UK inflation is running away, currently at 7% (CPI), the highest rate for 30 years. News reports are full of apocalyptic stories expecting the worst fall in living standards since records began in 1956. This is causing anxiety for all but the wealthiest. A recent poll by Opinium suggests 71% of voters would support price controls on essential goods, like food, clothing and transport. I will argue that price controls seldom work, and lessons from as far back as the 3rd and 4th century Roman Empire can show us why not.
Economist Isabella Weber argued recently in the Guardian that price controls could buy time to deal with pandemic supply bottlenecks and would bring monetary stability which would spur investment. Ancient Rome was an example of why this approach backfires as it addresses the symptom not the illness.
Inflation is as ancient as civilisation. Roman Emperor Diocletian inherited in 284AD an Empire destabilised politically, militarily but also economically. It was blighted by hyperinflation. This was the product of centuries of debasing the currency, the Denarius, by reducing its precious metal content. The Denarius was 95% pure silver, but by 268AD, less than 5% of the coin was.
This was comparable to today’s quantitative easing and was similarly deployed to cheaply raise central finances (in ancient times to support ambitious military operations when tax revenue was insufficient.) Successive rulers also melted down church artefacts made of metals when metal mining couldn’t keep up. The consequence was not only an increase in money in circulation, but a decline in the purchasing power parity of the currency.
Throughout most of the debasement, the Empire’s economic growth boomed, largely due to thriving trade. The quantity theory of money holds that when accompanied by a corresponding increase in GDP, an increase in the money supply counteracts inflation. Some economists like Temin claim the GDP of the early Empire was as big as Spain’s in the 1700s. Therefore, the continuing debasement of the currency was barely inflationary.
But then, in 200 AD, it all turned. The Empire, like the UK today, had been running a trade deficit, importing more from India and China than it was exporting. Trading partners demanded more and more of the devalued currency for the goods they sold, and it led quickly to a trade recession, which can be inferred by proxy from the dramatic decrease in Mediterranean shipwrecks documented after 200 AD.
Essentials such as wheat, wine and donkeys saw prices explode. It’s estimated that inflation reached an astronomical rate of 15,000% between AD 200 and 300 AD. Wage inflation of the soldiers needed for growing military expansion far outstripped wages of normal workers, tax revenue fell, and the Empire fell into a recession. The result was hyperinflation and an economic slump: stagflation and an existential threat to the empire.
The Emperor Diocletian sought to fix the problem with a piece of legislation in 301AD called the Price Edict. This was a detailed list of a whole host of goods, raw materials and finished products, with a maximum price. It was so stringent that the penalty for overcharging was death. But rather than dampening the runaway inflation, it had many damaging effects.
Microeconomics tells us that when you introduce a price control, it simply creates excess demand (QD – QS) at the maximum price, as sellers do not want to sell. This resulted in scarcity and a thriving black market. Unofficial but actual prices rocketed, including essential items and the economy began to retreat from a monetary one to barter. The currency lost credibility. City dwellers moved out into rural areas to escape the long arm of the state and its regulations. Taxation cannot easily be collected in a predominantly black economy, and so the situation deteriorated, and the Empire teetered on the edge. People increasingly ran the risk of capital punishment and eventually the price controls became unworkable leaving inflation worse than before.
The big oversight from Diocletian was that he thought prices were the cause of problems rather than a symptom of centuries of currency debasement which drove domestic and imported inflation. His mismanagement of the economy and therefore the Empire drained his authority and Diocletian eventually retired and was replaced by Constantine who had a better understanding of economics, demand and supply. The Price Edict was scrapped and other monetary reforms were introduced to bring some stability to the empire, however fragile.
This same misconception is echoed in the modern day calls for price controls to deal with inflation. They presume that the root of inflation is in the cost of goods per se rather than in wider causes, like years of central bank bond purchases, pumping money into the economy to pay for the financial crisis of 2008 and the costs of the COVID-19 pandemic. Again, quantitative easing has created the conditions for inflation, which along with an unexpected supply side crisis caused by the pandemic (shutting down of factories and scarcity of goods), devaluation of sterling after Brexit, making our imports more expensive (which price controls can’t help) and sanctions on energy exporting Russia, leads to a perfect storm for price rises.
The Roman Empire shows us that introducing price controls simply distorts the market and does not address the wider root causes of the inflation. They can be effective temporarily in a situation where goods are highly rationed, to prevent profiteering, counterfeiting and black markets, like post WW2. Countering Weber, investment won’t increase as interest rates need to rise and QE is turned off. Additionally, supply chains are resolving themselves after the severe lockdowns of 2020/2021 and attempts to control prices in an import dependent open economy like ours, will only lead to shortages, and much higher prices of most goods, including essential ones like food and energy, which will be borne mostly by the lower income segments of society.