Katie Lam is a shadow Home Office minister and MP for Weald of Kent.
Since entering Number 10, Keir Starmer has described all manner of things as his “number one priority”, proving the phrase means nothing at all coming from our Prime Minister.
But amongst them is bringing down the rising cost of day-to-day goods. He’s right that, across the country, many people are working harder and harder, while finding themselves with less money at the end of the month.
Curiously, the Prime Minister’s plan for bringing down those costs seems to have involved driving up energy costs for food producers, taxing farms into oblivion, and taking more of people’s money to give to those who aren’t working.
And now, having tried nothing, this Government is all out of ideas.
Perhaps that’s why they’ve looked at stubbornly high prices and concluded, amazingly, that price controls might be the answer. Last week, it was reported that Rachel Reeves had approached a number of supermarkets to ask them to “voluntarily” freeze their prices.
The idea is simple. If the price of something is too high, simply tell the person who provides that thing to reduce the price – or, if they won’t, force them to.
If this seems too good to be true, it’s because it is.
Price controls have never, ever worked – and in fact, they usually drive up prices, and increase shortages. The first recorded instance of price controls as a policy mechanism is found in the law code of the Babylonian King Hammurabi, which was issued in 1750BC. The Roman Emperor Diocletian tried the same trick in 301AD, with his Edict of Maximum Prices.
In fact, partly because they seem like such an obvious mechanism for keeping prices low, governments across history have tried, again and again, to mandate that prices remain low. As Robert Schuettinger and Eamonn Butler note in their excellent book, Forty Centuries of Wage and Price Controls, “while there are some cases in which controls have at least apparently curtailed the effects of [price] inflation for a short time, they have always failed in the long run”.
This is because telling businesses what to charge for their products and services doesn’t actually change the underlying factors which ultimately lead to the price that we pay for those goods.
Prices are not plucked out of thin air. When a business sets a price for the product that they’re offering, there are a few factors at play.
The first thing that a business will work out is how much they need to charge to cover their costs. Most of the time, a business won’t survive if it sells its products at a loss. Those costs will include things like the cost of raw materials, the cost of complying with regulations, the cost of hiring people to produce and sell the product, and overhead costs, like energy bills.
If prices rise, it’s often because production costs have risen. Businesses therefore need to charge more, in order to cover their costs. In a whole host of ways, this Government has driven up production costs – by piling even more red tape onto businesses, by taxing businesses when they hire new employees, and by driving up energy bills through their ideological commitment to Net Zero. It shouldn’t come as a surprise, then, that prices are rising.
Another cause of price increases is inflation. If the amount of money in the economy grows faster than the production of new goods and services, then the spending power of that money will be reduced – it’s more money chasing fewer goods.
The Government has also made the problem worse here too, by borrowing eye-watering amounts of money, to pay for things like welfare for those who don’t work. That money has then been pumped straight into the economy, with no corresponding increase in the production of new goods and services. The relative value of the pound in your pocket falls, and businesses increase their prices accordingly.
Once production costs and inflation are taken into account, a business will also usually try to make a profit on top, based on what people are willing to pay. That profit can be invested – in creating new goods and services or improving existing ones – or it can be saved for a rainy day, or it can be given to people who’ve invested in the business, to reward them for the risk that they’ve taken by investing, and to encourage more people to invest in future.
Price controls address neither rising production costs, nor increases in the money supply. The cost to the business remains the same, even if the short-term cost to the customer comes down.
But why would a business continue to sell something if it can’t make a profit?
If, for example, a supermarket is told to sell strawberries at a price that wouldn’t allow it to make a profit from doing so, it will simply stop selling strawberries. That means that the supermarket will stop buying strawberries from fruit farmers – who will, in turn, lose the income that the supermarkets provide, or be forced to sell the strawberries at a price lower than the cost of growing them.
But a farmer can’t maintain their farm if they’re making a loss. They will be forced to shut up shop, or scale back their operation. Either way, we end up with fewer strawberries available, even if demand for strawberries has stayed the same, or increased.
That means that, ultimately, the price of strawberries will rise, or we’ll face shortages. The same is true of almost every other product that you can think of. If businesses can’t set their own prices, they’ll simply stop selling their products. Whether we like the results or not, the price mechanism responds to real-world, material changes. Simply insisting that prices should be lower doesn’t change that material reality.
If the Government actually wanted to bring down prices, they could start by bringing down energy prices – including by opening up drilling for oil and gas in the North Sea. They could cut back on some of the absurd regulations, which incur staggering compliance costs for businesses before their products can be sold. They could roll back the disastrous rise in National Insurance for employers, which has made it more expensive for businesses to hire people.
All of these things would make it cheaper to produce the goods and services that we need – and would, in turn, cause prices to fall, or at least stabilise. This Government’s war on the price mechanism will achieve exactly the opposite.