David R. Henderson  

Galbraith's Imposition of Price Controls

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Japan Bet Bleg... I, Beef Jerky...

In 1941, Leon Henderson (no relation), the head of the Office of Price Administration, chose John Kenneth Galbraith as his economist to control prices. This was a few months before the U.S. government officially entered World War II. Galbraith learned very quickly that controlling prices in a complex economy is--complex. In John Kenneth Galbraith: His Life, His Politics, His Economics, Richard Parker quotes from Galbraith's autobiography, A Life in Our Times:

On my first Sunday in office I went to the Blaine Mansion and sat down by myself with the Census classification of American industry. From this I derived the subdivisions of my office--nonferrous metals; fuel; steel and iron and steel products; textiles, leather, and apparel; and so forth. It seemed almost too simple.

Parker writes:
It was too simple. As the complexity of their task and the requisite bureaucracy grew, so did the intricacy of these divisions. Soon under textiles and apparel came clothing: under clothing, footwear; under footwear, a section for soles and another for (reclaimed) rubber heels. For the soles-and-heels people at OPA to estimate quality and grade accurately, they recruited Washington postmen and carefully measured the wear-and-tear on their footwear. (Galbraith himself fell prey to the obsession over detail; one memo to Henderson somberly begins, "A big move is coming very soon on the sardine and pilchard situation . . ."

Then came the Japanese government's attack on Pearl Harbor on December 7. Galbraith took action. Parker writes:
But Galbraith felt no panic on December 8. Reaching his office shortly before dawn, he quickly and practically plotted out the most urgent tasks he faced. When the regional community exchanges opened in a few hours, prices would start spiraling upward almost immediately, so he arranged for cables to be sent to the exchanges--most important, the one in Chicago--to place limits on the daily increases in wheat, soybeans, butter, eggs, and other products. He then ordered aides to wire or call executives at major companies, and place limits on the prices of dozens of other products that would face immediate speculate pressures.
His obviously necessary actions nonetheless brought howls from Congress within hours of its voting for war that afternoon.

The first paragraph above is simply factual. But the last sentence of the quote is shocking. "Obviously necessary?" Remember that Parker is an economist writing about another economist. One of the conclusions most settled in economics is that ceilings on prices cause shortages. It turns out that these ceilings were no exception to that conclusion. So one would think that Parker would want to explain why these ceilings were a good idea. But not only does he not do so but also he begs the question by simply calling the ceilings "obviously necessary."



COMMENTS (11 to date)
Arthur_500 writes:

History is written by the man with the pen. It matters not whether you win or lose as long as you live to tell the story in your fashion. Then you win.

Tom Cairns writes:

I would have thought it was "obviously necessary" to prevent massive fluctuations in prices causing panic in a war situation. Wouldn't most economists call price controls in that situation a short term solution?
I have a supplementary question; did that response not occur to you, as a professional economist?

David R. Henderson writes:

@Tom Cairns,
I would have thought it was "obviously necessary" to prevent massive fluctuations in prices causing panic in a war situation.
Right, it was necessary if it was a good idea to prevent massive fluctuations. I'm saying that prices serve an important function and preventing them from changing by a lot causes harm.
Wouldn't most economists call price controls in that situation a short term solution?
They wouldn't call it a good solution.
I have a supplementary question; did that response not occur to you, as a professional economist?
No, it did occur to me. But I was shocked, as I thought I had explained adequately above, because it's not a good response.

EclectEcon writes:

One of my professors in grad school had been a Galbraith fan. He related that at one point in trying to control beef prices, Galbraith shook his head and said, "Price controls bring out the carnivore in all of us."

Douglass Holmes writes:

As an economist, Leon Henderson should have seen that these price controls were not "obviously necessary." However, Galbraith was trying to deal with politicians in Congress. To politicians, price controls are obviously necessary.
Are "obviously necessary" price controls bad for war production? Of course. But good politics trumps good economics.

Adam writes:

It's simple: economists are called to save civilization from ignorance and greed. Good economists like Parker and Galbraith understand their calling.

Economists have tools and understandings superior to the greed and ignorance of ordinary folk. Small minded researchers fantasize about trade and the growth wonders of innovation. The truth is: Solow showed that aggregate growth is just population growth and innovation is an error term.

Economic scientists know that growth is a distraction. Short-term, the economic goal is to control the rapacious instincts of traders and business owners. Long term, the only question is the distribution of income. Yes, our calling may seem a conceit, but it's really the only hope--and the only truth.

My mentor is more eloquent:

http://www.theguardian.com/books/2012/dec/04/paul-krugman-asimov-economics

Have a blessed day.

Daniel Artz writes:

Whether or not price controls are "obviously necessary" depends entirely upon one's perspective. From the point of view of a consumer who is going to be severely inconvenienced by rapidly escalating prices of a needed commodity, like, say, gasoline, it may very well appear that price controls on that commodity are "obviously necessary". The problem is that most consumers fail to think through the logical, and entirely foreseeable, consequences of price controls. Just like Paul Krugman almost invariably fails to think through the logical and entirely foreseeable consequences of his policy prescriptions. Price controls remove the economic incentives for the market to react to the shortages, whether arising from supply interruptions (as in the case of gasoline shortages which result from natural disasters, such as the superstorm that hit the Atlantic Coast last year), or from changes in demand (such as the increased demand for ferrous metals, fuel, and other commodities which results from the conversion to a war time economy). Price controls may well be short term, but they are never a "solution" as long as the term "solution" is given its ordinary meaning -- they don't "solve" anything at all, they simply postpone necessary adjustments in the market which the changes in prices would cause.

And if it is the duty of economists to "save civilization from ignorance and greed" (a highly questionable hypothesis), then Galbraith did a mighty poor job of it when he simply perpetuated the ignorance that price controls were a solution. And Paul Krugman is definitely following in Galbraith's footsteps in that regard -- no "economist" alive today is better at perpetuating economic ignorance.

Eric Falkenstein writes:

Seems like a lot of these guys really need to digest Bastiat's essay on the seen and unseen. Like most wisdom, it's common to conveniently dismiss, which is why Bastiat is profound.

ColoComment writes:

"Price controls may well be short term, but they are never a "solution" as long as the term "solution" is given its ordinary meaning -- they don't "solve" anything at all, they simply postpone necessary adjustments in the market which the changes in prices would cause."

I am but a spectator of economic conversations, so I may not have the right words to explain my thought, but:
Is this not also applicable to the FED's ongoing QE/hold-interest-rates-low policy(ies)? By interfering with the "necessary" adjustments in the pricing of money (credit, investment, etc.) that would usually reflect changing conditions, isn't the FED finding that the longer-term "necessary" adjustments that are coming due, indeed, that are/may be overdue, are likely going to be more acute, i.e., more painful to the ecoonomy, than if pricing of money had been allowed to adjust more incrementally over time, based on voluntary actions of participants?

Daniel Artz writes:

Erik, I couldn't agree with you more about Bastiat. I graduated with a degree in Economics, but never even heard of Bastiat until Graduate School - it should have been required reading in Econ 101. Instead, I had professors telling their classes that Keynes was the devinely inspired truth of Macro, without ever even a critical analysis (probably because Keynes can't survive any critical analysis). It strikes me now that a BA in Economics from MOST Colleges and University means only that the graduate THINKS he or she knows a whole lot more than they really do, and they are sadly unaware of the depth of their ignorance.

ColoComment -- you've nailed it on the head. But keeping interest rates artificially low, as the Fed has done, had as much to do with enabling continued profligate spending by the Federal Government as it had to do with stimulating economic activity (a stimulus which never worked very well because of the risk-rated capital requirements imposed on Banks by Dodd-Frank - yes, money was cheap, but, unless you were a Fortune 500 Company with Billions in cash reserves, impossible to borrow). So now, when rates go up (and up, and up), that $17 Trillion in Federal Debt is going to get a LOT harder to service, and interest costs will put an impossible squeeze on the FederalBudget. It is going to be an incredible mess.

Tracy W writes:

Tom Cairns: do massive fluctuations in prices ever cause panics? I've been googling this and can’t find a single example. There are cases where massive fluctuations in prices are attributed to panic buying or selling, which is the opposite causality. And also to me has overtones of journalists making a story sound more dramatic.

Fears of bank failures or having money confiscated (eg Cyprus) can cause panic runs on banks, but that's not a panic caused by a price fluctuation.

And generally the data is that in actual physical emergencies people don't panic.

So it doesn't seem obvious at all to me that price fluctuations would cause panic at all.

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