which caused price inflation, and a scarcity of goods caused by wartime conditions. In the letter to Washington, he pushed the analysis further, evincing a sophisticated understanding of the market process.
The occasion for Witherspoon’s letter to Washington was a public announcement that the Continental Army would hold a market near its encampment at Valley Forge. The problem for Witherspoon was that fixed prices were being imposed by the Army. Witherspoon believed this would undercut merchants’ and farmers’ incentive to bring their goods to market, and that as a consequence, the Continental Army would remain under-provisioned.
The major thrust of Witherspoon’s argument in the letter was epistemic: Even if one admits that price fixing is a proper office of the state—which Witherspoon vehemently denied—how can a regulator know what the proper price is? Or, rather—since goods must be differentiated—what the proper prices are? Price regulations in whatever form have always been embarrassed by this very simple question, for there are so many factors that enter into the emergence of a price, and these factors interact and change in real time:
There are so many difference circumstances to be taken in to constitute equality or justice in [pricing decisions], that they cannot be all attended to, or even ascertained. The plenty of one kind of provision, and scarcity of another—The plenty in one corner of the country, and scarcity in another—The distance of one place and the nearness of another—The changes of circumstances in the course of a few weeks or days—Good or bad roads, or good or bad weather—The comparative quality of the goods—These, and an hundred other circumstances which can never be forseen, actually govern the prices of goods and market, and ought to govern them.7
Add to the list high and variable inflation, which plagued the states during the war, and the impossibility of effective price regulation—price regulation that improves the allocation of goods and services—becomes apparent.
Today, price fixing does as Witherspoon argued in the 1770s it had always done: “increased the evil it was meant to remedy, as the same practice has ever done since the beginning of the world.”8 Reflecting briefly on the experiences in American economic history back to the founding makes this clear, and we can derive wisdom from reflections on these episodes in their context.
- The following discussion draws on Erik W. Matson, “The Recurrent Evil of Price Controls: John Witherspoon’s 1778 Letter to George Washington,” The Independent Review 29, no. 2 (2024), 303-314.
- Quoted in Kenneth Scott, “Price Control in New England During the Revolution,” The New England Quarterly 19, no. 4 (1946): 457.
- Journals of the Continental Congress, quoted in Scott, “Price Control,” 453.
- Ibid, 454.
- Ibid, 465.
- Ibid, 458.
- John Witherspoon, The Miscellaneous Works of the Rev. John Witherspoon (Philadelphia: William M. Woodward, 1803), 283.
- Ibid, 282.
