Price Controls
Why Price Controls Fail: Lessons from Global Economies and California’s Fast Food Minimum Wage
Price controls—those noble attempts to save the masses from the greed of private enterprise—have been tried for decades across the globe, with results that range from the mildly inconvenient to the catastrophically hilarious. Whether it’s India controlling the price of crops or California recently hiking the minimum wage for fast food workers to $20 an hour, the outcome is often a reminder of an economic rule as old as capitalism itself: Goodhart’s Law—"When a measure becomes a target, it ceases to be a good measure."
When governments step in to dictate prices or wages, it usually sets off a chain reaction that ends with a question everyone hates asking: "How did this make things worse?"
Price Controls in Action: The Case of India
In countries like India, price controls have a long history. The government imposes price ceilings on essentials like food grains, fuel, and even medicine. The idea is to protect consumers from sudden price hikes, particularly in a country where large portions of the population live on thin margins. In theory, this sounds like a heroic act of economic justice. But in reality, it’s a bureaucratic Frankenstein’s monster.
Consider the agricultural sector: The Indian government sets minimum prices for crops, particularly wheat and rice, to protect farmers from being taken advantage of by middlemen. The result? A black market where buyers offer to purchase goods below the official rate, and farmers, desperate to sell, often have no choice but to agree to these under-the-table deals. So, while the government congratulates itself for “protecting” the poor, the actual poor end up making less money in secret deals than the officially sanctioned minimum.
Meanwhile, private traders, eyeing those price controls, simply refuse to buy at the government rate. After all, why would they when they can wait until farmers, strapped for cash, come knocking, ready to sell for less? The end result is an artificial shortage on the legal market, not because the goods don’t exist, but because the price controls drove them underground.
The intention was noble: protect the weak from exploitation. The reality was predictable: distorting the market doesn’t remove its forces—it merely redirects them into shadows.
And Now, California’s $20 Fast Food Minimum Wage
On the other side of the world, California has introduced its own brand of price controls, only this time it’s not commodities that are being regulated—it’s wages. As of 2024, fast food workers in the state will earn a minimum of $20 per hour, up from around $15. The reasoning is straightforward: fast food workers don’t usually receive tips, and they deserve a “living wage.” Again, on paper, this seems like a victory for workers. But the underlying economics are what you’d expect from a rerun of a bad sitcom.
Enter Goodhart’s Law: By targeting a specific wage level, the policy ignores the larger dynamics of labor and pricing. The predictable outcome? Sudden price increases for fast food meals, which leaves the average Californian paying more for the same sad burger and fries combo they were enjoying a few months earlier. And it's not just the prices going up—reduced hours for workers have also come into play. After all, when labor costs jump overnight, businesses do what they must to survive: cut back on hours, automate roles, and pass the increased costs onto consumers.
So, while fast food employees are celebrating their $20 hourly wage, many of them are now getting fewer hours per week. The same workers who were supposed to benefit from this wage hike find themselves earning only marginally more, while customers are stuck paying more for the same greasy calorie count. The price of labor became a target, and the measure stopped functioning as intended.
The Limits of Artificial Market Manipulation
This isn't just about fast food burgers and crop prices—it's about how price controls, whether on goods or wages, inevitably distort the free market. The free market thrives on voluntary exchange, where prices reflect the balance of supply and demand. When governments intervene by mandating prices or wages, they throw off this delicate balance, often leading to unintended consequences.
Price controls tend to fail because they operate on the belief that prices can be dictated by fiat, ignoring the underlying forces that determine them. Set a price too low, and you create shortages, as suppliers withdraw from a market they can no longer profit from. Set a wage too high, and you incentivize businesses to cut back on labor, automate jobs, or raise prices to cover the new costs.
In both the case of India’s crop price controls and California’s wage hike, the intention was to help the disadvantaged—whether it be small farmers or underpaid workers. But in both cases, the interventions disrupted the natural balance of the market, leading to outcomes where the very people the policies aimed to protect were often worse off.
Conclusion: Why Free Markets Work (and Price Controls Don’t)
The allure of price controls is understandable. It’s comforting to believe that you can legislate away greed or inequality by simply setting prices or wages through policy. But the truth is, the market has its own set of rules that don’t bend to the will of government edicts.
Free markets work because they allow prices and wages to be set organically by the forces of supply and demand. When we try to manipulate these forces, whether in India’s agricultural market or California’s fast food industry, we encounter the same predictable cycle: distortions, shortages, price hikes, and unintended consequences.
California may have ensured that fast food workers get $20 an hour, but in the process, they’ve guaranteed that every burger-loving Californian will be paying a higher price—and perhaps for less than they used to. As Goodhart’s Law reminds us, once a measure becomes a target, it stops being useful as a measure. Markets, on the other hand, continue to function, regardless of how much governments try to control them.
